In a tale of two Dollar stores, tariffs play a significant role

One of the dollar stores imports 40% of its goods, with most coming from China.

It’s a tale of two dollar stores this week, as both Dollar Tree (NASDAQ: DLTR) and Dollar General (NYSE: DG) reported first quarter earnings.

Both had strong quarters, beating estimates, but only one of them saw its stock price rise, while the other watched its sink.

The one that rose was Dollar General, as its stock jumped some 13%, as we covered on Tuesday. The one that sank was Dollar Tree, which dropped some 8% on Wednesday after posting earnings.

While there is not one simple answer as to why the divergence, tariffs were certainly a big factor.

Dollar General has very little exposure to tariffs, as just 4% of its goods are imported. As a result, Dollar General raised its guidance for the fiscal year, which helped spur the rally.

Dollar Tree, on the other hand, imports about 40% of its merchandise, with the vast majority of it coming from China, according to its 2024 annual report. Imports from China are facing 30% tariffs under the latest Trump Administration action and that could impact Dollar Tree’s second quarter earnings.

Dollar Tree beats earnings and revenue estimates

Overall, Dollar Tree had a strong first quarter, with results beating both revenue and earnings estimates.

The company generated $4.6 billion in sales in the quarter, up 11% year over year. That beat revenue estimates of $4.5 billion.

Net income from continuing operations rose 17% to $314 million, while earnings increased 20% to $1.47 per share. Adjusted earnings rose 24% to $1.26 per share, which handily beat analysts’ estimates of $1.17 per share.

The company also posted an impressive 5.4% increase in same-store sales and opened 148 new Dollar Tree stores in the quarter. In addition, it converted 500 stores to its multi-price format, wherein it will carry items that sell for $3, $5 and $7, in addition to the $1 products.

In addition, it is getting ready to close on its $1 billion sale of its Family Dollar franchise to private equity investors Brigade Capital Management and Macellum Capital Management. CEO Mike Creedon said the sale is part of the company’s transformation that will allow it to grow and optimize the Dollar Tree business.

Tariffs to impact Q2

Dollar Tree has historically outperformed when the economy is struggling or the stock market is down. This year, the stock had been up about 29% before today’s selloff, and in the 2022 bear market it was up about 1%.

But the current quarter, Q2, will prove to be challenging for Dollar Tree due to the impact of tariffs.

Dollar Tree expects comparable net sales in the second quarter to be near the higher end of its full-year outlook range of 3% to 5%. However, it does expect adjusted earnings from continuing operations in Q2 to be down as much as 45% to 50% year-over-year.

“We expect our second quarter profits to be meaningfully lower than last year in light of higher tariff and other costs, including some costs we absorbed during the 145% window on China tariffs,” Creedon said on the earnings call.

Dollar Tree expects to accelerate sales in the back half

The good news is that it is maintaining its full year sales guidance, as the company expects to mitigate the impact of the tariffs in the third and fourth quarters and hit its targets as net sales re-accelerate. It is targeting net sales from continuing operations to be in the range of $18.5 billion to $19.1 billion with comparable store growth between 3% and 5%.

Also, the company is updating its adjusted earnings outlook to $5.15 to $5.65 per share, up from the previous $5.00 to $5.50 per share.

So, the kneejerk reaction by investors was likely based on that challenging Q2 forecast, but analysts were largely bullish on Dollar Tree’s report.

The fact that it maintained its full-year guidance shows it has a plan to deal with the tariffs, and the proceeds from the sale of Family Dollar should give it plenty of capital to invest. But given the uncertainty around tariffs and the somewhat elevated P/E, it might be smart to wait for more visibility and a better opportunity to buy low.