Dollar Tree undertakes transformation plan as stock plunges on tough Q1 report

Dollar Tree’s stock price nosedived about 14% early Thursday before rebounding slightly after the discounter lowered its financial forecast following a hit to its margins due to a shift to consumables and increased theft.

For the discounter’s first quarter ended April 29, same-store sales rose 3.4% at Dollar Tree and 6.6% at Family Dollar. The retailer’s gross margin declined 340 basis points to 30.5% and gross profit decreased 4.7% to $2.23 billion.

“We are rapidly executing on a multifaceted plan to fundamentally transform and improve the operating performance of Dollar Tree and Family Dollar for the long term,” CEO Rick Dreiling said in a statement. “We believe both Dollar Tree and Family Dollar have a clear path to accelerated sales growth and margin expansion over the next three to five years … At our investor conference in June, you will hear more details about our company’s exciting growth plans and the transformational changes we are making.”

For fiscal 2023, Chesapeake, Virginia-based Dollar Tree said it expects consolidated net sales of between $30 billion and $30.5 billion, with same-store sales growth in the low- to mid-single digits.

Dollar Tree opened 107 new stores during the first quarter, relocated 33 stores and closed 29 locations.

The retailer said it does not expect to see any change in theft or the increased mix shift toward food and beverage during the remainder of the year. The sales mix of consumables jumped about 200 basis points during the quarter, Dollar Tree said.

During the quarter, Dollar Tree added multi-price frozen and refrigerated doors at more than 400 Dollar Tree Stores and it is on track to add 16,000 new cooler doors at Family Dollar this year.

“The consumer is feeling the real pressure now of a lot of things that have taken place,” Dreiling told analysts Thursday. “We’ve had a change in SNAP benefits, tax returns are smaller than this time last year, all the stimulus is out of the system and all of that is taking root. And the consumer now is more focused on needs and buying to those needs as close as they can versus wants, and that’s the shift we’ve seen. Now we think that shift is going to continue for a while.”

The discounter noted a 20-point differential in margins between discretionary and consumable products.

Shrink was a hot topic during Dollar Tree’s earnings report, negatively impacting the company’s gross margin during the first quarter by 60 basis points. Dreiling said soaring theft will need to be resolved through “defensive merchandising, store closures and/or through government action at the local level.”

Dollar Tree recently opened a test kitchen at its headquarters, giving it a place to further develop private-label products across categories including food and beverage, and health and beauty items as it looks to boost its margins in consumables.

The trend of higher-income shoppers visiting the discounter continues, Dreiling said.

“We're actually seeing new customers,” he said. “Our core customer is coming more frequently. Now when they come, they don't spend any more, but they come more often. And what we're now seeing is the trade down in that $80,000 income range, and we're actually beginning to target that consumer, and that consumer is more wrapped up in the consumable business.”

Dreiling told analysts that the company recognizes its challenges and is working hard to transform the business.

“Our stores are of comparable size to those of our closest peers but they generate far less revenue per store,” he said. “We understand why and we know how to close the gap. There are no structural impediments to our progressing towards this goal. As we do, we will drive growth and gain market share … We have a tremendous opportunity to improve both of our segments, and we are pursuing that with vigor.”