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Dollar Tree (DLTR +3%) is trading higher following its Q3 (Oct) report this morning. Following EPS misses in three of its past four quarters, this dollar store chain posted its first EPS beat in several quarters. In Q1, DLTR reported in-line, so this was its first beat in a while. Revenue rose 3.5% yr/yr to $7.57 bln, which also was better than expected. This was its first upside following four narrow misses. The in-line guidance for Q4 (Jan) was also good to see after recent downside guidance.

• Enterprise comps in Q3 increased +1.8%, up from +0.7% in Q2 (Jul). Enterprise comps were driven by a +1.6% increase in traffic and a +0.2% increase in average ticket. DLTR says customers continue to seek value and many are focused on buying for need and buying closer to the time of that need. DLTR continues to see evidence of belt tightening, particularly among lower-income customers and, to a lesser extent, among middle and higher income families with young children.
• While this dynamic remains a discretionary headwind, it does create some opportunities with consumables. Lower middle income households are increasingly shifting more of their spending toward food at home. A customer that walks in to a typical Dollar Tree store will find 90+% of products in the store priced at $1.25, which places DLTR in a good position.
• Dollar Tree segment comps were +1.8% vs +1.3% in Q2. Comps were driven by a +1.5% increase in traffic and a +0.3% increase in average ticket. This was Dollar Tree's first positive ticket comp since 4Q22. Dollar Tree's consumable comp was +6.2% despite lapping a tough +11.1% comp last year. Snacks, beverages, and candy were the best-performing categories. Discretionary comp declined -1.8%, reflecting consumers' ongoing focus on needs-based purchases.
• Family Dollar segment comps rose +1.9% vs -0.1% in Q2. The comp increase was almost entirely by traffic. Average ticket was flat after three consecutive quarters of declines. Consumables comp increased +1.3%, which was lapping a strong +6.2% comp last year. Discretionary comp increased +3.7%, a 540 bps sequential improvement. More importantly, Q3 was Family Dollar's first positive discretionary comp since 4Q22. FD has been adjusting its pricing strategy with more emphasis on value and higher frequency purchase items.
• The company addressed concerns about tariffs given that the bulk of its merchandise comes from overseas. Back in 2018 and 2019, when it last dealt with this issue, DLTR was able to mitigate the majority of the potential impact by negotiating lower costs with suppliers, changing product specs or pack sizes or dropping non-economical items. Also, it now has detailed plans to shift supply sources for most products to alternate countries.

Overall, this was a nice bounce back quarter with solid upside and good comps. Of note, we had thought DLTR might name its new CEO today, but the search continues. In a surprise, it did announce today that CFO Jeff Davis would step down, so the company is looking for a new CEO and CFO. Also, its previously announced review of strategic alternatives for the Family Dollar segment continues. The process is moving forward as planned and there is no set deadline.