Dollar Tree Inc. was the latest retailer to call out a sizable increase in its theft/shrink during its most recent quarter. Management noted that shrink impacted sales by about $200M (on an annualized basis) for the Dollar Tree banner and $130M for Family Dollar. Like other retailers, potential strategies to offset the higher theft include closing the worst impacted stores or raising the prices in those stores to compensate. CEO Rick Dreiling said, “We have four classes of shrink stores, with 4 being the highest. The shrink impact is pretty uniform through all four classes which I've never seen that in my career, which is truly fascinating.” CFO Jeff Davis noted, “This is not unlike what you're seeing in many other retailers across the industry. Some of this is societal, some of it is economic, some of it is particular to us.”
Due to the higher theft as well as a larger shift in the sales mix to consumables from discretionary goods (a mix shift also impacting the discounters), Dollar Tree Inc. lowered its earnings outlook by 10%. Gross margin was down 530 basis points at Dollar Tree with the biggest driver being the shift from general merchandise to consumables and great values on those consumables (i.e., a lower initial mark-up).
Comparable-store sales for the quarter were solid driven by traffic and transactions. Those traffic gains came despite a reduction in SNAP benefits and tax refunds (the Earned Income and Child tax credits). Dreiling noted that, "Both Dollar Tree and Family Dollar are part of the solution for shoppers buying for need, and close to need, as they look to stretch their paychecks. Our stores are nearby, easy to shop, and provide tremendous value.” Dreiling also attributed the gains to the actions that the company took to improve pricing/value, wages/staffing, service levels, in-stocks, and store standards.
As we discussed in our summary of Walmart/Target’s Q1 2023 updates, the dollar stores are benefiting from a channel shift from discounters to dollar stores as less-affluent households seek out a path to lower ticket purchases in consumables as they to minimize their spending paycheck to paycheck – a dynamic that we have seen several times over the past two decades.
Driving this shift in consumer behavior is the high inflation in packaged food, a topic we have been discussing a lot lately. This an environment that Dollar Tree Inc. has been planning and pricing aggressively, as periods of high consumer stress are when they can capture outsized market share. Frozen and refrigerated products at the $3-$5 price point were added to 3,500 Dollar Tree stores over the past year (resulting in a doubling of these stores’ average ticket) and 16K additional cooler doors are planned for Family Dollar this year.
In terms of pricing strategy, what the value or bargains on these non-produce grocery items look like can be gauged in the difference between the growth in sales and COGS. Looking at just Dollar Tree’s consumables business, sales grew +8%, whereas COGS grew +20%. That 12 ppt spread demonstrates a disruptive pricing and value strategy aimed at taking meaningful market share. Moreover, looking at comparable traffic versus comparable transactions, we can also see that conversion rate improved, meaning that when consumers visited the store, they liked the prices and merchandise deals and they bought. Jeff Davis, “Across both banners, they are averaging about 3 million net new customers over a trailing 12-month period. So you are seeing that customer -- a new customer coming to us. We're seeing that customer shop across the entire store across consumables and discretionary. And as Rick has mentioned, our ability to make sure that we have the right store environment such that they want to come back is an important element for us. That's the reason why we want to continue improving our store standards and delivery and service to those stores.”