Dollar Tree, Petco shares drop: Will shrink concerns continue?
Dollar Tree (DLTR) stock sank on Thursday after posting a weaker-than-expected forecast and a decline in gross margins. Petco (WOOF) shares drop after the company slashed its full-year guidance. Michael Lasser, UBS US Hardline & Broadline and Food Retail Analyst, joins Yahoo Finance Live to discuss these recent retail results, the state of the consumer, and concerns about shrink.
Regarding consumer shrink, Lasser said, "The retail sector has been through a tremendous amount of volatility between supply chain challenges, inflation, a very tight labor market. All of those have contributed to the shrink issue in one way or another."
Video Transcript
- Joining us now is Michael Lasser, UBS US hard line and broadline and food retail analyst. Michael, good to talk to you today.
Let's start with what we saw from Dollar Tree today, because that really seems to point to a trend that we've been hearing a lot of consumers going after more discounts or spending less in stores, they're also getting hit on the inventory side because of theft as well. Is there anything that emerged from their quarter that you think is specific to them or are we starting to see this broader trend, which is consumers are spending but being very selective in seeking out value?
MICHAEL LASSER: I think it's the latter. This is an issue, a systemic issue really, across the retail sector. The fact that Dollar Tree has won 25 price point across the majority items in the core of brand that it operates means it has less merchandising flexibility to deal with some of these challenges that have been facing the whole retail sector.
Now that being said, Dollar Tree generated as good traffic across both banners as anyone in retail so far, suggesting that what it is doing to attract incremental consumers is working. And eventually, as some of these pressures subside, that is going to lead to significant earnings growth over time. So we would use this pullback in Dollar Tree as an opportunity to accumulate the stock.
- Michael, you just mentioned when some of these pressures subside, and I think everyone's trying to figure out how big of an issue theft is or how long that issue is going to last. We've heard a little bit more Dollar Tree, one of the executives chiming in on what they're going to do to combat the theft. But how long do you see this being a significant issue across the industry?
MICHAEL LASSER: So we expect that to shrink across the industry. Will get better into next year. In the past, Shrink has proven to be cyclical. When the consumer is a bit pressured, they tend to engage in more malicious acts like theft. Also, the retail sector has been through a tremendous amount of volatility between supply chain challenges, inflation, a very tight labor market. And all of those have contributed to this Shrink issue in one way or another.
Our view is that as a labor market starts to settle down, what's going to happen is retailers are going to have not an easier time attracting talent, but they're going to see less attrition. And that means that more of their workers are going to be tenured. More tenured workers should help stabilize the unexplained loss of inventory, which is what shrink is all about.
- So Michael, when you look at the retail landscape, what's sort of the better place to put your money? Is it towards discount retailers? Not just somebody like Dollar Tree but also like a TJX, where consumers are seeking out value or is it more of the traditional players who are diversified like a Walmart?
MICHAEL LASSER: I don't think it's an either/or, I think you need to have some balance in your portfolio. So we like names like Dollar Tree, like Walmart, like Target, who do offer the discounting that the compelling values to the consumer at this point. Now with that being said, we would balance it out with names like Home Depot and Lowe's that eventually stand to gain as more discretionary spending improves and as interest rates come down. So our view is you got to have a balance between the more defensive type names in retail and the more offensive cyclical names in retail.
- Michael, you also cover Petco, which is under a tremendous amount of pressure today on the heels of their results before the bill this morning. We're looking at a massive loss here for today. I think just over 20%. Some of the biggest headwinds facing Petco, you would think that it would be relatively well-positioned given the fact that people continue to spend on their pets, but what's going on here?
MICHAEL LASSER: So more than 30% of Petco sales come from those more discretionary type purchases, apparel, toys, collars. And the profitability that Petco sees on those discretionary purchases is far greater than the profitability of pet food. And so the fact that those discretionary purchases are under pressure is translating to significant pressure on the profitability for this business. So until there's an improvement in the overall discretionary spending environment, Petco is going to probably experience lingering impacts from this.
Now, it is more defensive because pets do need to eat. The pet owner is more likely to feed their pet at times than feed themselves. But until those discretionary sales improve, we think that the performance of this business is going to be pressured.
- UBS's Michael Lasser. As always, it's good to have you on.
MICHAEL LASSER: Thank you.
- Really appreciate the time.
