The company is struggling to generate a profit at the moment.
Shares of discount retailer Dollar Tree (DLTR -0.59%) fell by 16.8% in September, according to data from S&P Global Market Intelligence. The owner of the Family Dollar and Dollar Tree brands posted weak earnings and lowered guidance for its full fiscal year in the month, leading investors to sell off the stock. As of this writing, the stock is in a drawdown of over 60% and sits at a market cap of just $15 billion.
Here’s why Dollar Tree fell yet again in September.
Weak earnings, profit margins
On Sept. 4, Dollar Tree reported earnings for the second quarter of its fiscal year. Shares plummeted after the announcement. Why? Because management revised down its earnings and revenue guidance for the full year.
Previously, Dollar Tree expected to generate upwards of $32 billion in sales in fiscal year 2024. Now, it expects just $30.6 billion to $30.9 billion in revenue. Earnings per share (EPS) guidance fell to a range of $5.20 to $5.60, compared to $6.50 to $7.00 previously.
The company is still facing inflationary pressures on both products and labor, while facing competitive pressures from the likes of Temu and Walmart. Family Dollar is especially struggling and has been unprofitable for a long while now.
The problems are materializing in Dollar Tree’s profit margin. Operating margin has slipped to just 0.33% in the last 12 months, compared to around 8% historically. Investors are worried that Dollar Tree can’t rein in its costs, which will lead to structurally lower profit margins going forward — which will lead to weak EPS.
At a 60% drawdown, 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 in the last 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 that Dollar Tree can bring its profit margin back to 8%, it would be generating around $2.5 billion in earnings at its current sales level. That is a price-to-earnings ratio (P/E) of just 6, which is extremely cheap. However, if you are not confident in the margins reverting to its historical mean, it is best to avoid buying the dip on Dollar Tree stock today.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walmart. The Motley Fool has a disclosure policy.
