Another Day, Another Dollar

Dollar store stocks went on sale today, following a pair of less-than-stellar earnings reports. Shares of Dollar General and Dollar Tree fell about 4% and 12%, respectively.

As with many things in life, how good or bad an individual earnings report is is all relative. For Dollar General, the larger of the two chains, net sales of $8.7 billion last quarter were up more than 14% from the same three months in pre-pandemic 2019. That's very solid growth for any retailer over any two-year period.

But compared with the May-to-July period last year, sales were down almost 5%. Dollar Tree's sales were likewise up considerably from 2019's fiscal second quarter, but lower than 2020's.

"Unlike department stores, which recently reported far better results than expected amid a recovery in apparel shopping, dollar stores faced tough comparisons with last year, when they saw an uptick in sales amid the pandemic," wrote Barron's Connor Smith today.

And there were other signs of tougher times for dollar stores than usual. As their names suggest, the chains thrive on sales of low-priced goods, which tend to carry slim profit margins. That makes the businesses particularly sensitive to input cost increases. Those took a bite out of earnings last quarter.

Dollar General and Dollar Tree both pointed to higher transportation costs in particular as weighing on their gross margins in the period. 

Here's Dollar Tree CEO Michael Witynski on this morning's earnings call:

As you have certainly seen in the media and elsewhere, freight costs have reached unprecedented levels as a result of increased demand, limited capacity, and shipping delays. For context, three months ago, the Shanghai Containerized Freight Index, which reflects spot rates on ocean freight from China, was already at an all-time high, up more than 280% year-over-year and more than 400% since 2019. Now these rates have continued to rise and have increased more than 20% since we last reported on May 27.

Dollar Tree management now expects to incur up to $200 million more in additional freight costs than it had forecast back in May. The company was forced to lower its earnings guidance for the current fiscal year as a result.

Read more from Connor Smith on today's dollar store earnings here.