Dollar Tree Inc. says one of its supply ships was delayed for two months after a crew member tested positive for COVID. The vessel had to return to Indonesia, switch crew and return for entry to China.
Chief Executive Michael Witynski held up the example as just one of the supply chain challenges the discount retailer has faced. Equipment shortages, port delays in the U.S. and China and lingering effects of the Suez Canal blockage are just a few others.
“[W]e believe the Dollar Tree banner imports more containers per $100 million in sales than other large retailers,” he said on the most recent earnings call, according to FactSet. Family Dollar is also part of the Dollar Tree portfolio.
“After the first quarter of 2021, our updated freight outlook assume that our regular ocean carriers would fulfill only 85% of their contractual commitments and assumed – we also assume the higher spot – the spot market rates. However, we are now projecting that our regular carriers will fulfill only 60% to 65% of their commitments and their spot market rates will be much higher than previously estimated.”
Dollar Tree says it’s “more sensitive” to freight costs because of the low price point on its merchandise.
“Industry experts expect the ocean shipping capacity will normalize no later than 2023 when many new ships come online,” Witynski said.
“We are not counting on material improvements in 2022, especially in the first portion of the year. As a result, we are working proactively to reduce the freight cost impact and otherwise improve gross margin merchandise.”
Among the measures taken are the use of charters and alternative supply sources.
Dollar Tree says it’s also managing labor shortages with national hiring days, bonuses and other perks to attract workers.
Dollar Tree is not alone in facing global supply chain problems. Nike Inc.
Foot Locker Inc.
and Yeti Inc.
are among the other companies that have said getting goods has become a problem due to COVID and other related factors.
“We are disappointed by the magnitude of the margin pressure at Dollar Tree, but see bright spots in stronger comps QTD, the accelerated expansion of Dollar Tree Plus! and combination store formats, and, longer term, in the normalization of this sizable cost headwind,” wrote KeyBanc Capital Markets in a note.
Dollar Tree Plus offers items at varying prices.
KeyBanc rates Dollar Tree stock overweight with a $116 price target.
“We continue to favor Dollar General over Dollar Tree, particularly in the current inflationary environment, as the Dollar Tree banner is significantly less flexible to manage inflationary pressures from a margin perspective,” wrote BMO Capital Markets in a note.
Dollar General reported its second-quarter earnings last week as well, with sales and profit falling.
BMO rates Dollar Tree stock market perform with a $97 price target.
Raymond James analysts are encouraged by developments like Dollar Tree Plus.
“All-in, while we see the long-term potential, the near-term operating environment still appears very challenging in our view, with meaningful labor and transportation inflation (large impact given Dollar Tree’s sourcing),” analysts said.
Raymond James rates Dollar Tree stock market perform.
Dollar Tree shares have slumped 15.1% for the year to date while the S&P 500 index
is up 20.4%.