Dollar Tree cuts 2022 profit view again as inflation threatens margins

12:09 pm Tuesday, November 22nd, 2022

By Deborah Mary Sophia

(Reuters) – Dollar Tree Inc lowered its annual profit forecast for the second time as price cuts to attract inflation-wary shoppers pressured margins, dragging down its shares about 10% on Tuesday.

Cash-strapped Americans are spending less on high-margin discretionary goods such as toys and party supplies, offsetting the boost from red-hot demand for cheaper food and other household essentials sold by discount retailers.

The increased footfall from discount-hunting shoppers helped the company lift its annual sales outlook and post a strong third quarter.

An increase in prices at Dollar Tree banner stores to $1.25 from the traditional $1 supported margins during the period, but company executives said the lack of flexibility to adjust prices could lead to margin pressures in the short term.

The Chesapeake, Virginia-based company is also dealing with higher freight costs, a rise in investments to fuel a turnaround and price cuts at its Family Dollar banner that were rolled out in the second quarter.

The price cuts, however, helped Family Dollar post its strongest quarterly same-store sales jump since 2020 and grow quarterly traffic for the first time in three years.

Wall Street analysts noted while the report was mixed, improved sales trends at both banners signal that Dollar Tree’s efforts to fix the businesses were working.

“Elevated spending on store associates … and supply chain, while painful in the near term, are what is needed for the business, and we believe (are) important foundational steps for the turnaround,” Evercore analyst Michael Montani said.

Dollar Tree now expects annual per-share profit at the lower half of its previously estimated range of $7.10 to $7.40.

The company raised its forecast for full-year net sales to between $28.14 billion and $28.28 billion, from $27.85 billion to $28.10 billion earlier.

Total same-store sales rose 6.5% in the quarter, beating Refinitiv estimates for a 4.7% jump.

(Reporting by Deborah Sophia in Bengaluru; Editing by Shounak Dasgupta and Devika Syamnath)