Should you buy Dollar Tree stock at its 9-year low?

The dollar treehis (DLTR 1.38%) the stock fell to its lowest level in nearly nine years after posting its most recent earnings report on Sept. 4. For the second quarter of fiscal 2024, which ended Aug. 3, the discount retailer’s net sales rose just 0.7 percent year over year to $7.37 billion and missed analysts’ estimates by 100 million dollars. Adjusted EPS fell 26% to $0.67 and broadly missed the consensus forecast by $0.37.

Those headline numbers were ugly, but could it be a contrarian play for patient investors? Let’s dig into Dollar Tree’s biggest problems to find out.

Image source: Getty Images.

What happened to this stalwart retailer?

For many years, Dollar Tree was considered a recession-proof retailer. It survived the retail apocalypse, continued to open brick-and-mortar stores as other retailers pulled back, and grew at a steady pace during economic downturns.

Dollar Tree’s troubles began after it acquired competitor Family Dollar in 2015. Back then, Dollar Tree still sold all of its products for $1, while Family Dollar sold most of its products for less than $10. Dollar Tree’s namesake brand has defended its lower-price niche, but Family Dollar has struggled to keep up with Amazon and discount superstores like Walmart (WMT 0.91%) and Aim (TGT -0.46%).

As a result, Family Dollar’s slowdown offset Dollar Tree’s steadier growth while compressing the combined company’s gross margins. To address this problem, it closed hundreds of Family Dollar stores, added Dollar Tree sections to some Family Dollar stores, and converted others to Family Dollar/Dollar Tree “combo” stores.

But as Dollar Tree executed that costly turnaround strategy, rising tariffs on Chinese goods, rising inflation and persistent theft further reduced its sales and eroded its margins. That pressure prompted the company to raise Dollar Tree’s base prices from $1 to $1.25 in 2021 and $1.50 earlier this year. It also began selling a wider range of more expensive products by raising the price cap to $5 in 2023 and $7 this year. But despite these efforts, the company’s annual gross margin has still fallen from 35.3% in fiscal 2014 (before buying Family Dollar) to 30.4% in fiscal 2023.

What happened to Dollar Tree in the last year?

In fiscal 2023, Dollar Tree’s net sales rose 8%. His company’s same-store sales rose 4.6 percent, driven by 5.8 percent growth at Dollar Tree and 3.2 percent growth at Family Dollar. But over the past year, both banners have lost steam.

Data source: Dollar Tree.

That slowdown suggests Dollar Tree’s new multi-price strategy isn’t bringing in more shoppers. It’s also growing more slowly than Walmart US and Target, which reported growth of 4.2% and 2%, respectively, in recent quarters. On the bright side, it is still growing slightly faster than its main competitor, general dollar (DG -1.94%)which squeezed out just 0.5% same-store sales growth in the second quarter.

However, Dollar Tree’s total store count fell 0.5% year-over-year to 16,388 at the end of the first half of fiscal 2024. That’s a worrying reversal of its expansion from 13,851 locations in the fiscal year 2015 to 16,774 locations in fiscal year 2024.

What’s next for Dollar Tree?

Dollar Tree’s slowdown was already worrisome, but those headwinds are expected to persist into the second half of the year. It now expects its net sales to rise just 0%-1% for the full year, compared with its previous guidance of 1%-5% growth, and has cut its full-year adjusted EPS guidance from an increase of 10%-19% to a decrease of 5%-12%.

It attributed the cuts to a messy second-quarter earnings miss, a “more conservative sales outlook” for the rest of the year, incremental costs to convert defunct 99 Cents Only stores (which it acquired earlier this year) into stores Dollar Tree, and higher depreciation and amortization costs at its existing locations.

Is Now the Right Time to Buy Dollar Tree?

At $66, Dollar Tree might look cheap at 12 times the midpoint of its adjusted EPS guidance. Dollar General trades at 14 times forward earnings, while Walmart and Target have even higher forward multiples of 31 and 16, respectively.

But Dollar Tree deserves this discount rating, for obvious reasons. Its namesake brand is losing momentum, Family Dollar is still struggling and diluting its own brand appeal and narrowing its own moat by raising prices. Dollar Tree also doesn’t pay dividends like Dollar General, Walmart, and Target do.

So for now, I can’t consider Dollar Tree a contrarian buy. It is trading near a nine-year low as it has not resolved the problems that started nine years ago and will face macro and competitive headwinds in the near future.