Dollar Tree cuts profit target on slowing demand, higher costs; shares slump

By Aatrayee Chatterjee and Granth Vanaik

(Reuters) -Dollar Tree Inc on Thursday trimmed its full-year profit forecast after missing quarterly profit estimates, hurt by slowing demand for discretionary items and elevated cost pressures, sending shares of the retailer down more than 14%.

With stubborn inflation, the company is experiencing a fall in demand for higher-margin discretionary goods compared to perishables like snacks and cookies, that has dented margins at a time when costs have been elevated.

"We expect the elevated shrink (inventory loss) and unfavorable sales mix to persist through the balance of the year," CEO Rick Dreiling said in a statement.

Chesapeake, Virginia-based Dollar Tree said it now expects fiscal 2023 earnings of $5.73 to $6.13 per share, compared with its prior outlook of between $6.30 and $6.80 per share.

"We were very surprised by the cut. We are not sure why shrink wasn't known when guidance was provided last quarter," said Wells Fargo analyst Edward Kelly.

Last week, big-box retailer Target Corp also warned that theft and organized retail crime could reduce this year's profitability by more than $500 million.

Dollar Tree's gross margins declined 340 basis points to 30.5% in the quarter ended April 29, compared to a year ago. This contrasts comments from some retailers which have been optimistic towards their gross margin recovery.

Still Dreiling said the company expects consumer shopping behavior to normalize over time and margin profile to rebound.

The company tightened 2023 net sales forecast to between $30.0 billion and $30.5 billion, compared to a $29.9 billion to $30.5 billion range estimated previously.

"We are disappointed by another mixed earnings report and the fourth consecutive lowered guidance," Telsey Advisory Group analyst Joseph Feldman said.

Excluding items, Dollar Tree earned $1.47 per share in the first quarter, below estimate of $1.52.

(Reporting by Aatrayee Chatterjee and Granth Vanaik in Bengaluru; Editing by Maju Samuel)