Why Did Dollar Tree Stock Sink 55% This Year?

Note: DLTR fiscal year 2024 ended February 3, 2024

Dollar Tree’s stock (NASDAQ: DLTR) has declined from around $142 at the beginning to $69 now  – about a 55% fall over a period when the benchmark S&P index grew 16%. In comparison, DLTR’s peer Target stock (NYSE: TGT) is up almost 9% over the same period.

Dollar Tree is a leading operator of discount variety stores. It also owns Family Dollar which specializes in selling $1 items like toys, books, party supplies, and general discount items. Notably, the sharp decline in the DLTR’s stock was driven by weaker-than-expected second-quarter results. Higher-than-expected costs severely impacted the company’s earnings. Furthermore, the company revised its outlook for the full year downward significantly.

Taking a longer view of the company’s stock, the decrease in DLTR stock over the last 3-year period has been far from consistent, although annual returns were considerably less volatile than the S&P 500. Returns for the stock were 30% in 2021, 1% in 2022, and 0% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period.

Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could DLTR face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

In Q2 (which ended on August 3), DLTR’s revenues grew 0.7% year-over-year (y-o-y) to $7.38 billion. The company operates in two main segments: Dollar Tree and Family Dollar. Same-store sales for its Dollar Tree segment rose by 1.3%, and same-store sales for the Family Dollar segment dipped by 0.1%. Its non-GAAP earnings per share of $0.67 was down 26% y-o-y in Q2.

DLTR posted an 80-basis-point increase in gross margin to 30% due to lower freight costs in Q2. However, selling, general, and administrative expenses grew from 25.3% to 27.3%, due in part to additional legal expenses, which weighed on the bottom line. This is largely a one-time general liability charge related to customer accidents and the increasing costs of dealing with them.

For the third quarter, Dollar Tree is guiding for sales in the range of $7.4 billion to $7.6 billion. In addition, DLTR’s adjusted earnings per share for the quarter are projected to come in between $1.05 and $1.15. For the full fiscal year 2024, the discount retailer expects revenue to range between $30.6 billion and $30.9 billion. Previously, management had forecast that annual sales would be between $31 billion and $32 billion. The company’s management is projecting adjusted earnings per share to be between $5.20 and $5.60, a significant drop from its previous guidance of $6.50 to $7.

[1] Returns as of 9/6/2024
[2] Cumulative total returns since the end of 2016

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