Dollar Tree (DLTR): A few points to note about the discount retailer’s Q3 performance

Shares of Dollar Tree, Inc. (NASDAQ: DLTR) were up over 1% on Thursday. The stock has dropped 13% year-to-date. The discount retailer delivered third-quarter 2023 earnings results that did not meet expectations. The company also narrowed its guidance for the full year. Here are a few points to note about the Q3 performance:

Quarterly numbers

Dollar Tree’s consolidated net sales increased 5.4% year-over-year to $7.31 billion in Q3 2023 but narrowly missed estimates. Enterprise same-store sales grew 3.9%, helped by a 4.7% rise in traffic, partly offset by a 0.8% decline in average ticket.

The company delivered EPS of $0.97 in Q3, which was down 19% year-over-year and below expectations. Gross margin declined 20 basis points to 29.7%, due to the shift in sales mix towards low-margin consumables, higher shrink, product cost inflation, and distribution center payroll investments.

Segment performance and trends

Against a challenging backdrop of inflation, depleted savings and reduced government benefits, Dollar Tree managed to grow its top line as customers from a broad range of income levels turn to its stores in search of value.

In the third quarter, the company saw traffic grow by 7% at its namesake banner and 1.4% at the Family Dollar banner. However, average ticket dipped 1.5% at the Dollar Tree segment and rose less than 1% at the Family Dollar segment.

The discount retailer continued to see strength in the consumables category, with comps increases of 11.1% at the Dollar Tree segment and 6.2% at the Family Dollar segment. The higher-margin discretionary categories remained under pressure during the quarter. Discretionary comps inched up by 1.1% at the Dollar Tree banner but fell 12.5% at the Family Dollar banner.

Categories such as home décor, toys and electronics experienced weakness in particular, which is an indication that lower-income households under financial stress are opting to spend more on needs-based goods.  

Outlook

On its quarterly conference call, Dollar Tree said it expects shrink trends to remain unfavorable in the fourth quarter of 2023. Comps for the Family Dollar segment are expected to remain soft due to a challenging macro environment for low-income households and continued weakness in the discretionary category. The Dollar Tree segment, on the other hand, is expected to see continued strength.  

Consolidated net sales are expected to range between $8.6-8.8 billion in Q4 2023. Enterprise same-store sales are expected to increase in the low single digits. For the Dollar Tree segment, same-store sales are expected to increase in the mid-single digits while in the Family Dollar segment, the same is expected to range between a decrease of 1% to an increase of 1%. EPS is expected to range between $2.58-2.78.

Dollar Tree narrowed its guidance for the full year of 2023. It now expects consolidated net sales of $30.5-30.7 billion as opposed to the previous range of $30.6-30.9 billion. Comparable store net sales are expected to increase in the mid-single digits, with a mid-single-digit increase in the Dollar Tree banner and a low single-digit increase in the Family Dollar banner. EPS is now expected to be $5.81-6.01 versus the prior outlook of $5.78-6.08.