The U.S. economy isn't in a recession yet, but there is no shortage of consumers who are struggling right now. Multiple years of price increases and higher housing costs are wearing down low-income consumers who shop at dollar stores. While you might assume a stock like Dollar Tree (NASDAQ: DLTR) should be fairly resilient in times like these, even it's having trouble generating much growth.
The dollar store chain's recent earnings numbers weren't impressive, and the stock hasn't been trading this low in years. Here's a look at why investors are so bearish on Dollar Tree, and whether the beaten-down stock could be worth buying right now.
Why Dollar Tree tanked after earnings
Last week, shares of Dollar Tree crashed by more than 20% after investor were less than impressed with the retailer's latest quarterly numbers. Same-store sales for the period ending Aug. 3 were up just 0.7% compared to the same quarter last year. CEO Rick Dreiling says the company is facing "immense pressures from a challenging macro environment" as consumer demand proves to be underwhelming, even for the company's low-priced goods. Further exacerbating concerns for investors were the discount retailer's disappointing profits, which totaled just $132.4 million and which fell by 34% year over year.
And for the full fiscal year (which ends in January), Dollar Tree slashed its guidance, now expecting adjusted earnings per share (EPS) to be within a range of $5.20 to $5.60, which is down sharply from its previous forecast, where it expected EPS of at least $6.50. Part of the reason for the reduction in the outlook is due to the company's acquisition of 170 leases from 99 Cents Only stores (which filed for Chapter 11 bankruptcy earlier in the year). The purchase will result in Dollar Tree incurring some higher-than-normal expenses as it converts the stores, but in return, it will allow the company to expand its presence in multiple states, including Arizona, California, Nevada, and Texas.
Is the stock in trouble?
Investors may have already been feeling bearish on discount retailers after Dollar General reported earnings in late August and it blamed its own underwhelming results on a "financially constrained" core customer. Dollar Tree, which also offers low-priced items, is likely facing similar headwinds and it's little surprise that both stocks are struggling this year (they're both down more than 40% since January).
Dollar Tree isn't in terrible shape, however, as the company has generated more than $1 billion in operating cash flow during the first half of the year. And with the company looking to possibly sell Family Dollar, which has been struggling, that could inject some additional cash flow into Dollar Tree's business while also making its operations smaller and leaner. It's a challenging period for Dollar Tree, but the business is by no means doomed.
How cheap is Dollar Tree stock?
Shares of Dollar Tree have been tumbling sharply this year and the stock hasn't been this low since 2017. At less than 12 times its estimated future earnings, based on analyst expectations, the retail stock is trading at a fairly modest multiple. Even Dollar General is slightly higher -- it's trading at more than 13 times future profits.
But how strong next year's profits prove to be could be up for debate, especially if the economy falls into a recession and Dollar Tree's struggling consumers face even greater headwinds. The danger with relying on forward earnings multiples is they rely on assumptions about what may lie ahead for the business, and given the current economic climate, that's not easy for analysts to predict.
Should you buy Dollar Tree stock today?
Dollar Tree is facing some challenges but they aren't insurmountable. Amid some stronger economic conditions, the stock could bounce back in the long run.
At a low valuation, Dollar Tree is a stock that makes for an appealing buy right now. I wouldn't expect a quick turnaround in the stock's value and it may even continue to struggle in the weeks and months ahead. But I also don't think the stock is in as much trouble as its falling share price seems to indicate. As long as you're willing to hang on for the long haul and aren't in a rush to turn a profit, buying the retail stock now could be a great move.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
