Dollar Tree forecasts tepid annual profit on costs, pivot to spending on essentials

(Reuters) -Dollar Tree forecast annual profit largely below estimates on Thursday, owing to higher costs and a shift in spending towards lower-margin consumables.

Shares of the Chesapeake, Virginia-based company were down more than 3% in trading before the bell.

Consumers, especially from low- and middle-income groups, are turning price-sensitive as they feel the pinch of a steady rise in the cost of everything from groceries to consumer durables, and are favoring consumables that carry low margins over non-essential goods.

Gross margins for the quarter declined 290 basis points over the previous year from a slump in demand for discretionary goods, typically more profitable than perishables like snacks and cookies.

The dollar store chain saw its expenses rise to 25.3% of total revenue in the second quarter compared to 24% last year, primarily driven by higher labor wages and higher cost of utilities from “unseasonably high temperatures”.

Chief Financial Officer Jeff Davis said the profit outlook was also impacted by unfavorable shrink trends and higher diesel fuel prices.

Dollar Tree (NASDAQ:), like retailers Target and Macy’s (NYSE:), has been plagued by a rise in retail shrink, where inventory is lost, damaged, or stolen.

Latest results and forecasts from retailers ranging from Macy’s to Foot Locker (NYSE:) also offered fresh signs that U.S. consumer spending is under stress heading into the second half of the year.

Dollar Tree said it now expects to earn in the range of $5.78 to $6.08 per share in fiscal 2023, compared with its prior outlook of between $5.73 and $6.13.

Analysts on average expect earnings per share of $6.03, according to Refinitiv IBES data.