Dive Brief:

• Dollar Tree Inc. on Thursday reported first quarter consolidated net sales rose 4.0% to $5.29 billion from $5.09 billion in the prior-year period, matching the Thomson Reuters I/B/E/S cited by Reuters. Same-store sales rose 0.5%, driven by increases in average ticket and comparable transaction count, according to a company press release. Consensus Metrix analysts cited by Reuters had expected a 0.9% same-store sales increase.

• By brand, Q1 same-store sales for Dollar Tree rose 2.5%, while that metric fell 1.2% for its Family Dollar banner. Analysts cited by Reuters had forecast a 0.1% same-store sales rise expected at Family Dollar. Q1 gross profit rose 4.7% to $1.63 billion, compared to $1.55 billion in the prior-year first quarter. As a percent of sales, gross margin rose to 30.8% compared to 30.6% in the prior year, driven primarily by lower merchandise and freight costs, and partially offset by higher markdowns, the company said.

• The dollar store retailer has determined that an outstanding balance of $50.9 million (a divestiture-related receivable from Dollar Express, which the Federal Trade Commission had required Dollar Tree to divest amid its takeover of Family Dollar) is not recoverable and recorded an impairment charge to write down the receivable to zero. As a result, Q1 net income fell $32.2 million to $200.5 million and diluted earnings were 85 cents per share, compared to 98 cents per share last year. 

Dive Insight:

In his statement Thursday, CEO Bob Sasser expressed satisfaction with the company’s progress in the first quarter, noting that same-store sales were positive and total sales landed within the company’s guidance.

"The Dollar Tree banner continues to generate results that are strong, consistent and growing, and we are enthusiastic about the opportunity to improve the Family Dollar business as we launch our renovation initiatives in the second quarter," he said.

While the results weren’t bad overall, they include several disappointing elements, according to GlobalData retail analyst Håkon Helgesen, who pointed to “noticeable deterioration in same-store growth.”

“This slower advancement of productivity gains along with more discounting across parts of the range put a dent in profits,” Helgesen said in a note emailed to Retail Dive. “At operating level, profit was down 7.1%; at net level, it declined by 13.8%. The step-down in growth was noticeable in both parts of the business, although while Dollar Tree shops managed to maintain growth, sales at Family Dollar shrunk. Fortunately for Dollar Tree, strong new store openings allowed total enterprise-wide growth to remain in the mid-single digit range. Even so, this is a deterioration over the prior quarter.”

The retraction was caused by tax return delays this year, but also by pressure on spending by lower-income consumers due to rising gas prices and other inflationary pressures, on top of stepped up price competition, most notably from Wal-Mart Stores Inc., Helgesen said. The competition will likely only be exacerbated by the entry of low-price no-frills grocery store Lidl, he said.

GlobalData Retail research has found that Dollar Tree and its Family Dollar unit have lost market share to Wal-Mart. To fight that, Family Dollar in particular, which Helgesen notes is competitive on price, “needs to make more noise if it is to be heard above the cacophony of retailers banging their price drums.” 

That will continue to hit margins, however. Dollar Tree’s investments in its Family Dollar stores, though prudent according to GlobalData Retail’s assessment, may take longer to bear fruit, he said.

“None of this suggests that Dollar Tree is a bad or broken business,” he said. “We believe it remains relevant, has continued fleet expansion opportunities and has some scope to grow its embryonic digital business. However, it is also clear the company is now in an era where it will need to run faster just to stand still.”