The Q2 2023 results and market share gains by Dollar Tree and Family Dollar were a “Wow!”. The large unit market share gains for brands, traffic outperformance (below), and margin compression demonstrate, once again, that CEO Rick Dreiling’s disruptive strategy for the brands of strong-value prices and enhanced store conditions, in stocks, and service levels are having outsized impact. Dreiling noted, “You heard me say many times that retail is all about growing units, growing transactions, and growing sales per square foot. When these retail fundamentals move in the right direction, everything else follows.”
The expansion of consumables and cooler doors, along with the inflationary price pressures on less-affluent households, are driving large gains in consumables. Dollar Tree’s consumables business was up +13% year-over-year and Family Dollar’s was up +9.5%. By comparison, Walmart’s was up +8%-9%. Dreiling offered additional color: “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. There is also growing evidence that consumers are seeking value through private brands, expanding and improving our private brand assortment will be a significant growth vehicle for us going forward.” The dynamics between Placer visitations and comparable transactions suggest an improvement in conversion rate. Inventory turns improved to 4.0x. Sales per square foot increased to $225 at Family Tree and to $218 at Dollar Tree.
Like other retailers, higher theft-shrink is also hitting Dollar Tree Inc.'s profitability ($250M on a cost basis, or $350M on a sales basis). That, combined with the market share investments noted above, led to a -28% profit decline at Dollar Tree and just above break-even profitability at Family Dollar. Unsurprisingly, Drieling reiterated his confidence that the business can deliver $10 or more in earnings per share (EPS, a measure of company's profitability) by 2026; this year the business will produce around $6 per share in earnings. As we previously discussed, Dollar Tree Inc. is undertaking a significant modernization of its stores, supply chain, and IT infrastructure. On store standards, Drieling said, “With the continued focus on our people, we saw double-digit improvements during the second quarter in employee turnover and store vacancy levels across both segments as the investments we are making in store-level wages, benefits, and elevated standards begin to yield clear intangible results. As I mentioned at our investor conference, we had a significant number of stores that don't open on time or close early due to staffing shortages. I'm happy to report that we saw a measurable improvement in this area during the second quarter at both Dollar Tree and Family Dollar.”