Dollar Tree (DLTR 3.41%) stock has been doing fairly well this year, up 17% entering trading this week, which is better than the S&P 500's gain of 11%. But in recent weeks, Dollar Tree's stock has been in a tailspin, reaching levels it hasn't been at in months. It recently was down about 26% from its high of $118.06.
What's behind the stock's sharp sell-off, and could there be more trouble ahead for Dollar Tree investors? Here's what you need to know about why it's been doing so poorly, what could impact its future performance, and whether it's worth buying the retail stock on the dip.
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The sell-off began after its second-quarter results came out
On Sept. 3, Dollar Tree released its second-quarter results for fiscal 2025. That day, the stock would fall by more than 8% and its decline would continue in the following weeks.
Overall, the quarter wasn't a bad one for Dollar Tree. Same-store net sales rose by 6.5% for the period ending Aug. 2 and operating income of $231 million rose by 7% year over year. Investors, however, may have been worried about what lies ahead for the business in upcoming quarters.
On the company's earnings call, CEO Michael Creedon did allude to tariff risk ahead.
"The timing of the impacts of tariffs and our mitigation activities played out differently than we originally anticipated, with some of the net positive benefits of our mitigation initiatives coming earlier in Q2 and the tariff impacts shifting to later in the year," he said.
Tariffs have been a big concern for investors this year and while Dollar Tree is planning to mitigate those potential headwinds as best as it can, it could mean that worse results may be on the horizon for the discount retailer. A big test may be looming for the company when it reports results later this year, and investors may be hesitant to hold on to the retail stock given the uncertainty.
Why it may not be all bad news for Dollar Tree investors
Although tariffs may negatively impact Dollar Tree's top and bottom lines, the company is giving itself more of a buffer these days by introducing a greater variety of products that are priced between $3 and $5. While the vast majority of its products still cost consumers less than $2, the expansion into higher-priced items can help it appeal to a wider range of shoppers.
During the quarter, Creedon said that households earning $100,000 or more were a "meaningful portion of our Q2 growth," and that's been part of an emerging trend for Dollar Tree as consumers look for ways to trim their budgets.
Dollar Tree is in a good position where both low-income and high-income shoppers may see a reason to go to its stores. With a solid comparable store growth rate, it's proving that the business may be more resilient than other retailers.
Is Dollar Tree stock a good buy?
The decline in Dollar Tree's stock in recent weeks doesn't put it anywhere near its 52-week low of $60.49, but it does bring its price-to-earnings multiple down to around 17. That's well below where the average S&P 500 stock trades -- a multiple of nearly 26.
Tariffs may be a concern for the company in the short term, but over the long run it's not likely to weigh on the business because policies may change and Dollar Tree will have more time to adapt. The stock's reasonable valuation combined with the company's continued strong results makes it a solid investment to consider today.
