Why Dollar Tree Shares Crashed Then Rebounded

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of discount retail chain Dollar Tree (Nasdaq: DLTR  ) collapsed 23% just two seconds after trading began today in what CNBC is reporting as another trading glitch. The stock is currently down less than 2%. Dollar Tree also reported second-quarter results and provided preliminary third-quarter guidance as well.

So what: Just 15 days after a software glitch at Knight Capital Group (NYSE: KCG  ) caused erratic trading in 148 separate companies and nearly drove the market maker into bankruptcy, we have yet another mini flash-crash in Dollar Tree. Whatever the problem was it appears to have been fixed now, but it is nonetheless a reminder that trading algorithms are imperfect and hiccups like these have become more common.

What really matters is Dollar Tree's third-quarter guidance released this morning, which places its total expected revenue range of $1.71 billion-$1.75 billion on EPS of $0.47-$0.51 below Wall Street's forecasts for $1.77 billion in sales and a profit of $0.52.

Now what: As for the trading glitch, it'll be looked at and perhaps we'll know more about what happened by next week. Dollar Tree's guidance, however, isn't something you can just look past. I've been saying for months that dollar stores have been priced for perfection. A mixture of low wage growth and rising food prices has pinched consumers to the point that I couldn't figure out how dollar stores would squeeze any more out of their customer base. Dollar Tree's warning today is a confirmation that the tide is shifting. I've made CAPScalls of underperform on Family Dollar Stores (NYSE: FDO  ) , Dollar General (NYSE: DG  ) , and Dollar Tree, and feel the trend of rising food prices, weak wage growth, and high unemployment levels could send this group much lower.

Craving more input? Start by adding Dollar Tree to your free and personalized Watchlist so you can keep up on the latest news with the company.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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  • Report this Comment On August 16, 2012, at 5:01 PM, ctb007 wrote:

    How are rising food prices, weak wage growth, and, high unemployment going to adversly impact the dollar stores? If anything those factors should help them. Dollar General has no exposure to California. They just started opening stores there. CA is 1/5 of the US economy. The company has more physical store locations than any other retailer in the country already without being in CA. At best the economy is going to grow slowly. At worse a double dip. I don't see how either scenario causes this group to go "much lower." In terms of the dollar stores squeezing more out of its customers, I just noticed a Family Dollar near me with a big sign that said "We now sell cigarettes." They just added Pepsi products and larger assortments of frozen foods. This was not reflected in their recent quarter. In the past August has not been a strong month performance wise for FDO,DG and, DLTR. In your priced for perfection piece in June you reccomended selling the group near 52 highs. Stocks that make new highs tend to continue to make new highs. You may be correct on DLTR (they always give overly conservative guideance though) and FDO. However, I believe this is a pause before they resume higher. I bet in one year all 3 stocks are trading for more than they are now.

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