Deep Discounters Like Dollar Tree Get Hit, as They Juggle Supply Chain Costs and Price-Sensitive Customers

• Deep discounters like Dollar Tree are feeling the pain as Covid outbreaks and congested ports drive up the cost of moving merchandise across the globe.
• Dollar Tree said rising freight costs will drag down its earnings by $1.50 to $1.60 per share — more than double the 60 cents to 65 cents that it had projected in May.
• Off-price retailers, which also cater to price-sensitive shoppers, were trading down on Thursday, too.

When a chartered vessel for Dollar Tree arrived to China to load up goods, a single crew member's positive Covid-19 test forced the ship to turn around. The trip was delayed by two months.

CEO Mike Witynski shared that story and other shipping woes on a Thursday earnings call. He spoke in blunt terms about supply chain snarls and labor shortages. And he said they have made it harder for the retailer, which sells most of its items for a dollar. And they are expected to continue into next year.

"The Dollar Tree banner is more sensitive to freight costs than others in the industry," he said.

Dollar Tree said Thursday that rising freight costs will drag down its earnings by $1.50 to $1.60 per share — more than double the 60 cents to 65 cents that it had projected in May. It estimated earnings per share will be in the range of $5.40 to $5.60 for the fiscal year, which was lower than analysts expected.

Shares of the company were closed Thursday down 12.08% to $93.48.

Deep discounters are feeling the pain as Covid outbreaks and congested ports drive up the cost of moving merchandise across the globe. Retailers like Dick's Sporting Goods, Best Buy and Williams-Sonoma, reported higher profits this week. These companies found that fewer promotions didn't dampen their customers' willingness to spend. Some said they are paying more to move merchandise quickly — like flying in goods on planes, and shoppers are still buying.

At low-cost retailers, however, shoppers can't afford to pay more or will walk away if the item doesn't seem like a bargain. That puts retailers in a bind, as they must choose when to hike prices and when to absorb higher costs.

"I would tell you we've been very thoughtful on passing along price because we know that our core customer can ill-afford very many price increases," Dollar General CEO Todd Vasos said on a Thursday earnings call.

The rival dollar store chain's shares were closed down 3.77% to $225.90 Thursday.

Off-price retailers — which also cater to price-sensitive shoppers — all fell on Thursday, too. Ross Stores, T.J. Maxx and Burlington Stores closed down about 4%, 3% and 9%, respectively, on early Thursday afternoon. Nordstrom, which includes Nordstrom Rack, closed down about 8%.

Some have detailed how they are managing through the headwinds.

Dollar General's Vasos said the retailer is negotiating with vendors and has swapped out some items for similar ones in recent quarters to keep prices down.

Dollar Tree's Witynski said the retailer has reserved dedicated space on charter vessels for the first time — including signing a three-year contract for a large vessel. It bought more U.S. goods, so Dollar Tree and Family Dollar stores were well stocked for back-to-school season. And it is prioritizing shipping containers, based on what merchandise is in season or in demand.

Plus, he said, it will continue to order seasonal purchases 30 days earlier than usual and monitor shipping availability at ports in China and the U.S.

On the call, company executives pointed to predictions by industry experts that ocean shipping capacity will normalize no later than 2023, as more ships become available.

Yet Chief Financial Officer Kevin Wampler acknowledged the fast-changing environment during the pandemic — and said that makes it difficult to estimate future freight costs.

"There could be another Covid outbreak," he said. "There could be a lot of different things that could affect it. I think you have to think about the fact that it's probably the most dynamic thing we may have ever seen as it relates to that marketplace."

—CNBC's Robert Hum contributed to this report.