Investors dumped Wall Street's two most popular dollar store stocks Thursday after the duo cautioned that rising supply chain costs were taking a toll on earnings.

Key Takeaways

  • Dollar store stocks sold off sharply Thursday after Dollar General (DG) and Dollar Tree (DLTR) cautioned about rising freight costs.
  • Pay attention to how DG shares respond to the $206 level, where the chart finds support from a multi-year horizontal trendline.
  • Keep an eye on the $85.50 level in DLTR shares, where the price is likely to find support from a trendline connecting several swing lows.

Dollar General Corporation (DG) and Dollar Tree, Inc. (DLTR)—which concentrate their stores in lower-income areas—have performed relatively well over the past 18 months, benefiting from increasing demand from price-sensitive shoppers amid job losses and uncertainty caused by the pandemic. However, it remains to be seen if discount retailers can keep prices ultra-low as profit margins shrink due to increasing freight costs.

Let's take a more detailed look at both stocks' quarterly earnings and review the charts to identify important technical levels worth watching.

Dollar General Corporation (DG)

The Goodlettsville, Tennessee-based discount retailer slumped nearly 4% Thursday, despite surpassing analysts' top- and bottom-line projections. Dollar General posted a second quarter profit of $2.69 per share, topping forecasts of $2.59 per share; however, the metric contracted 13.8% from the corresponding quarter last year. Similarly, net sales of $8.65 billion nudged past the consensus estimate of $8.61 billion but decreased by 0.4% from the June 2020 quarter.

Meanwhile, same-store sales slipped 4.7% year over year, with management now expecting full-year (FY) comparable-store sales to fall 3.5% to 2.5% compared to its previous forecast of a 5% to 3% decline. The company said that rising freight costs sliced into its second quarter gross profit margin by 80 basis points and that it expects supply chain expenses to be higher than previously anticipated in the second half. As of Aug. 27, 2021, Dollar General stock offers a modest 0.72% dividend yield and has gained 7.42% year to date.

The discount retailer's share price gapped lower on the open but closed less than $2 from its intraday high. However, given the sell-off occurred on the highest volume since January, expect further short-term weakness as investors digest the company's latest earnings report. Pay particular attention to how the price responds to the $206 level—an area on the chart that finds support from a multi-year horizontal trendline.

Chart depicting the share price of Dollar General Corporation (DG)

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A gap is an area discontinuity in a security's chart where its price either rises or falls from the previous day's close with no trading occurring in between. Gaps are common when news causes market fundamentals to change during hours when markets are typically closed, for instance an after-hours earnings call.

Dollar Tree, Inc. (DLTR)

Dollar Tree, which operates 7,800 discount stores under its namesake and Family Dollar brand, plunged 12.08% yesterday after lowering its FY outlook. The company said that it now expects fiscal 2022 earnings to come in between $5.40 and $5.60 per share, down from its prior guidance range of $5.80 to $6.05 per share. Management cited a blowout in transportation costs for the downward revision, saying that rising freight expenses will weigh on earnings by $1.50 to $1.60 per share—more than double the 60 cents to 65 cents that it had forecast in May.

In its latest quarter, the discount retailer posted respective top- and bottom-line growth of 1% and 11.8% on the back of strong discretionary sales. However, same-store sales fell 1.2% from a year earlier. Trading at $93.48 with a $21.68 billion market capitalization, Dollar Tree stock has fallen 13.5% since the start of the year, underperforming the discount retail industry average over the same period by 25%.

Dollar Tree shares broke down below key support on above-average volume Thursday in a move that could drive additional selling pressure in the days ahead. Traders should keep a close eye on the $85.50 level, where the price is likely to find support from a trendline connecting several prominent swing lows over the past 18 months.

Chart depicting the share price of Dollar Tree, Inc. (DLTR)

TradingView.com

A swing low refers to the troughs reached by a security's price or an indicator during a given period of time, usually fewer than 20 trading periods. A swing low is created when a low is lower than any other surrounding prices in a given period of time.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.