Dollar Stores Report Strong Second Quarter Earnings

Dollar Tree, Inc. (DLTR) is trading lower while Dollar General Corporation (DG) is adding points in Thursday's pre-market after both discount chains beat top- and bottom-line second quarter 2020 estimates and reported healthy same-store sales growth. The split reactions follow similarly unsettled price action in Dow retailers Walmart Inc. (WMT) and The Home Depot, Inc. (HD), highlighting an uneven retreat from COVID-fueled retail plays into traditional and aggressive growth stocks.

Key Takeaways

  • Dollar Tree stock is trading lower while Dollar General stock is in rally mode, even though both chains beat earnings expectations.
  • Dollar General hit an all-time high in Thursday's pre-market, whereas Dollar Tree hasn't posted a new high since October 2019.
  • Broad market action is transitioning into a more optimistic post-pandemic outlook that doesn't favor deep discount retailers.

The market has always acted as a "future discounting mechanism," attempting to forecast conditions six or more months into the future. Right now, that means looking past the pandemic and into manufactured vaccines or a failed second wave that allows Americans to resume historical consumer behavior. Unfortunately, this classic digestion process can be dead wrong, trapping bulls at highs or bears at lows.

A discounting mechanism operates on the premise that the stock market essentially discounts, or takes into consideration, all available information including present and potential future events. 

Dollar Tree Earnings and Outlook

Dollar Tree posted earnings per share (EPS) of $1.10 in the second quarter, $0.17 better than expectations, while revenue rose 9.4% to $6.28 billion. Same-store sales for the Family Dollar division rose 11.6%, while Dollar Tree division sales rose 3.1%. The stock, which carries an 18.9 forward price-to-earnings ratio, is trading lower by nearly 6% in the pre-market after hitting a 10-month high in Wednesday's session.  

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

A long-term uptrend topped out at a split-adjusted $16.08 in 2000, marking a high that wasn't challenged for the next 10 years, ahead of a bear market decline into the deep single digits. The stock posted higher lows in 2001, 2003, and 2008, finally attracting strong buying interest at the start of the new decade. A breakout in the second quarter of 2010 posted the strongest gains so far this century, splitting twice during an ascent that topped out at $116.58 in January 2018.

The subsequent decline ended near $80 in the third quarter, yielding a bounce that reached the prior high in June 2019. An October breakout added three points before turning tail in a selloff that accelerated in March 2020. The stock reversed at the 2015 low into the second quarter and lifted within two points of the .786 Fibonacci selloff retracement level ahead of the news. It's now settling near the .618 retracement in the upper $90s, with the 50-month exponential moving average (EMA) at $90 offering strong support.

Dollar General Earnings and Outlook

Dollar General reported even stronger results than its rival, delivering EPS of $3.12, which beat expectations by $0.65. Revenue rose 24.4% year over year to $8.68 billion, while same store-sales lifted a healthy 18.8%. The company also announced the authorization of $2.0 billion for share repurchases at a time that many corporations have been forced to abandon this manipulative activity, which underpins stock prices.

Chart showing the share price performance of Dollar General Corporation (DG)

The company came public at $22.00 in November 2009 after benefiting from the 2008 economic collapse. It posted an all-time low at $21.30 three months later and turned sharply higher, lifting into the $30s at the end of 2010. A 2011 breakout eased into a rising channel in 2012, while price held within those boundaries into the 2016 high in the mid-$90s. The subsequent decline broke channel support after the presidential election, ahead of a strong bounce at the end of 2017.

A September 2018 breakout posted strong gains into the October 2019 peak near $165, giving way to a pandemic swoon that dumped shares more than 40 points. It returned to the high and broke out once again in April, adding points within a second channel into this week's all-time high at $204.66. The stock is trading about two points higher in the pre-market and will maintain a bullish outlook as long as it holds channel support in the lower $190s.

A share repurchase is a transaction whereby a company buys back its own shares from the marketplace. A company might buy back its shares because management considers them undervalued. The company buys shares directly from the market or offers its shareholders the option of tendering their shares directly to the company at a fixed price.

The Bottom Line

Deep discount chains Dollar Tree and Dollar General beat second quarter 2020 expectations and posted healthy same-store sales growth.

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

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