Tariffs will test low-margin business, Dollar Tree CEO says
- Even if a large swathe of tariffs on $200 billion worth of goods does not rise from 10% to 25% after a 90-day negotiation period, businesses are already spending time and money mitigating the extra potential costs, as demonstrated by Dollar Tree executives on the company's third-quarter earnings call.
- CEO Gary Philbin told analysts the company had mitigated 80% of the existing and expected 2019 tariffs for Dollar Tree and 50% for Family Dollar, which the company acquired in 2014. He described a broadened supplier base, new negotiations with existing suppliers, nixing some items and a focus on landed costs no matter the source as successful tactics Dollar Tree merchandisers and buyers have employed.
- Since his customers will not abide a price increase, Philbin said that when it comes to tariffs: "We've got to be just better buyers."
Even businesses that haven't been directly affected by tariffs remark that the uncertainty surrounding the current trade disputes with China are affecting their bottom lines, and low margin businesses such as discount stores that have traditionally sourced mainly from China are particularly vulnerable.
"I mean it sounds like it's easy; it's not because we are touching a lot of SKUs," said Philbin on the company's considerable mitigation work to date.
The uncertainty around tariffs is not the only cost rising for Dollar Tree. Executives repeatedly mentioned rising domestic freight costs as well as recent wage increases as putting further pressure on the company's already tight margins. Gross margin for the company was down roughly 1% while sales were up 4.2% YoY in the third quarter.
"We expect higher domestic freight and diesel costs to continue," CFO Kevin Wampler told analysts.
Rising freight costs and tariffs may be the most recent causes of stress on Dollar Tree's bottom line, but the 2014 acquisition of the Family Dollar chain has been a source of chronic pain. Four years later, Dollar Tree is still in the process of integrating the two companies operationally, and costs are still less controlled on the Family Dollar side of the balance sheet. One such way of finding the efficiency in the deal is combining distribution networks, which Philbin described at "complicated."
The first combined distribution center, located in St. George, Utah, began serving both brands in 2016. "Our learnings from this center are paving the way for the launch of our next generation combined DCs and additional synergies," explained Philbin.
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