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Dollar Tree, Dollar General plummet on weak guidance

Yahoo Finance's Brian Sozzi breaks down Thursday morning's dollar store earnings from Dollar General and Dollar Tree. Both companies saw shares dip following lower earnings guidance.

Video Transcript

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- There is another segment of retail that reported today, the Dollar Stores. And of course, Brian says he's got a take on that. It was Dollar General and Dollar Tree that reported, right?

BRIAN SOZZI: Yeah, my take right off the bat here is that both of these quarters really stunk. And that's why you're seeing the stocks really take a pounding here in the early going.

Dollar General-- I'll start with that-- shares down 8%. That sell off has accelerated through the morning here. A couple of things to take away here, same store sales for Dollar General down 4.7%.

Estimates were for a 5.8% decline mark, and could absolutely care less. They just don't like that negative same-store sales result, especially when you have a Target, Walmart posting positive same-store sales for the second quarter market, hates that stuff.

Another thing they hate for Dollar General and ultimately Dollar Tree-- which I'll get to. Gross profit margin's down 80 basis points for Dollar General in the most recent quarter. Company calling out a large amount of supply chain inflation.

And when you're selling stuff at $1, and you can't move enough of that volume, and you're seeing big pockets of inflation in transportation, your margins are going to go down. Which ultimately leads me to the third thing here that the market doesn't like, really come out with a really dreadful outlook here.

Dollar General now at $9.60 to $10.20 a share for the full year. TheStreet was at $10.22. So this is a complete reset of the earnings expectations by Dollar General compared to where TheStreet was.

And now, looking at Dollar Tree, the-- the story really is the same story here. Same-store sales for Dollar Tree only down 1.2%. But again, they were down. Estimates in this case were for almost a slight increase.

So Dollar Tree-- Dollar Tree is missing same-store sales and estimates here too. Also, profit margins here for Dollar Tree, gross margins down year over year because of inflation.

And that ultimately leads to this company coming out with an outlook for the full year of $540 ,to $560 a share. Street was at about $603.

So another Dollar Store really coming out and saying, hey, inflation traffic has started to weaken a little bit. And it's not just inflation in the supply chain. It's wage inflation as well. They're also remodeling both of these chains, hundreds of stores also opening in this year alone.

Dollar Tree's supposed to open close to, I believe, 1,000 stores. That is just mind-blowing. That obviously comes at a cost as well. Overall, these are not the trades to be playing with this morning.

- You know, Sozzi, I'm also wondering here too, you know. You mentioned the-- uh, mentioned the inflation part of this. But I mean, think about it coming out of the last crisis. You had too few people working. You had too few jobs available.

And basically, you needed budget options for consumers. We're in the exact opposite situation today. And-- and you wonder with the strength we're seeing from your Walmarts and your Targets-- your big-box retailers that are going to be competing, you know, with these Dollar Stores-- you wonder how these businesses think about their future in a world where consumers want to have more money coming out of the pandemic into or going into a labor market, where, you know, let's-- let's call it the-- the-- the-- basically, the entry wage is $15 an hour, give or take, right?

And-- and you see a lot of retailers and a lot of places where we're talking $19, $20, $21 per hour for roles that had previously been $7 or $8 or $9 an hour. And-- and you-- you wonder if the structural and a value proposition is changing for these businesses.

BRIAN SOZZI: And here's how at least one of these chains, Miles, is thinking about. Like Dollar Tree, they are now starting to lift prices. Now, they're not coming out and saying that. But they are moving away from their traditional model of selling everything for $1.

And then they're adding another Plus! to the many plethoras of Pluses out there launching a Dollar Store-- a Dollar Tree Plus!-- yes, Dollar Tree Plus! They now have this in 30-- 340 stores where they sell maybe some little higher quality merchandise at prices that are above $1.

They will roll this out to a couple 100 more stores by year end with a goal of reaching 5,000 Dollar Tree stores by 2024, again, trying to lift prices in that regard, just trying to offer some higher quality stuff in certain parts of the store, hoping that that lower-income consumer has enough money in their pocket to go and buy it.

And some of those higher price point sales can offset what they're seeing in wage inflation and certainly transportation.