The dollar store operator’s new management sees more opportunities
By guest author Jinjoo Lee from the Wall Street Journal.
Dollar Tree DLTR 1.95%increase; green up pointing triangle is no longer looking wilted under new management. Further growth won’t come cheap, though.
The retailer said on Wednesday that comparable-store sales grew 8.7% for the Dollar Tree chain in the quarter ended Jan. 28 compared with a year earlier—better than the 7.2% growth analysts polled by Visible Alpha were expecting.
Its Family Dollar chain saw comparable-store sales growth of 5.8%, well exceeding Wall Street expectations of 3.7 % growth. At least part of that is thanks to higher-income consumers feeling squeezed by inflation: Chief Executive Officer Richard Dreiling said on the earnings call on Wednesday that consumers making USD 80000 a year are trading down to the company’s stores.
The green shoots at Dollar Tree and Family Dollar are surprising given the short amount of time the new management has had to turn the company around. It is early proof that the store concepts themselves are still healthy as long as they are exposed to the right merchandise mix and operating conditions.
The retailer’s management has undergone something of an uprooting since early 2022, when the company settled with activist investor Mantle Ridge to appoint Mr. Dreiling, the former Dollar General CEO, as its executive chairman. He led a turnaround at Dollar General starting in 2008 and has replaced most of the top positions since stepping in as chairman at Dollar Tree in early 2022. He recently took over the CEO role.
Of the 16 executives listed on Dollar Tree’s website, only two were with the company 15 months ago, Mr. Dreiling said on the earnings call on Wednesday.
The company has already picked the lowest-hanging fruit: It raised the base price point at Dollar Tree from USD 1 to USD 1.25 and introduced more products in the USD 3 and USD 5 range. That has helped boost margins at its namesake stores. Management has also improved in-stock positions at Family Dollar, a move that perhaps explains the chain’s year-over-year traffic growth for two consecutive quarters.
The company said it would expedite spending this fiscal year to further improve the business: It plans to raise average hourly wages by USD 2, build 650 new stores, renovate 1000 stores, improve its distribution centres and make technology investments to improve efficiency. All of that adds up to higher-than-expected capital expenditures and overhead: The company said it expects to make USD 2 billion of capital expenditures this year, well above the USD 1.3 billion that Wall Street was penciling in.
Operating expenses will increase by USD 430 million, or by USD 1.45 per share. It remains to be seen how long those extra dollars go, though. Notably, the wage increases come as other major retailers such as Walmart and Home Depot are beefing up their paychecks, too. Competitor Dollar General is expected to spend a much more moderate USD 1.4 billion on capital expenditures this year.
All of that means Dollar Tree’s profit will be weaker than expected this year, though it expects investments to yield returns starting 2024. The company said it expects earnings per share of USD 6.30-USD 6.80 this fiscal year, which at the midpoint would be a 9.2 % decline and well below analysts’ expectation of USD 7.63. Despite that disappointing guidance, Dollar Tree shares gained 2.2 % by early Wednesday afternoon following the earnings call, showing that investors trust Mr. Dreiling’s new direction for the company.
Dollar Tree’s stock is up more than 30 % since the day The Wall Street Journal reported that Mantle Ridge is working with Mr. Dreiling to shake up the company, while his former firm Dollar General is down 4.6 %. Dollar Tree has greener thumbs tending to it now, but expectations are running a lot higher, too.