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How dollar shops will cope with the difficult cross-border logistics situation

Cross-country shipping bottlenecks and freight costs are hitting retailers across the board in the United States in recent times.

While many retailers have responded by increasing the selling price of their products, the options for reducing costs are even more limited when you are opening a dollar shop.

As a result, Dollar Tree's management has added an estimated annual freight cost of $185 million to $200 million to the company's earnings estimates.

This could increase freight costs to US$1.60 per share in 2021, which could be a significant drag on earnings this year.

According to Dollar Tree, the reason for the increased cost estimate is because ocean freight rates in China have risen by 20% since May, another increase above the all-time high.

As a result of these cost increases, Dollar Tree now expects to see a significant reduction in commodities shipped to the company.

Dollar Tree previously assumed that ocean carriers would honour 85% of their contractual commitments - already a problematic situation - and higher rates.

DollarTree now expects the logistics carrier to meet only 60% to 65% of its commitments.

It is easy to see why Dollar Tree is so vulnerable to global transport congestion.

Dollar Tree's chief executive Mike Witynski told analysts this week that Dollar Tree ships close to 90,000 40-foot containers a year.

"We believe Dollar Tree shops need to import more containers per $100 million in sales than other large retailers," Mike Witynski said, "and combined with our low $1 price point, freight costs are having a huge impact."

As the executive points out, when congestion occurs in the global shipping system, they reverberate and compound just like any other type of transportation congestion.

"A recent occurrence was that one of our dedicated carriers was recently denied entry into China because a crew member tested positive for nucleic acid, so the ship had to return to Indonesia and replace its entire crew," Wittinski recalls. "As a result, the whole voyage was delayed by two months."

On the other hand, executives at Dollar Tree's rival Dollar General agreed that the logistical upheaval had affected the company, but their outlook wasn't as bad.

In fact, the word "freight" came up only eight times on Dollar General's second quarter conference call, compared to 41 times on Dollar Tree's call.

"As with our second quarter results, we do expect continued pressure on gross margins in the second half of the year, primarily due to inflation, which we believe is temporary but related to higher transportation costs than previously anticipated," said Dollar General Chief Financial Officer John Garratt. John Garratt said during a conference call on Thursday.

DollarGeneral noted in its earnings report that freight costs had increased, but its profit outlook remained largely stable, while sales were expected to increase.

Dollar General's results have grown rapidly over the past year due to the ongoing New Crown Pneumonia outbreak.

Dollar General became a one-stop shop for consumers who were trying to spend less time in the shops, with a large number of consumers heading to Dollar General shops to splurge on household essentials during the first few months of the outbreak.

In the second quarter of the year, Dollar General's net sales fell 0.4% year-on-year to US$8.7 billion. This is probably to be expected given the exceptional circumstances of 2020.

As Neil Saunders, Managing Director of GlobalData, said, "While any negative number would overshadow the results, this decrease is too modest to worry about."

He points to two possible reasons for the slowdown in sales, namely the normalisation of grocery shipping habits and the decline in the number of shoppers.

Sanders said, "With the New Crown outbreak appearing to have abated and restrictions having been lifted, some non-core Dollar General customers have resumed their normal shopping activities, cutting back on shopping close to home and instead travelling further afield to meet their needs - including to large shops like Walmart."

Telsey Consulting Group, led by Joe Feldman, said in a research note that Dollar General's comparable sales and profits exceeded their expectations and that "a healthy consumer environment, continued strength in consumables, and multiple government incentives helped the company's earnings growth."

Meanwhile, Dollar Tree's overall sales increased by 1% to $6.3 billion.

However, revenues at the company's Dollar Tree shops fell by 0.2 per cent, while another shop, Family Dollar, saw an even larger decline (2.1 per cent) due to the company's portfolio having performed better during last year's outbreak.

However, Dollar Tree was hit harder by freight costs than Dollar General, and Telsey Advisory Group lowered their expectations for the company's stock due to freight costs.

"Given that most items in Dollar Tree shops (about 52% of sales) are priced at $1.00, Dollar Tree's ability to pass on higher costs by raising prices is limited," Feldman said.

"As a result, we expect the company's profitability to be under significant pressure over the next four quarters, with potential out-of-stock phenomena and reduced service levels negatively impacting sales."

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