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Dollar Tree Inc. shares fell 10% Thursday to put them on track for their longest losing streak in three years, after the company lowered full-year earnings guidance to reflect planned price cuts at its Family Dollar franchise.
The stock
DLTR,
was the worst performer on the S&P 500
SPX,
and has now fallen for seven straight days, the longest losing streak since the seven-day period through Oct. 31 of 2019. The stock is now about 15% below its all-time closing high of $174.08 hit on April 20. The steep decline dragged rival Dollar General Corp.
DG,
lower with it, as the news of the investment required to prop up Family Dollar spooked investors and overshadowed Dollar Tree’s better-than-expected second quarter.
“This morning’s dollar store fireworks were unexpected, to us, at the very
least from a timing perspective,” said Guggenheim analysts in a note to subscribers.
Guggenheim was expecting the initial Family Dollar investment would be modest, with more impacting in 2023 than in 2022 and mostly affecting labor — wages and hours — and not price. Dollar Tree acquired Family Dollar in 2015 and has worked since then to improve the business.
“While such investments may be necessary, we have (1) never found a solid intermediate-term ROI (return on investment) on significant price cuts, especially in an inflationary environment, and (2) typically have not seen the targeted price leaders materially impacted by these investments,” they wrote.
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Guggenheim is sticking with buy ratings on both stocks, but expects Dollar General to rebound sooner, while Dollar Tree will likely “be in the penalty box for some period of time.”
Dollar Tree reported second-quarter net income of $359.9 million, or $1.60 a share, up from $282.4 million, or $1.23 a share, in the year-earlier period. Sales rose to $6.77 billion from $6.34 billion last year.
The FactSet consensus was for $1.60 a share and revenue of $6.79 billion.
The company’s same-store sales were up 4.9% year-over-year, just below the FactSet consensus of 5%.
Also read: Here’s why Target was willing to pay so much to sell off excess inventory.
Dollar Tree narrowed its full-year revenue outlook to $27.85 billion to $28.1 billion, compared with the FactSet consensus of $28.1 billion. The retailer now sees full-year earnings of $7.10 to $7.40 a share, below the FactSet consensus of $8.17 a share.
The company said it did find traction with more thrifty shoppers, who typically shop at dollar stores during times of stress. “..We believe we are putting our best foot forward at a time when customers are coming to us to help them navigate difficult times,” said Chief Executive Mike Witynski in the earnings release.
Dollar Tree did see a shift toward more spending on food and necessities, and less on apparel and home goods, a pattern seen at other chains this earnings season as shoppers pay more for food and gas.
Dollar General, meanwhile, beat on second-quarter earnings and offered robust guidance, highlighting positive contributions from new stores and growth in same-store sales.
The company had net income of $678 million, or $2.98 a share, for the quarter, up from $637 million, or $2.69 a share, in the year-ago quarter. Sales rose to $9.4 billion from $8.7 billion. Analysts tracked by FactSet were looking for earnings of $2.94 a share and revenue of $9.4 billion.
“The quarter was highlighted by same-store sales growth of 4.6%, a slight increase in customer traffic, accelerated growth in market share of highly consumable product sales, and double-digit growth in EPS,” said CEO Todd Vasos in a statement.
The company raised its guidance and said it now expects full-year sales to be up about 11%, compared with its prior guidance of 10% to 10.5%. Dollar General now sees FY22 same-store sales up 4% to 4.5%, compared with its prior guidance 3% to 3.5%. The company still sees full-year EPS growth of 12% to 14%.
Dollar General saw the same pattern of growth in sales of food and declines in clothing, seasonal and home products.
“On a three-year geometric stack basis, second-quarter comparables increased 19.2% vs. a 19.5% increase in the first quarter and an 18.2% increase in the fourth quarter of 2021,” said Raymond James analysts.
“The relatively stable three-year stack comp growth rate is encouraging and indicates (in our view) DG is retaining some customers gained during the pandemic,” they wrote.
Raymond James rates Dollar General a strong buy.
Shares were down 1.5% in early afternoon trade.
