Another American dollar store giant flashes a consumer red light! Dollar Tree slashes full-year profit guidance by 20%, plunges over 20% intraday | Financial Report Insights

Following the performance debacle of Dollar General, another American "dollar store" discount retail giant Dollar Tree, which specializes in the sinking market, has also raised the red flag of weak consumption among low- and middle-income groups, slashing its full-year profit guidance beyond expectations.

On Wednesday, September 4th, Eastern Time, Dollar Tree announced the financial data for the second quarter of the fiscal year 2024 ending on August 31, 2024, and provided performance guidance for the full fiscal year 2024.

1) Key Financial Data:

Revenue: Net sales in the second quarter were $7.37 billion, a year-on-year increase of 0.7%, with analysts expecting $7.49 billion.

EPS: Adjusted earnings per share (EPS) in the second quarter were $0.67, a 26.4% year-on-year decrease, with analysts expecting $1.05.

Same-Store Sales: Overall same-store sales in the second quarter increased by 0.7%, with analysts expecting a growth of 1.45%. A year ago, it increased by 6.9%. Specifically, same-store sales for Dollar Tree business in the quarter increased by 1.3%, with analysts expecting a growth of 2.89%, compared to a 6.9% increase a year ago. Same-store sales for Family Dollar business in the quarter decreased by 0.1%, with analysts expecting a decrease of 0.21%.

Gross Margin: The overall gross margin in the second quarter was 30%, with analysts expecting 29.9%. A year ago, it was 29.2%. Specifically, the gross margin for Dollar Tree business in the quarter was 34.2%, with analysts expecting 34.1%, compared to 33.4% a year ago. The gross margin for Family Dollar business in the quarter was 24.9%, with analysts expecting 24.6%.

Stores: As of the end of the second quarter, the total number of stores was 16,388, a 0.5% decrease year-on-year, with analysts expecting 16,374. Specifically, there were 8,627 Dollar Tree stores, a 5.5% increase year-on-year, with analysts expecting 8,294, and 7,761 Family Dollar stores, a 6.5% decrease year-on-year, with analysts expecting 8,071.

2) Full-Year Performance Guidance:

Revenue: Net sales for the full year are expected to be $30.6 billion to $30.9 billion, previously expected to be $31 billion to $32 billion.

EPS: Adjusted EPS for the full year is expected to be $5.2 to $5.6, previously expected to be $6.5 to $7.0, with analysts expecting $6.57.

After the financial report was released, Dollar Tree's stock price opened nearly 11% lower on Wednesday, with a decline of over 20% in the morning session, maintaining a decline of over 20% at midday.

Weak demand is not limited to low-income families, macro pressures are increasingly affecting shopping for middle- and high-income customers

In the second quarter, Dollar Tree's revenue saw a slight increase, benefiting from a 1.1% growth in foot traffic. However, the average transaction value dropped by 0.5%, indicating that although there were more customers shopping, their spending decreased, still unable to significantly drive the company's revenue growth.

The bleak outlook for consumer spending is further reflected in Dollar Tree's performance guidance. Dollar has lowered its full-year sales guidance by about 1.3% to 3.4%, with the entire EPS guidance range significantly reduced by 20%. The EPS guidance is thus far below Wall Street expectations, with the lower end of the new guidance nearly 21% lower than analysts' expectations, and the upper end nearly 15% lower. A Goldman Sachs analyst commented that while it was expected that Dollar Tree would lower its EPS guidance, the extent of the reduction was unexpected, pointing out that the company mentioned soft consumer demand among middle to high-income customers.

Chief Financial Officer (CFO) Jeff Davis stated in a release that the downward revision of the full-year sales guidance is mainly due to "the increasing impact of macro pressures on the purchasing behavior of Dollar Tree's middle to high-income customers."

During the earnings conference call, Davis reiterated this point, saying,

"Our sales are softer, especially in non-essential categories, reflecting the increasing impact of macro pressures on the purchasing behavior of Dollar Tree's middle to high-income customers."

He also said, "Our initial expectations for the second quarter did not anticipate these pressures shifting so severely onto Dollar Tree's customer base."

Some analysts pointed out that Dollar Tree's performance provides a unique window into observing the consumption health of American consumers, as its flagship Dollar Tree stores target middle to high-income consumers in suburban areas, while its Family Dollar chain primarily serves low-income families purchasing essential goods. Over the past few quarters, the core low-income customer base of Family Dollar has shown consistently weak demand. Now, this weakness seems to have spread to the relatively affluent customer base that frequents Dollar Tree.

Dollar Tree also mentioned this shift in consumer behavior when announcing its financial results, stating that households with annual incomes exceeding $125,000 have begun to shift from "buying what they want" to "buying what they need," leading to a significant shift in the sales mix towards essential items.

Mike Creedon, Dollar Tree's Chief Operating Officer, said, "People may have changed the way they celebrate parties this summer. There are fewer guests, and fewer parties."

Dollar Tree stated during its earnings release that it is "experiencing one of the most challenging macro environments in history." This sentiment should resonate with Dollar General, its longtime rival that announced its earnings last week.

Wall Street CN previously mentioned that Dollar General's second-quarter performance released last Thursday fell well below expectations across the board, and the company lowered its full-year EPS guidance range by nearly 18% to 19%. Dollar General's CEO mentioned that the trend of weak sales is partly due to financial pressures on its core customers Analysis suggests that Dollar General's poor performance at least indicates that the downward trend in US consumption is still ongoing and may worsen in the coming months