What happened
Shares of Dollar Tree (DLTR 0.31%) soared 29% this week compared to where they closed on Friday, May 20 after the company reported first-quarter earnings that beat Wall Street expectations on the top and bottom lines.
Revenue of $6.9 billion was 6% above last year's $6.5 billion performance and ahead of analyst forecasts for $6.8 billion. The deep-discount chain generated adjusted earnings of $2.37 per share, handily topping consensus expectations for $2 per share as well as outstripping the year-ago result of $1.61 per share.
Image source: Getty Images.
So what
It shouldn't be surprising that during a time when inflation is at its highest point in over 40 years, gas prices are at record levels, interest rates are rising, and consumers have less money to spend that they would turn to a deep discounter like Dollar Tree to help stretch their budgets.
The retailer's executive chairman Rick Dreiling told analysts: "We are in the midst of a very challenging time for consumers as many are living paycheck to paycheck. ... In tough times, value retail can be part of the solution to help families stretch their dollars to meet their evolving needs."
Dollar Tree owns not only its namesake stores, but also the Family Dollar banner. Among the many initiatives it has launched over the past few years -- all of which President and CEO Michael Witynski says are working -- are combination stores that are half Dollar Tree, half Family Dollar, which give consumers a variety of price points and product selection.
Ever since Dollar Tree "broke the buck" and began selling items above the $1 threshold that made it unique among the so-called dollar stores, consumers have responded positively to the broader selection of better quality and name brand goods.
Now what
It's not all blue skies and green grass for the discounter, because along with consumers, retailers are also experiencing higher costs. Diesel fuel, for example, severely impacts trucking companies delivering goods to the stores.
Where the average cost of regular gas is $4.60 per gallon, the average cost of a gallon of diesel fuel is $5.53. Dollar Tree expects cost pressures on domestic freight will continue to rise and it has increased its full-year expense forecast as a result. CFO Kevin Wampler noted that a $1 increase in the cost of a gallon of diesel fuel results in a $63 million headwind for Dollar Tree on an annualized basis. One year ago diesel fuel cost $3.18 per gallon; in 2020, it was $2.39 per gallon.
Dollar Tree, however, has still raised its outlook for the year, increasing its earnings guidance to a range of $7.80 per share to $8.20 per share, from $7.60 per share to $8 per share.
