Dollar Tree Earnings: Traffic Trends Positive, but Declining Discretionary Mix Pressures Margins

No-moat Dollar Tree’s DLTR strategic roadmap remains sound, but cautious consumer spending and heightened sensitivity to price increases drove another quarter of tight margins, with no near-term turnaround catalyst apparent. We didn’t see anything particularly striking in the second-quarter results—not enough to justify the market sending the shares down 10% after the earnings release—and expect to leave our $105 fair value estimate relatively unchanged as we balance time value with tighter margin guidance than we’d previously assumed. The shares continue to look overvalued.

We expect to move our full-year $6.05 adjusted EPS forecast closer to the $5.93 midpoint of the guidance range even though management lifted its enterprise sales target by about 2%, to $30.8 billion at the midpoint. Our lower EPS outlook predominantly reflects worse-than-expected shrink, which posed a 75-basis-point and 45-basis-point annual headwind at Dollar Tree and Family Dollar, respectively, and a larger-than-contemplated mix shift toward lower-margin consumable products. While the firm’s investments in a higher-priced assortment, frozen goods, and premium-branded products should yield long-term benefits, we don’t see them generating a near-term lift, given a price-sensitive customer base and the limited benefit to average check (which fell for Dollar Tree in each of the past two quarters), even though 44% of stores are now outfitted in the premium Dollar Tree Plus format.

Despite our cautious outlook, it was encouraging to see the firm take unit market share in both segments, with careful pricing defending its value proposition as Dollar Tree benefits from value-seeking behaviors across income strata. To this effect, more than half of the firm’s 5 million new customers over the past 12 months boast household incomes north of $125,000, and the firm continues to generate traction in its premium frozen and Plus assortments as consumers trade into the discount retail category.