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  • Economic environment weighs on higher income shoppers
  • Customers spent less per trip as they focus on essentials

Dollar Tree Inc. shares fell the most in more than a decade after the chain lowered its full-year guidance as its higher income customers also begin to pull back on spending.

The discount chain operator said it now expects comparable sales growth in the low-single-digits, versus the previous forecast of growth in the low-to-middle single digits. That is roughly in line with what Wall Street analysts were anticipating. It also cut its forecast for adjusted earnings.

The company’s shares fell as much as 22% in New York trading, the most intraday since August 2012. The stock has fallen 43% this year through Tuesday’s close, compared with a 16% gain for the S&P 500 Index.

Family Dollar’s core lower-income customers have remained weak for quarters, Mike Creedon, chief operating officer of Dollar Tree, said Wednesday on a call with analysts. But inflation, interest rates and other economic dynamics have started to have a bigger impact on Dollar Tree’s middle- and higher-income consumers during the latest quarter, he added.

“We are not pleased with our second-quarter results or having to revise our full-year outlook. But this updated outlook reflects how the challenging macro-environment continues to pressure our customers,” he said.

The company said comparable sales increased 0.7% for the quarter ended Aug. 3, worse than what analysts forecast. Its Family Dollar chain weighed on overall sales with a decline of 0.1%. Adjusted earnings per share were lower than the average analyst estimate.

Traffic grew during the quarter, but shoppers spent less per trip. Soft discretionary demand continued to weigh on operations. Consumable products like candy, apparel and beverage were popular, while discretionary categories like home decor and floral underperformed.

Like its peer Dollar General Inc., Dollar Tree is facing longer-term challenges. Its core customers are under pressure from high inflation and interest rates. While challenging economic times have historically lifted their businesses, dollar stores are now facing heightened competition from Walmart Inc., Aldi Inc. and other retailers focused on low prices. Dollar General shares plunged the most on record last week after slashing its full-year sales forecast.

In response to competition and consumers’ struggles, Dollar Tree has been expanding its assortment to sell products with a greater range of price points, including items that cost as much as $7. The company is experiencing a notable sales increase at the 1,600 stores that are offering various price points. New stores offering a broader range of prices are growing faster than other locations, Creedon said, though hundreds of stores are behind schedule for conversion.

Dollar Tree is reviewing a potential sale and other strategic alternatives options for Family Dollar, a chain it bought for about $8.9 billion almost a decade ago. The company had no further update on the process on Wednesday.

The company, which operates more than 16,000 stores, said earlier this year that it would close about 1,000 underperforming stores to improve profitability and focus on more favorable opportunities.

Written by: @Bloomberg

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