Dollar Tree is adding closed cases and removing items from stores amid rising theft costs

Dollar Tree (DLTR) said Thursday that it is taking steps to combat a growing problem in retail: shoplifting, or “deflation” as the industry calls it.

The value retailer’s stock fell more than 10% on Thursday after posting a weaker-than-expected outlook and lower gross margins due to customers shifting toward consumables and “high deflation.”

“Unfortunately, the headwinds we’re facing are shrinking our margins right now,” Jeff Davis, Chief Financial Officer of Dollar Tree, told analysts during the earnings call Thursday.

The company’s gross margins of 29.2% in the fourth quarter were down 220 basis points from the year-ago period and were just shy of the consensus forecast of 29.7%.

Dollar Tree’s quarterly earnings of $0.91 per share beat estimates of EPS of $0.87. However, its third-quarter earnings forecast fell short of expectations, as the company forecast earnings of $0.94-$1.09 per share in the current quarter, less than the $1.29 Wall Street was expecting.

Second-quarter revenue of $7.32 billion rose more than 8% year-over-year and came in above estimates of $7.21 billion.

An unfavorable sales mix as customers continue to spend more on low-margin perishables also affects Dollar Tree’s bottom line. “As you can see in the retail sector, people are moving more towards consumer items and we are not immune to that,” Davis said.

“We’re now taking a very defensive approach to cut,” Dollar Tree CEO Rick Drilling said during the earnings call. “I don’t see any problem with getting to more realistic margin levels.”

In response, the company plans to introduce anti-theft initiatives including moving certain items behind the checkout platform and removing some SKUs altogether.

Household products manufactured by Procter & Gamble are seen on shelves at the Dollar Tree in Newburgh, New York, US, May 14, 2023. REUTERS/Jessica DiNapoli

Household products made by Procter & Gamble are seen on shelves at the Dollar Tree in Newburgh, New York, May 14, 2023. (Jessica DiNapoli/Reuters)

“It took us a quarter, but we have several new trim formats that we’ll be introducing in the back half of the year,” Drilling said.

“And it has to do with everything from moving certain SKUs to behind the checkout stand. It has to do with some cases getting closed. And even to the point where we have some stores that can’t keep a certain SKU on the shelf, which just gets the item off. So We have a lot of things in the works that (to) move forward.”

Theft has been a growing problem in the retail sector this quarter, as big-name retailers like Target (TGT), Home Depot (HD), and Walmart (WMT) all contend with deflationary pressures.

Earlier this week, Dick’s Sporting Goods stock fell 20% after Chief Financial Officer Navdeep Gupta said, “The number of incidents and the impact of organized retail crime came in much higher than we expected, which affected our second-quarter results.”

Ines is the chief business correspondent for Yahoo Finance. Follow her on Twitter at @ines_ferre

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