It is hard to knock Dollar Tree (DLTR -0.14%) for increasing sales by 6.5% in the first quarter, a period in which some of the industry's biggest names appeared to struggle. But the good news here just doesn't look quite so great when you step back and dig into the numbers a little bit.
Here's why you might want to take a more cautious approach with Dollar Tree right now.
The good and the not so good
When it comes to good news, it was Dollar Tree's namesake brand that garnered all of the attention. Sales in the first quarter for this business rose a hefty 11.2%. Those are comparable-store sales figures, so it's a pretty robust number given that it measures results for stores that were open for at least a year. Clearly, consumers are going to Dollar Tree and spending more.
Image source: Getty Images.
There's a nuance there that's important because Dollar Tree hiked prices by a massive 25% on most of the products it sells. True, that only means shifting from $1 per item to $1.25, which is kind of small on an absolute basis, but percentage wise, it is huge. So perhaps it is more shocking that comparable-store sales in this division only rose 11.2%. It would seem that a more material increase might have been expected.
Then there's the company's Family Dollar division, which saw comparable-store sales fall 2.8%. To be fair, most of that was the result of store closures related to a "product-related recall," which accounted for two percentage points of the drop (more on this below). However, that still left sales in this division down 0.8%, which the company explained was caused by cycling through "significant stimulus dollars released in the prior year's quarter." In other words, people spent less because they had less money to spend. To think that only the Family Dollar business saw this impact seems a bit unrealistic and hints that, maybe, Dollar Tree is facing some sales issues, too.
As for the product-related recall, it was tied to a rat infestation at one of the company's distribution centers. That could be a one-off event, but investors should probably keep an eye on the news here just the same. If there are more such problems, it would indicate worrisome operational issues.
Is there pain to come?
Adding to the worry here is management's commentary during Dollar Tree's Q1 2022 earnings conference call that traffic at the company's stores decreased 3.6% in the quarter. That was likely driven, at least in part, by the company's price hikes. And it also fits in well with competitor Dollar General's (DG 0.30%) first-quarter 2022 earnings call comments that it saw traffic decline and that its customers were shopping more "intentionally." Or, to put it another way, customers aren't spending money on stuff they don't actually need.
If that becomes a trend at dollar stores, then Dollar Tree, Family Dollar, and Dollar General will all be facing notable sales headwinds. And that comes as all three of these nameplates are also dealing with rising costs thanks to inflation. While hardly unique to these retailers, rising costs for products, employees, and shipping crimp margins and, thus, impact earnings in a negative way.
The offset to these problems is that people who might not normally shop at a dollar store might consider it if inflation is crimping their wallet. So the hit from current customers spending less might be offset by new customers. That's a potential positive, but with names like Walmart and Target likely serving such trade-down customers, competition for those dollars is likely to be fierce. Note that both of these retail giants have highlighted the need to keep prices low in order to retain customers, which suggests they will give up margin to maintain market share.
Glass half empty
It's pretty easy to take a positive view of Dollar Tree's Q1 results, which were -- from a top-level perspective -- strong. However, if you take the time to dig in just a little, there are some issues here that look likely to get worse before they get better. And the bad news looks like it is being hidden by the massive price hike at Dollar Tree's namesake stores.
At the very least, investors should be closely monitoring what happens through the rest of the year, specifically looking for signs of further weakness.
