When Dollar Tree (DLTR) released their earnings this morning, the Chesapeake, VA based discount retailer hit an unwelcome trifecta, missing on both revenue and earnings while also issuing reduced guidance for Q1. It is, then, no real surprise that the stock is down around eight percent in premarket trading as I write, but investors should be careful not to read too much into one quarter from one company, good or bad.
The possible good interpretation is not about Dollar Tree itself, but about what slowing business in their chain of outlets says about the economy overall. It is tempting to look at weakness in the ultra-discounted stores and see it as a positive. They are where people shop when they can’t afford anything else, so the logic goes, so if Dollar Tree is struggling, it could be because consumers are feeling flush and trading up, a good sign for economic growth.
First and foremost, there is a massive, if somewhat unsurprising arrogance to that view. It comes mostly from Wall Street types who have probably never set foot in a Dollar Tree or Family Dollar store and can’t imagine why anyone ever would. In their heads, anyone who is regularly shopping there is just dying to “move up,” at least to Walmart (WMT), which the Wall Streeters would also never go to, or maybe even Target (TGT), which they might patronize in a pinch.
The fact is there are many rural parts of the country -- and inner city areas too -- where a Dollar Tree-owned store is one of the only places to shop without making a significant journey, and doing so is simply seen as a prudent thing to do given the good value offered in those stores.
Even if you do believe that spending in dollar stores is always done as a last resort and is therefore a sign of hard economic times, an analysis of the numbers reported by DLTR this morning doesn’t support the idea that this is about their customers “trading up.” Net sales may have missed analysts’ forecasts, but they still grew compared to the same quarter last year. The comparable transaction count also grew, by 7.1% in the Dollar Tree branded locations and 0.7% in the company’s Family Dollar stores.
None of that indicates a good thing for the economy because customers are leaving for more “upmarket” chains. If anything, it suggests the opposite. Dollar Tree’s clientele is spending more on low margin necessities like groceries than higher-margin discretionary items such as home décor items, or toys. That indicates that far from feeling flush, they are feeling the pinch that comes with sustained inflation.
What is significant in the breakdown by brand is that not only was transaction growth wildly different between the company’s two types of stores, but revenue growth was also focused on Dollar Tree, with Family Dollar actually posting a small reduction in total sales for the quarter. That bifurcation is the real problem at Dollar General.
The Family Dollar brand, which was acquired by Dollar Tree in 2015, has continued to struggle, but this earnings report at least showed that the company is doing something about that. They took a range of charges, including nearly $600 million for a “portfolio optimization review” and others related to a food safety scandal and judgement. Those are one-off deductions and the accompanying announcement that the company is closing nearly a thousand underperforming Family Dollar stores will alleviate the issue going forward.
Obviously, those store closures will also reduce the overall size of the company and its potential profit in the near future, so the drop in the stock looks justified in some ways. However, there is such a thing in business as shrinking to grow. Cutting out unprofitable or underperforming parts of a company can allow more resources to be focused on the profitable parts, resulting in a leaner company that actually makes more money than when it was sprawling and a little ungainly.
Once traders and investors get over the initial shock of a retailer closing close to a thousand outlets, they will understand and appreciate that element more.
Dollar Tree's earnings and the market's reaction invites immediate, seemingly obvious conclusions about their implications for both the company and the broader economy. But after a little clear thinking, none of the hot takes actually seem plausible. From a company-specific perspective the miss comes at a time of rationalization and restructuring that could usher in a period of decent, more focused growth, and the suggestion that there are positive indications for broader economic growth doesn’t stand up to scrutiny either.
Dollar Tree’s Q4 earnings may not be what they seem to be at first glance, and traders and investors should be careful not to get caught up in reacting to hot takes. Instead, they should focus on what the underlying message from those earnings is telling us.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
Read Martin's Bio