Dollar Tree Is Putting Investors On Discount

Dollar Tree (NASDAQ: DLTR) has seen its stock plummet by 25% year to date, driven by inflation and competition. The company’s main consumer base is shifting towards less profitable consumables, and its acquisition of Family Dollar has been underperforming, leading to plans to close nearly 1,000 stores. Despite cost-saving measures, the long-term outlook remains bleak due to persistent inflation, weak consumer demand, and competitive pressures.

While Other Stocks Are Minting New Millionaires

On the other side of the ledger are AI stocks like Super Micro (Nasdaq: SMCI) and Nvidia (Nasdaq: NVDA) flirting with all time highs. If you’re worried the gains have already been had, don’t. As of today, the AI boom shows no signs of slowing down.

Our brand-new “The Next NVIDIA” report dives deep into AI winners beyond just NVIDIA. Make sure to grab a complimentary copy if you’re interested in discovering more high-upside ideas in this massive trend. You can access a free copy here.

 

Transcript:

Austin, you looked at the worst performing stocks in the S&P 500 year to date.

And Dollar Tree, it stands out as a major loser, especially since it has been a winner in previous years.

The company is down 25% year to date, and we’re only halfway through the year.

So this is a brutal return for a company thought to be immune from changing consumer patterns due to the, you know, let’s call it essential nature of their products and affordability.

So the question is, what’s going on with this company?

And, you know, could this drop actually be an opportunity for long term investors?

Yeah, it’s really been a shocking performance.

So one quarter of the company’s value has been erased in just six months, really halfway through the year.

And as you mentioned, inflation and competition are the major factors here.

So first, let’s talk about inflation.

The company’s been grappling with weak discretionary demand as shoppers focus more on less profitable consumables products.

Dollar Tree and their stores and their brands do cater to a less well-off consumer and they start to feel the inflation pinch first and probably most acutely among American shoppers.

So when they go into these stores to spend, they’re going to be shifting a lot more of their consumption towards less profitable consumables, better for them as individuals, better way to use their money, but less profitable, lower margin for Dollar Tree and their various brands.

So in addition to that, if you look at Family Dollar, which Dollar Tree bought in 2015, it’s been the main underperformer here.

So earlier this year, the company outlined plans to shutter 970 of its Family Dollar stores.

You heard that right.

Almost 1,000 locations.

I mean, that’s one of the biggest admissions I can recall in recent memory of just overpaying for an acquisition or potentially oversaturating your market by having too much overlap between your various brands here.

Now, this pattern matches with other trends we’ve seen, like weakness from Walgreens, which is expected to close maybe a quarter of its locations due to weak profitability.

But then there’s also another issue here, which is competition.

If you look at Target and Walmart, they face their own challenges, but they’re certainly not sitting still.

These are very good operators.

And while their locations are often not as accessible as Dollar Tree’s locations, which tend to be more rural or strip mall locations, they do also offer grocery and apparel, which makes them a one-stop shop for consumers.

So a lot of people are, you know, you can just go to Walmart or Target, buy many of the same goods at a similar price as you might get at a Dollar Tree, but also get your clothing and your groceries.

So let’s put some real figures behind this weakness.

This company has lost a billion dollars in the last 12 months.

That’s a lot of money.

So what’s happening?

They’re closing 1,000 stores.

They’ve lost a billion dollars.

Are shares worth buying today?

Probably not.

I don’t see any relief on Dollar Tree’s main customer base on the horizon.

We’ve heard for years that inflation is transitory, but what we’ve seen in the data is it’s actually relatively persistent.

So if that is the dynamic that’s resulting in changing consumer patterns, it does not appear that Dollar Tree’s main customers are going to be out of the woods here anytime soon, and they can go back to higher margin, more discretionary items.

And while shuttering 1,000 locations will result in cost savings, it’s not going to do anything for the top line.

It’s not going to do anything to help their revenue story.

And while we don’t have any details on their actual leases, remember, most of these affordable retailer locations are triple net leases with multiple years of commitments.

So they aren’t going to be able to sell the real estate for a gain because in many cases, they just don’t own it.

So they’re also often going to have to execute the remainder of their lease or buy out whomever the lease is with who actually does own the property.

So we’ve got no salvation on the top line, no help on the expense line.

I think it’s going to be a brutal few years here for both Dollar Tree shareholders and customers.

If investors want to speculate on the one thing that might be able to save the company, it’s probably a private equity firm coming in and buying it.

But at this point, it’s a $23 billion company, which means you probably have to come in with $25 to $28 billion to take them private.

That’s a lot of money, even for a major PE firm, even like a Carlisle and at a time when debt is very expensive.

So the bottom line, if we add it all up, the company is facing a lot of weakness.

The main customers don’t appear to have any relief on the horizon.

And the most immediate levers that Dollar Tree can do to save costs are going to do nothing to save their revenue.

And there’s probably no gains to be made from shuttering these 970 underperforming locations.

All it does is it saves their expenses a little bit, but there’s probably still some ongoing expenses associated with buying out their leases.

So this is a rough stock.

I think investors should be staying away at today’s prices.

Yeah, and Austin, that’s a great point about Carlisle.

You know, sometimes you have those other catalysts.

Sounds pretty removed from this story.

It sounds a little dangerous from investors and I’d agree with you.

This stock sounds like a stay away.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.