Dollar Tree had a miserable quarter, which the company’s management attributes to a combination of factors: changing consumer demands plus higher gas and electricity prices…and theft.
The company’s CEO and CFO spoke about the latter on a call with Wall Street analysts Thursday.
Dollar Tree CEO Richard Drilling and Chief Financial Officer Jeffrey Davis blamed the surprisingly large drop in gross margin — falling to 29.8% in the fourth quarter from 32.7% a year earlier — on “deflation,” which is the industry term for inventory losses. Due to theft, damage and other reasons.
The company has taken steps to fix the problem, Davis said, but the downturn is getting worse — and “has definitely progressed a little bit further than we expected.”
In response, Drilling said Dollar Tree and Family Dollar stores, which the company also owns, will take tougher measures in the coming months.
“We’re now taking a very defensive approach to cutting back,” Drilling told analysts Thursday. “We have several new shrink formats that we’ll be introducing in the latter half of the year, and they include everything from moving certain SKUs to behind the inspection stand. With a certain SKU on the shelf, you just have to stop the product. So we have a lot of stuff in the works.”
Dollar Tree, Dollar General, and other discount stores had long-standing theft problems, as the stores ran short staffs who were sometimes victims of violent robberies and other crimes. Dollar Tree employees have complained about unsafe working conditions, and Kurt Petermeyer, Occupational Safety and Health Administration regional director in Atlanta, in February criticized the company for a “consistent disregard for human safety” that “suggests that the company believes profits are more important than people”.
These theft-preventing changes will come at a cost, and the company said that’s part of the reason it lowered its earnings forecast for the current quarter — which came in well below Wall Street analysts’ forecasts.
Dollar Tree shares fell 10% on the news.
Theft has become a growing concern for retailers. Dick’s Sporting Goods this week also cited theft as a major reason for its profit decline in the most recent quarter, even though sales were up.
Retailers big and small say they are struggling to contain a surge in shop crime – from small shoplifting to organized bouts of large-scale thefts that clear entire shelves of products. And Target warned earlier this year that it was poised to lose half a billion dollars due to rising rates of theft. The retailer has reported a high number of incidents of shoplifting and organized retail crime in its stores nationwide.
It is not clear that crime has become significantly more serious. Within the industry, at least one major player has argued that the problem is overblown: Walgreens earlier this year changed its tone about shoplifting that hurt its business, saying: “We may have cried too much last year.”
Dollar Tree has also cited consumers’ shift away from discretionary items as part of its problem. Target, Home Depot, Lowe’s, and other retailers have all said much of the same thing — people are forgoing purchases of items they don’t need in favor of food and other items that they do.
The company also said higher diesel prices had dented its profit due to higher freight costs. The summer heat sent air-conditioning costs through the roof; Dollar Tree said that also hurt its bottom line.