Dollar Tree, Inc. (NASDAQ:DLTR) is having one of the worst starts to a year in recent memory. After crossing over the psychologically important $100 barrier, Dollar Tree stock enjoyed several positive sessions before fading badly. Then, the discount dollar store released its fourth-quarter 2017 earnings results, and all hell broke loose.
Surprisingly, the actual performance metrics weren’t bad at all. Indeed, I would consider them quite good. Earnings per share came in at $1.89, a whopping 39% higher than the year-ago quarter. Thanks to President Trump’s tax reform creating a $583.7 million one-off lift, Dollar Tree’s net income was $1.04 billion. But even discounting the tax benefit, net income would have been nearly 42% higher than Q4 2016.
None of that seemed to matter in the markets. Dollar Tree stock tanked more than 14% after the earnings report. The most conspicuous explanation was that, technically speaking, Dollar Tree failed to hit Wall Street’s earnings per share target of $1.90.
But that just doesn’t make sense, according to InvestorPlace.com contributor Lawrence Meyers. He argues that the Dollar Tree stock selloff is way overdone and irrational. From the evidence at hand, it’s hard to disagree. Meyers writes:
For the fourth quarter, sales increased 13% to $6.36 billion, up from $5.64 billion last year. Comparable same-store sales were up 2.4%. For a retail operation like Dollar Tree stock, that’s perfectly acceptable. This is particular true because the comps were driven both by an increase in the average ticket size as well as the number of transactions.
Both sales and earnings are growing robustly. Are investors really that dumb on Dollar Tree stock? Meyers might say yes, but there’s something else you should consider.
Dollar Tree Stock Is Good, But Others Are Better
Two factors come into mind when analyzing discount dollar stores like Dollar Tree or Dollar General Corp. (NYSE:DG): The broader economy, and the grocery industry’s strength. Currently, both factors are unfavorable for Dollar Tree stock and its ilk. Let me explain.
First, rising consumer sentiment indicates that Main Street is stronger than we initially realized. According to the University of Michigan’s monthly consumer survey, sentiment last month was the second-highest since Trump took office. Moreover, the index has been rising steadily since July of last year.
Naturally, consumers that either have more money or are more willing to spend it will eschew a discount store for something like Sprouts Farmers Market Inc (NASDAQ:SFM). Even if they won’t make that jump, customers will probably do all their shopping at Kroger Co (NYSE:KR). The point is, the more money someone has, the less likely they’ll shop at Dollar Tree; Hence, a headwind for Dollar Tree stock.
As you might imagine from the consumer sentiment, the grocery industry is likewise strong. However, total grocery sales growth over the last three years has slipped to the lowest three-year period average since 2008-2010.
Essentially, this means that grocery sales might hit a maturity point soon. Thus, current competitors will have to duke it out ferociously for limited consumer dollars, which bodes poorly for Dollar Tree stock.
Look at it this way. You’re a highly confident American consumer. Every week, you buy groceries. With your increased income, you buy food at a “real” grocer. Why would you buy potentially dangerous goods at a discount dollar store when you don’t have to?
Dollar Tree Needs Trump To Make America Poor Again
I’ve been just as surprised as most Americans over recent headlines, particularly about President Trump’s rising approval rating. Whether you like him or not, he’s stuck to his guns, put America first, and our economy ain’t half-bad. I don’t know if America is “great again,” but I don’t think we’re going to shop at Dollar Tree again.
Certainly, Wall Street is rethinking the thesis for Dollar Tree stock. We’re impressed with the company’s Q4 results — that is, until we stack them against the competition. On an annual basis, DLTR’s revenue growth against 2016 isn’t anything to write home about. On the flipside, companies like Kroger or Sprouts produce similar, if not better, sales growth.
Now, we can start to see why Dollar Tree stock was hit as hard as it was. It’s not that it missed earnings expectations by a penny — that would be silly. Rather, the question is if Dollar Tree is the better bet given our current and forecasted economic condition?
Yes, Dollar Tree has produced some impressive numbers. The problem is the higher-end stores have done at least as well.
Moreover, consumer sentiment indicates Americans are willing to pay for more premium goods. That spells trouble for Dollar Tree stock, which depends on a healthy stream of tight-fisted people.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
