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Dollar Tree's Biggest Threat in Q4 May Not Be Tariffs, Transportation, or Family Dollar

By Rich Duprey - Mar 3, 2020 at 9:30AM

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Whatever happened before doesn't compare with the new threat facing the deep discount chain.

Dollar Tree (DLTR -0.22%) reports its fourth-quarter results on Wednesday, March 4, but it may not really matter much what the deep discounter says about what happened over the past three months. Analysts and investors may be more interested about what management has to say about the future, particularly as it relates to China.

Because Dollar Tree imports a "substantial majority" of the goods it sells from China, the coronavirus outbreak will likely play a bigger role in how the retailer performs.

Having escaped the frying pan of more tariffs from a trade war, Dollar Tree may have jumped into the fire of a global health crisis.

Scissors cutting $1 bills.

Image source: Getty Images.

High cost of trade wars

Despite Family Dollar continuing to reward investors for the faith activist investor Starboard Value placed in Dollar Tree's management to bring the chain back to health, it was the deep discounter lowering its sales forecast for the third straight quarter and cutting its profit outlook for the full year that sank its stock after third-quarter results were issued in November.

Dollar Tree had expected earnings to take a hit from higher tariffs. As the trade war between the U.S. and China was escalating, it looked as though tough, new, costly duties would be imposed on Chinese imports.

While it had pulled forward orders early to get in ahead of the tariff hikes that were coming, Dollar Tree said new impositions were expected to cost it $19 million, or about $0.06 per share. However, both sides walked away from the brink, and the full measure of tariffs was never imposed. The retailer will have incurred higher costs from previous duties that did go online, but it shouldn't have borne the brunt of the full weight of the tariffs this quarter.

A heavy reliance on China

Just as well, the novel coronavirus that causes the disease known as COVID-19 seems to have wreaked havoc all on its own. A combination of the two may have made the situation even worse.

There doesn't appear to be a let-up in the spread of the virus, and though China is slowly returning to work, the ripple effect on company inventories could be severe the longer this drags on.

As noted, Dollar Tree ordered early to get ahead of the tariffs, but analysts are warning that it and other retailers may face a rude shock if they're not able to restock their shelves. Many deep discounters, including Dollar General (DG -1.48%) and Walmart (WMT -1.47%), rely heavily upon China for their goods. Analysts estimate Walmart sources 70% of its merchandise from the country.

Shares of Dollar Tree have lost 11% of their value in the past week as the broader market sold off over fear the contagion couldn't be contained. Much of that is probably unwarranted panic selling, but the discount chain could see its efforts to get growing again hampered.

Direction, not location

Wall Street is forecasting Dollar Tree will notch a 3% gain in revenue in the fourth quarter as sales hit $6.39 billion, but earnings will fall 9% to $1.75 per share. That's right down the middle for the guidance range management provided for sales and profits, and the one good thing is the coronavirus didn't really seem to become a cause for concern until the quarter was already over.

But that's why I said it may not matter so much what Dollar Tree did in the fourth quarter, but where it sees the next few quarters. This could be a very volatile period for the deep discount chain.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Dollar Tree, Inc. Stock Quote
Dollar Tree, Inc.
$167.68 (-0.22%) $0.37
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$137.02 (-1.47%) $-2.05
Dollar General Corporation Stock Quote
Dollar General Corporation
$253.86 (-1.48%) $-3.80

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