Big discounters like Dollar Tree are vulnerable to high supply chain costs

Big discounters like Dollar Tree are vulnerable to high supply chain costs

When a vessel chartered for Dollar Tree arrived in China to load cargo, a positive COVID-19 test from a crew member forced the vessel to turn around. The trip was delayed for two months.

CEO Mike Wittensky shared this story and other shipping issues during Thursday’s earnings call. He spoke candidly about supply chain disruptions and the labor shortage. And he said he made it harder for the retailer, who sells most of his items for a dollar. And they should continue until next year.

“Dollar Tree is more sensitive to freight costs than others in the banner industry,” he said.

Dollar Tree said Thursday that rising transportation costs would drop profits from $ 1.50 to $ 1.60 per share – more than double the 60 cents to 65 cents estimated in May. He forecasted earnings per share of between $ 5.40 and $ 5.60 for the year, which was lower than analysts expected.

Shares of the company closed at $ 93.48, down 12.08% on Thursday.

Big discounters are feeling the pain as the COVID epidemic and congested ports increase the cost of moving goods around the world. Retailers such as Dix Sporting Goods, Best Buy and Williams-Sonoma posted higher gains this week. These companies found that fewer promotions did not reduce their customers’ willingness to spend. Some said they pay more to move goods quickly – like flying freighter on planes, and that buyers are still buying.

At low cost retailers, however, buyers cannot afford to pay more or will opt out if the item does not appear to be a good deal. This puts pressure on retailers, as they have to choose when to increase prices and when to absorb the higher costs.

“I will tell you that we are very careful with price transmission because we know that our main customer can lead to very high prices,” Dollar General CEO Todd Vasos said on Thursday’s earnings call. .

Shares of rival chain Dollar Store closed 3.77% lower on Thursday at $ 225.90.

Low-cost retailers – which also cater to price-sensitive shoppers – also all fell on Thursday. Ross, TJ Maxx and Burlington stores closed 4%, 3% and 9% respectively in the early hours of Thursday afternoon. Nordstrom, which includes Nordstrom Rack, closed about 8%.

Some explained how they cope in the face of adversity.

Dollar General’s Vasos said the retailer is in talks with suppliers and has traded some items for similar items in recent quarters to keep prices low.

Dollar Tree’s Wittensky said the retailer first reserved dedicated space on charter vessels, which includes signing a three-year contract for a larger vessel. He bought more American products, so Dollar Tree and Family Dollar stores were well stocked for back to school. And it gives priority to sea containers, depending on the cargo in season or in demand.

At the same time, he said, he will continue to place seasonal purchase orders 30 days earlier than usual and monitor the availability of shipments at ports in China and the United States.

During the call, company executives highlighted predictions from industry experts that shipping capacity will not return to normal after 2023, as more ships become available.

Still, CFO Kevin Wampler acknowledged the rapidly changing environment during the pandemic – and said it was difficult to predict future freight costs.

“There could be another Covid outbreak,” he said. “There could be a lot of different things that could affect this. I think you have to think about the fact that this is probably the most dynamic thing we have ever seen when it comes to this market. “

—CNBC Robert hum contributed to this report.

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