Dollar Tree Faces Profit Decline as Theft Surges, Considers Defensive Measures

A clerk brings in a shopping basket at a Dollar Tree store in Richland, Miss., on Nov. 26, 2019. Rogelio V. Solis/AP Photo

Dollar Tree is taking losses in some areas due to a spike in theft and a decline in profits.

Like many retailers, the discount store chain is considering “defensive merchandising” or restricting access to certain products.

Many major store chains have blamed a massive surge in theft as a growing challenge, as left-wing prosecutors restrict law enforcement from arresting shoplifters nationwide.

During the company’s first-quarter earnings report meeting on May 25, Dollar Tree CFO Jeff Davis told investors that the retailer expects to “improve our performance on shrink through defensive merchandising efforts, real estate optimization, and perhaps higher prices to compensate for areas of systematically higher shrink” over time.

Davis also told investors that the retailer’s “mix of discretionary will normalize” over time as well.

Shoplifting Takes a Toll on Earnings, as Executives Look to Tighten Security

Dollar Store reported a 14-cent loss from “shrink” for the first quarter, according to the Wall Street Journal.

“Shrink” is the retail industry’s code for the difference between the number of items a store has according to its records and the number it has on hand, including shoplifting and other inventory losses.

Davis expects that the “combined and continuing full-year earnings impact of unfavorable consumables mix and higher shrink is expected to be approximately $0.55 per share in 2023.”

“While we modestly raised the midpoint of our topline guidance, we are incrementally more cautious on our margin outlook given the growing industry-wide challenges of accelerating shrink, the unfavorable shift in sales mix and their impact on our near-term profitability,” Davis said.

“Since the beginning of the fiscal year, the impact of these two factors on our financial results has intensified,”  and noted that the increase in store theft was taking place “across all shrink classes.”

CEO Richard Dreilling said they were considering “defensive merchandising,”  a retail industry term for locking up store products and requiring customers to ask an employee to retrieve them.

He also suggested other solutions like “store closures” and “government action at the local level.”

“This is not unlike what you’re seeing in many other retailers across the industry,” said Davis and that the retailer was taking “all the appropriate steps” to mitigate theft, noting that other retailers have been facing similar problems.

US Retailers Face a Nationwide Surge of Theft

Big retail chains like Lowes, Target, Foot Locker, CVS, and Walmart, have already restricted access to items due to mass theft in recent years.

Target executives have blamed a wave of theft for millions of dollars in losses in 2022.

Walmart CEO Doug McMillon announced in the fourth quarter report that shoplifting had reached historically high levels and that the retailer might start closing stores if the situation did not get under control.

Walgreens had previously closed several stores in San Francisco due to shoplifting.

According to a recent report from the National Retail Federation and K2, a risk advisory firm, the shoplifting gangs rarely go after high-value items but steal smaller items like household, health, and beauty products.

“Some of this is societal, some of it is economic, some of it, of course, is particular to us. And we’re taking all the appropriate steps that we can to control and mitigate this where we can,” said the CFO.

Davis later outlined the company’s “multi-faceted sort of approach” to shrinkage, including working with law enforcement, additional store security, and “new technologies within the store” to monitor items and alert staff.

He also admitted that locking up items is very unpopular with customers and could negatively impact sales.

Dollar Tree Believes Losses Will Be Temporary

Meanwhile, the discount retailer’s revenue rose 6 percent year-over-year in the first quarter, hitting $7.32 billion.

However, Dollar Tree’s reported net income for the first quarter was $299 million, or $1.35 a share, compared with $536.4 million, or $2.37 a share, a 44 percent plunge from a year earlier.

On an adjusted basis, the retailer reported earnings of $1.47 per share, falling below Wall Street’s expectations.

The company lowered its outlook for the fiscal year to between $5.73 to $6.13 per share, down from a prior range of $6.30 to $6.80 per share.

Dollar Tree attributes its disappointing results to the rise in shrinkage and the shift toward consumables to continue through 2023.

The retailer’s fiscal 2023 outlook also included an expected range of $30 to $30.5 billion for consolidated net sales and a “low- to mid-single-digital comparable stores sales increase.”

Shoplifting and other inventory losses were not the only things affecting Dollar Tree’s profits during the first quarter.

The discount chain noted its customers bought more groceries and other consumable items, which generally are less profitable than other merchandise.

Still, Dreiling told investors that he believes the shift to consumables and the impact of shoplifting would be temporary.

“I do think if we are being realistic here, this consumables shift and this shrink impact are transitory,” Dreiling said.

“I do not believe we’re going to be living with them forever, and that is all accretive to what we’re doing.”