Dollar Tree's stock tumbles as rival Dollar General's bet on food and groceries pays off

Published Thu, Aug 25 202212:43 PM EDTUpdated Thu, Aug 25 20221:44 PM EDT

All dollar stores are not created equal. Look at what's happening between Dollar General and Dollar Tree if you want proof. Both dollar stores beat earnings forecasts, but what's important lies within the retailers' outlooks. Dollar General raised its same-store sales guidance for the fiscal year, and it's now above Wall Street's expectations. It's predicting a gain of 4.0% to 4.5% compared with an average estimate of a 3.2% gain, according to StreetAccount estimates. However, it only reiterated its earnings estimates. Shares are off more than 1% in trading Thursday on the news. That's still far better than what's going on over at Dollar Tree. That discounter gave fiscal third-quarter revenue forecast that was a bit below consensus and issued an earnings estimate that was way below Street expectations. It expects per-share earnings in the range of $1.05 to $1.20 compared with the $1.81 per share Refinitiv estimate. Shares are down more than 11% after this report. The reason for Dollar Tree's weaker outlook is price cuts it's taking at Family Dollar stores that will eat into margins. So what's going on here? Dollar General said it's seeing plenty of customers visiting its stores to buy food and groceries. CEO Todd Vasos even touted its ability to gain market share of "highly consumable product sales." Dollar Tree also commented that shoppers are leaning toward food purchases, too. But the problem for Dollar Tree is that it has less exposure to the grocery business than Dollar General. Low-income consumers feeling the pinch The company's Dollar Tree stores have been adding more discretionary items like party supplies such as serving platters, paper plates and balloons as well as greeting cards. The strategy hoped to take advantage of the increase in entertaining coming out of the pandemic. Instead, inflation has grown at 40-year high pace and stimulus checks are no longer padding bank accounts. Family Dollar's customers tend to have lower incomes than both Dollar Tree and Dollar General, and clearly these shoppers are feeling the strain of months of higher prices. Executives hope that the price cuts will create a more loyal customer and the company will benefit as inflation eases. "Competitive pricing at Family Dollar will over the long term enhance our sales productivity and profitability, and ultimately our opportunity to accelerate store growth," management said during its earnings call. Dollar Tree President and CEO Mike Witynski said its pricing gap has closed with rivals and its " ... value proposition is the most competitive it has been in the past 10 years." Time will tell if the investment pays off as expected. Tough times for apparel sales Meanwhile, the picture for apparel retailers continues to look nasty. Burlington Stores earnings beat, but revenue and same-store sales were worse than expected. Also, guidance is just awful with fiscal third-quarter earnings seen at 36 cents to 66 cents per share, after adjustments, compared with $1.39 per share, according to Refinitiv estimates. Shares are down more than 8% in the wake of the report . It also slashed its full-year outlook to a range of $3.70 to $4.30 per share, on an adjusted basis, from a prior range of $6.00 to $7.00 per share and below the $5.70 estimate. The off-price retailer said "lower-to-moderate income shoppers continue to face tremendous economic pressure driven by the higher cost of living." It also blamed higher markdowns during the rest of the year for its weak outlook. The picture isn't any better over at Abercrombie & Fitch either. The retailer reported a huge unexpected loss on weak sales, and shares are down more than 5%. The stock hit a fresh 52-week low of $15.87 in trading Thursday. Abercrombie expects fiscal third-quarter revenue to fall at a high-single digit pace versus the estimate for a 1% decline. Full-year sales will be down mid-single digits from $3.7 billion in fiscal 2021 compared with an average estimate of up 0.4% from analysts. The company is seeing significant trouble at its Hollister stores, and that has significantly contributed to the weakness. Brace yourself for what likely could be an ugly report from Gap this afternoon. The company, which also owns Old Navy and Athleta, is expected to post a fiscal second-quarter loss of 5 cents per share on revenue of $3.82 billion, according to Refinitiv.