Dive Brief:
- Tranche four tariffs will likely be passed on to consumers in the form of higher prices, warned executives from Dollar General and Dollar Tree (which also owns Family Dollar) on recent earnings calls.
- "We will do everything we can to minimize the impact of tariffs on our customers, but even with these efforts, we believe our shoppers will be facing higher prices as 2019 progresses," said Dollar General CFO John Garratt. Dollar Tree CEO Gary Philbin echoed: "If tariffs on List 4 products are implemented, we expect that it will be impactful to our business, and especially to consumers in general."
- Both retailers saw a boost in profits in the first quarter, leading executives to hold their projections for the rest of the year. The final version of the fourth tariff list, after the exemption process, is the main source of uncertainty regarding the retailers' performance for the balance of the year. The first public hearing on the proposed list four is in two weeks.
Dive Insight:
On last week's calls, both retailers touted their teams' ability to mitigate list three tariffs, even after the increase from 10% to 25% on May 10.
Philbin said Dollar Tree has been factoring in 25% tariffs on list three since the beginning of the year. Earlier in the year, when list three tariffs were set to rise in March, Dollar Tree put the potential impact on its business at $100 million and $40 million for Family Dollar. Both businesses increased inventory on hand to lessen the effect. And though the fourth quarter was rocky, solid growth in the first quarter would be encouraging were it not for the lingering uncertainty created by list four.
After experiencing similar dynamics for the last two quarters, Dollar General executives explained its mitigation tactics fall into four categories:
- Continual negotiations with vendors.
- Product substitution.
- Product reengineering.
- Country of origin and diversification.
Roughly 6% of Dollar General's merchandise is directly imported, mostly from China, explained Garratt. Several retailers, Walmart being the first, expressed it will be more difficult to insulate consumers from this list because of its size and expanse, but also because supplier negotiations can only go so far.
Dollar Tree did not offer any figures to illustrate its brands' exposure. "If I had sat down last September and tried to take you through our exposure on those three, I would have been wrong, because our team mitigated most of it, all of it you know as we went through our buying trips, and that's the approach we're taking on this list forward," Philbin said.
In November, Philbin told analysts mitigation was imperative because the Family Dollar and Dollar Tree customers don't have the funds to withstand a price increase. Six months later, the CEO has somewhat changed his tune in predicting some price increases may be on the way.
But the outlook isn't so bleak, executives from both chains tried to impress upon analysts. Dollar General CEO Todd Vasos reminded analysts his company is a "limited-SKU retailer" meaning it can choose what to carry and what not to sell — a helpful fact in the midst of a trade war.
With many retailers forecasting price hikes in the coming months, Vasos pointed out a bright side: "The great thing is though, I believe that Dollar General stands ready to build to serve that customer, because she’ll need us more at that time," the CEO said.
