Why Dollar Tree Stock Dropped Last Month

Discount retailer promotions The dollar tree (DLTR -0.59%) fell 16.8 percent in September, according to S&P Global Market Intelligence data. The owner of the Family Dollar and Dollar Tree brands reported weak earnings and cut guidance for its full fiscal year this month, prompting investors to sell the stock. As of this writing, the stock is off more than 60% and sits at a market cap of just $15 billion.

Here’s why Dollar Tree fell again in September.

Poor earnings, profit margins

On September 4, Dollar Tree reported earnings for the second quarter of its fiscal year. Shares fell after the announcement. Why? Because management revised down its full-year earnings and revenue guidance.

Dollar Tree previously expected to generate more than $32 billion in sales in fiscal 2024. Now, it expects just $30.6 billion to $30.9 billion in revenue. Earnings per share (EPS) forecasts fell to a range of $5.20 to $5.60, down from $6.50 to $7.00 previously.

The company continues to face inflationary pressures on both products and labor, while facing competitive pressures from companies such as Temu and Walmart. Family Dollar in particular is struggling and has been unprofitable for a long time now.

The problems boil down to Dollar Tree’s profit margin. Operating margin fell to just 0.33% over the past 12 months, compared to around 8% in the past. Investors are concerned that Dollar Tree can’t control its costs, which will lead to a structurally lower profit margin, which will lead to weak EPS.

At 60% off, is the stock a buy?

At a market cap of just $15 billion, Dollar Tree is at one of its cheapest levels in years. The company’s revenue is strong at $31 billion over the past 12 months, but it’s struggling to keep up with inflation.

Long-term investors may be attracted to the stock at current levels. If you believe Dollar Tree can get its profit margin back to 8%, it would generate about $2.5 billion in revenue at its current sales level. That’s a price-to-earnings (P/E) ratio of just 6, which is extremely cheap. However, unless you’re confident that margins will return to their historical average, it’s best to avoid buying Dollar Tree stock today.