Dollar Tree's Green Shoots Not Strong Enough

Dollar Tree's stock took a hit today, falling 8.64%. This comes after a disappointing earnings report and concerns about the company's future growth. While Dollar Tree is still a strong retailer, it faces stiff competition from other discount chains. Investors will be watching to see if the company can turn things around in the coming quarters.
's new pricing strategy may be making its foliage look greener, but lackluster traffic is taking away some of that sheen.

On Tuesday, the company reported that comparable-store sales at its namesake stores grew 8.6% for the quarter ended Oct. 29 compared with a year earlier. The Family Dollar chain saw same-store sales grow 4.1%. Both were well above Wall Street expectations. Net income for the whole company rose 23.1%, slightly beating expectations.

The retailer is seeing the benefits of a better pricing strategy under Rick Dreiling, who joined as executive chairman earlier this year. The company has been raising prices at its Dollar Tree stores, whose customers are middle-income suburban consumers looking for discretionary purchases like party items. The introduction of a $1.25 price point and the wider rollout of $3 and $5 items has helped the chain improve gross margins by 5.2 percentage points last quarter compared to a year ago.

Family Dollar saw growth in same-store traffic for the first time in three years after bringing prices down. In the earnings call on Tuesday, Mr. Dreiling said Family Dollar’s prices are now on par with key competitors and cheaper compared with grocery and drugstores. This is good news for lower-income consumers who are seeking essentials and looking for a good deal.

Investors may need more convincing evidence that consumers are migrating to dollar stores. Despite better-than-expected results and an upgrade in the full-year sales guidance, Dollar Tree's stock fell 9% after Tuesday's earnings call.

One clear positive sign for Dollar Tree was that same-store sales growth improved every month at both store chains. This stands in contrast to retailers such as Target, Macy’s and Kohl’s, which all pointed to worsening demand through the quarter.

Though store traffic looks disappointing at both chains, especially compared with big-box retailers Walmart and Target, there are some bright spots. Family Dollar saw same-store traffic growth last quarter, though it was just a 0.1% increase following a 3% decline the prior year. Meanwhile, Dollar Tree’s growth in same-store sales this year has been entirely driven by pricing increases rather than traffic, which has declined for five consecutive quarters. By contrast, big-box retailers have been drawing in more transactions: Target has seen same-store traffic grow for at least seven consecutive quarters, while traffic at Walmart’s U.S. business has been growing or flat for six consecutive quarters.

Although the income statement may look better due to pricing tweaks, sustained traffic growth is necessary to prove that the change at Dollar Tree is deep rooted.