(Bloomberg) -- Dollar Tree Inc.’s shares plunged on Wednesday in a harbinger of the pain coming for companies that cater to consumers earning less than $35,000 a year.
Along with poor results from Dollar General Corp. and Five Below Inc. last week, the weaker-than-expected performance reveals a particularly troublesome moment for dollar stores as relentless cost-of-living increases erode the purchasing power of low-income shoppers.
At the same time, big-box rivals such as Walmart Inc. and Target Corp. haven’t observed the same drop-off in demand — suggesting they’re winning over some customers who had previously shopped at discount chains.
“We think the dollar store sector is under extreme pressure from both low-income customer weakness as well as incremental share leakage to competitors like Walmart,” Truist Securities analysts including Scot Ciccarelli wrote in a note to investors on Wednesday. They said companies focused on low-income customers “have continued to substantially underperform given the cumulative, corrosive impact of inflation.”
US inflation peaked at 9.1% in 2022 and has steadily declined since then, currently hovering around 3%. Even so, the extended buildup has saddled consumers with prices that are well above what they were before the pandemic. At the same time, the job market has softened.
Dollar Tree, which also operates the Family Dollar chain, was the latest discount retailer to trim its outlook for the current year on Wednesday, sending shares down nearly 26% — the most intraday since 2001. Last week, Dollar General fell the most on record after its own guidance downgrade. Five Below, which sells mostly products for $5 or less, also lowered its sales view. All three companies have posted year-to-date stock declines of 40% or more.
Mike Creedon, chief operating officer of Dollar Tree, said on the company’s conference call that Family Dollar’s core lower-income customers remain under pressure. He added that high inflation, interest rates and other economic dynamics also started to have a bigger impact on Dollar Tree’s middle- and higher-income consumers during the latest quarter.
“We are not pleased with our second-quarter results or having to revise our full-year outlook. But this updated outlook reflects how the challenging macro-environment continues to pressure our customers,” he said.
The discount chain operator said it now expects comparable sales growth in the low-single-digits, versus the previous forecast of growth in the low-to-middle single digits. That is roughly in line with what Wall Street analysts were anticipating. It also cut its forecast for adjusted earnings.
Dollar Tree is reviewing a potential sale and other strategic alternatives options for Family Dollar, which it bought for about $8.9 billion almost a decade ago, as well as closing underperforming Family Dollar stores.
The industry’s struggles may complicate Dollar Tree’s efforts to sell Family Dollar, as well as Dollar General’s efforts to bolster its business, which include simplifying operations and slowing new store openings.
Michael Montani of Evercore ISI wrote that Dollar Tree’s earnings provided “another reminder of the headwinds facing the core low- to middle-income consumer, as well as the difficulty of executing a transformation amidst a lackluster demand backdrop.”
Dollar Tree, which operates more than 16,000 stores, said earlier this year that it would close about 1,000 stores to improve profitability.
It is also expanding its product lineup to include a greater range of items, including ones that cost as much as $7. The company said it’s experiencing a notable sales increase at the 1,600 stores that are offering various price points. New stores offering a broader range of prices are growing faster than other locations, Creedon said, though hundreds of stores are behind schedule for conversion.
(Adds economic data in fifth paragraph and updates shares.)
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