On paper, discount retailer Dollar Tree (NASDAQ:DLTR) should thrive under the present challenging environment in the consumer economy. With stubbornly elevated inflation and high borrowing costs, DLTR stock should be a beneficiary of belt-tightening. Unfortunately, its fourth-quarter earnings report told a different story.
According to Reuters, the retailer yesterday reported a net loss of $1.71 billion or $7.85 per share. This figure stood out against the year-ago period’s profit of $452.2 million or $2.04 per share. On the top line, Dollar Tree rang up sales of $8.64 billion, missing the consensus target of $8.67 billion.
For 2024, management anticipates revenue to land between $31 million and $32 million. The midpoint of this this range sits below Wall Street’s estimate of $31.65 billion. As well, annual profit may come in between $6.70 and $7.30 per share, slightly below expectations.
Fundamentally, Dollar Tree’s 2015 acquisition of Family Dollar has been a drag, with the enterprise struggling to maintain value in both brands. Subsequently, management announced plans to shutter 970 Family Dollar locations. It’s an ugly situation for the communities that depend on the discount retailer. However, the severe volatility presents a possible upside opportunity for risk takers.
Rare Downfall Opens the Door for a Quick Profit
To be sure, no one should ignore the severe challenges that Dollar Tree faces. But from a short-term perspective, it’s possible that the red ink could be overdone. After all, reducing the overall footprint and focusing on the most promising locations should theoretically boost investor sentiment.
In addition, DLTR stock could eventually see an expansion of its total addressable market. With both credit card debt and delinquencies rising, it’s clear that millions of Americans are struggling. People need more discount retailers, not fewer.
From a technical perspective, it’s worth pointing out that severe single-day downturns in DLTR stock are rare. Since 1995 when it made its public market debut, there have only been 12 sessions — including Wednesday’s drop — where the stock suffered a 14% loss or more in a single day.
Interestingly, the average of the subsequent five-day performances following the last 11 sessions of a 14% loss or worse comes out to a return of 0.55%.
Stated differently, DLTR stock features an upward bias. Knowing this, gamblers can attempt to scalp a quick profit from Dollar Tree’s possible bounce back.
Trade of the Day: Buy DLTR Stock Call Options
For those willing to take a high-risk, high-reward wager, consider the 15 March 2024 $129 call. On Wednesday, the premium finished the session at $1.67. If we assume a half-a-percent gain within Thursday, by late afternoon, this call could command a premium of $1.98. That would give us a profit of almost 19%.
As with the other trades mentioned, this is all about going in quickly and going out just the same. No matter what, we wouldn’t hold the call option past Thursday’s close as the time decay would badly hurt the value of the contract. With any luck, we should see a quick pop higher, giving us a chance to secure a solid gain before the weekend.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
