What happened
Shares of Dollar Tree (DLTR -0.14%) are tumbling 10.3% in morning trading Tuesday after the deep discount retailer reported third-quarter earnings.
Although Dollar Tree beat Wall Street expectations on the top and bottom lines, its profit guidance for the full year was below forecasts, as margins are under pressure because of persistently high inflation.
Image source: Getty Images.
So what
The deep discount chain has flourished this year as consumers respond to its cheap prices for name-brand products. While it abandoned its pure-play dollar status several years ago with a $1.25 baseline price and started offering products slightly more expensive than that, it's been a retailer seen as a go-to destination to stretch wallets during inflationary times.
Year to date, net sales are up 7.1% to $20.6 billion as same-store sales have jumped 9.2% from last year and the average ticket size rose by double-digit rates. Dollar Tree's results could have been better, but it's been held back by its sister Family Dollar chain, where comps are up only 1.3% this year.
Rising costs, however, are impacting its bottom line, so although Dollar Tree raised its full-year sales guidance, earnings are only forecast to be in the lower half of its prior outlook range as headwinds from inflation hold it back.
Now what
Retail is already a relatively low-margin business, so when confronted with inflationary cost pressures, it's going to narrow them further. Still, the market's reaction seems overblown.
Dollar Tree's sales are experiencing strong growth, but consumers are buying more consumable goods, which carry lower profits than other goods. That helps to build traffic over time, but it makes for periods such as we're in more tricky when it comes to the retail stock meeting Wall Street expectations.
