Dollar Tree’s grocery growth can’t make up for shortfall in discretionary purchases

Dollar Tree’s stock price fell nearly 13% Thursday, hitting a 52-week low, after the discounter reported that ongoing consumer challenges and shrink pressured its second-quarter margins.

Food-and-beverage sales, however, rose more than 11% during the period as the retailer continues to expand its assortment of $3, $4 and $5 refrigerated and frozen items while its shoppers shy away from discretionary buying.

Citing Nielsen data, Dollar Tree said its consumable unit volume growth outpaced the market by more than 1,100 basis points at Dollar Tree and 530 basis points at Family Dollar.

“We believe we are winning in consumables as more customers come to see Dollar Tree and Family Dollar as the compelling destinations for value,” CEO Rick Dreiling told analysts Thursday, according to a transcript from financial services site Sentieo. “We are well positioned to capture incremental share of wallet when higher-income consumers respond to our strong price value proposition and when lower-income customers concentrate their spending on needs-based consumables … Our food business is especially well positioned in the current environment, and we are seeing extremely high-volume growth across our frozen and center store food categories.”

For the quarter ended July 29, Chesapeake, Virginia-based Dollar Tree reported same-store sales increased 7.8% and 5.8% at Family Dollar. Dollar Tree’s same-store sales were driven by a 9.6% jump in traffic, partially offset by a 1.6% drop in average ticket. Family Dollar’s same-store sales increase came from a 3.4% increase in traffic plus a 2.3% increase in average ticket.

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Net sales rose 8.2%, to $7.32 billion. Gross profit rose slightly to $2.13 billion, but gross margin fell 220 basis points to 29.2%. Fewer discretionary purchases and ongoing shrink fueled the margin decrease, the retailer said.

“As we think about shrink and mix, it has definitely advanced a little further than what we had anticipated in our guidance that we had given last quarter,” CFO Jeffrey Davis told analysts.

Dreiling said the retailer is now taking a “very defensive approach” to theft, which hasn’t yet been reflected in its earnings reports.

“It’s taken us a quarter, but we have several new shrink formats that we’ll introduce in the back half of the year,” he said. “It goes everything from moving certain SKUs to behind the check stand. It has to do with some cases being locked up and even to the point where we have some stores that can’t keep a certain SKU on the shelf, just discontinuing the item.”

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In June, Dollar Tree had said it planned to add its “Plus” assortment of higher-priced items at 4,300 stores by the end of the year. The discounter is bumping up that goal, saying it is now targeting 4,900 stores by the end of the year. At the end of July, the Dollar Tree Plus assortment was in more than 3,600 locations, and the $3, $4 and $5 frozen and refrigerated grocery items was for sale in nearly 5,600 stores, the retailer said.

Private-label items remain key to Dollar Tree’s growth strategy. The retailer said it launched more than 125 store-brand products this year, with more items in family vitamins and wellness slated to debut during the fourth quarter.

“We are already seeing encouraging results across our private brands with second-quarter penetration expanding by 55 basis points, units sold growing by 4% and private-brand comps increasing over 15%,” he said.