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Dollar Tree leaves tariffs out of FY'19 guidance on efforts to sidestep them

Dollar Tree Inc. has successfully mitigated against the effects of tariffs imposed on Chinese goods thus far and will continue to implement strategies it hopes will offset newly planned and higher duties as the crucial holiday season approaches, executives said Aug. 29.

The Chesapeake, Va.-based discount retail has negotiated price concessions, evolved its product mix and diversified vendors to mitigate against the effects of tariffs on imports from China, Dollar Tree President and CEO Gary Philbin said during an Aug. 29 earnings call. Dollar Tree is one of several discount retailers that will likely be disproportionately affected by higher duties because a variety of low-cost items are made in China.

Dollar Tree raised its diluted EPS outlook for fiscal 2019 after posting better than expected second quarter earnings but did not include recently announced tariffs in the updated guidance. On Aug. 23, China announced plans to impose tariffs on $75 billion in U.S. imports. President Donald Trump responded later the same day with plans to slap additional tariffs on a combined $550 billion worth of Chinese goods.

Without action, the new tariffs could cost Dollar Tree at least $26 million between Sept. 1 and Dec. 15, the company said in its Aug. 29 earnings statement.

"We are now taking actions to mitigate the recently announced tariff increases and will continue to assess the future impact of these tariffs," Philbin said. "We have a developed and tested improvement process for mitigating costs and have the metrics in place to track and measure success."

Dollar Tree CFO Kevin Wampler said inventory for the company's Dollar Tree segment at the end of the second quarter increased 15.1% from the same time last year while selling per square footage increased 7.1%.

The higher inventory levels "reflect the early receipt of imports to mitigate tariffs" and will support new store openings and sales initiatives in the second half of the year, Wampler said.

Philbin also noted that Dollar Tree is working to more efficiently pack and ship items to offset freight costs, which have been a headwind.

"We can really work hard and changing how we're backing things, on the packaging and how many units can we get on the container so that we can add on the overall cost lever," Philbin said.

Dollar Tree is big enough that it can negotiate with vendors to offset the costs of higher duties and can leverage some flexibility on where it sources products from, Moody's Vice President Mickey Chadha said in an interview.

"If you are the biggest guy on the block, the vendors want to work with you," Chadha said. "The vendors have taken some of the pain on the tariffs in terms of not increasing the pricing as much or giving [retailers] better terms."

Chadha said he expects Dollar Tree to be able to successfully mitigate the tariffs in the back half of the year, adding that the company's increased outlook was a positive sign.

The company operates its Dollar Tree segment that offers merchandise at a fixed price of $1. Meanwhile, the company's Family Dollar segment has varied pricing for consumable merchandise including food and beverages, tobacco, health products and diapers.

"Because they have multiple sources of supply, you can go to a dollar store and there will be some items there that are not sourced from China," Chadha said. "That creates a little issue with pricing since everything is a dollar. But they have more flexibility on the Family Dollar side. With Family Dollar, you have a little more leeway into what you can price up."

Dollar Tree shares spiked in early trading on Aug. 29 but slipped by 1.3% in midday trading to $98.28.