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Soaring Freight Costs Whack Dollar Stores

Operating on razor thin margins has its downsides.

The dollar store sector is poorly positioned when it comes to higher freight costs because its price points leave less wiggle room for mark-ups.

“The main takeaway from 2Q results is the increasing margin pressure from freight,” Goldman Sachs retail analyst Kate McShane said. “While this issue is likely transitory, suggesting a future tailwind, duration remains uncertain.”

In the latest round of second-quarter earnings reports from Dollar General Corp. and Dollar Tree Inc., both firms touched on what they’re doing to navigate supply chain headwinds. One common denominator is that the sector—as well as its other discount channel counterparts, Walmart Inc. and Target Corp.—doesn’t expect relief anytime soon. Everyone in the channel is working with their vendor partners to keep prices low while managing margins.

Walmart’s plans include Capex spending to build additional capacity and automation from its largest fulfillment centers to its stores. The discounter is even chartering vessels to avoid out-of-stocks in the third and fourth quarter, according to chief financial officer Brett Biggs in a conference call this month.

Target also has focused on more investments in technology to beef up advances in its management of supply chain operations. Investments made a few years back allowed it to up its same-day service options last year when the Covid pandemic hit. And new investments are being made in robotics, machine learning and artificial intelligence, John Mulligan, chief operating officer, said in a conference call earlier this month.

In contrast, the dollar stores didn’t talk much about technology on their calls, but executives did provide some detail on how they’re handling freight challenges and higher costs.

Dollar General’s executive vice president and chief financial officer John Garratt told analysts that the company is anticipating “higher supply chain costs in the second half” compared to previous expectations. He pointed to transit and port delays, as well as elevated demand for services at third-party carriers, as the main culprits.

Todd Vasos, Dollar General’s CEO, said the retailer’s team adapted to the “challenging operating environment, including additional uncertainties brought on by the Delta variant and pressures on the global supply chain.”

Vasos told analysts that most of the freight pressures are from imports. While there’s been some instances of price increases due to inflationary costs, he said that Dollar General’s size and scale allows it to negotiate with vendors.

“If we have some price increases that we don’t believe we should pass on, we will drop the [stock-keeping unit] and move on to something else [our customer needs],” the CEO said, adding “We’ve done that a lot in the last quarter to two quarters.”

Dollar General Corp. reported earnings for the second quarter ended July 30 that fell 19 percent to $637 million on revenue that was essentially flat at $8.65 billion from $8.68 billion a year ago. The decrease was driven by a same-store sales decline of 4.7 percent due to a decline in customer traffic. The company expects an increase in transportation and distribution costs for the remainder of fiscal 2021.

Competitor Dollar Tree also on Thursday acknowledged that its Dollar Tree banner is “highly sensitive to freight costs,” and while it doesn’t expect the conditions to be permanent, it continues to take mitigation steps to lessen the impact and “otherwise improve gross merchandise margin.”

On the call with Wall Street analysts, Dollar Tree chief financial officer Kevin S. Wampler said freight costs and a slightly lower initial mark-up were weighing on margins. He said that the additional costs have the biggest effects on Q2 and Q3.

Wampler cited the lack of drivers for domestic freight, leading to having to pay surge rates to get goods moved. He said the expectation right now is that the “global supply chain will take pretty much the full year to work through this.”

Michael Witynski, Dollar Tree’s president and CEO spoke of delays at the ports that include the time that it takes to unload the ships, the amount of our ships. Some of the costs will be offset because we “don’t have the $289 million in Covid costs from last year,” the CEO said.

The company said its freight outlook in the first quarter assumed that its “regular ocean carrier would fulfill only 85 percent of their contractual commitments and also assumed higher spot market rates.”

In reality, that projection was optimistic. The company is now projecting that its “regular carriers will fulfill only 60 percent to 65 percent of their commitments.” Spot market rates for ocean freight from China have continued to trend upward from all-time highs, and “have increased more than 20 percent” since the company last reported earnings in May.

Dollar Tree reported a second-quarter profit increase of 8 percent to $282.4 million on a 1 percent increase in revenue to $6.34 billion from $6.28 billion. By banner, Dollar Tree’s same-store sales fell 0.2 percent, while comparable-store sales declined 2.1 percent at Family Dollar.

 

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