Have Poor Q1 Earnings Set Up A Short Opportunity In These Two Brick-And-Mortar Retailers?

The two leading dollar-store stocks seem to have come crashed heavily in recent days and may be setting up for continued weakness, presenting an opportunity for a quick play on the short side. The catalyst here is poor earnings from both Dollar Tree (NASDAQ:DLTR) and Dollar General (NYSE:DG), which has triggered a significant whipsaw in these two stocks.

Dollar Tree (NASDAQ:DLTR)

The weakness in Dollar Tree traces back to May 25 when the company announced its Q1 earnings, missing Wall Street earnings estimates and lowering its full-year EPS guidance. 

The company’s CEO Rick Dreiling said, “We are adjusting our EPS outlook as we expect the elevated shrink and unfavorable sales mix to persist through the balance of the year. We still expect earnings to be more back-end loaded this year as the benefits of lower ocean freight rates flow through.” Following the report, DLTR fell 12% and has continued to slide in recent days. 

The stock is now trading at year-to-date lows, with a fresh catalyst in the form of Dollar General’s own poor earnings setting up for even lower prices to come in the next couple of weeks. 

Over the last month, DLTR has now lost a little better than 16%, including 4% on Thursday amid a strong broader market. A look at the longer-term chart reveals that the share price has made something of a quadruple-top formation over the last year and if a low in the $128.00 area dating back to May 20, 2022 is taken out in the coming days, the near-term bearish momentum could see DLTR at $120.00 per share vs. a current price of $129.56. 

Dollar General (NYSE:DG)

Dollar Tree competitor Dollar General took a huge haircut during Thursday’s trading session, falling nearly 20% to close at $161.86, as the retailer reported EPS and sales for Q1 that missed Street expectations, and lowered its full-year guidance. 

“While the macroeconomic environment has been more challenging than expected, particularly for our core customer, we are confident in Dollar General’s ability to deliver strong growth in the years ahead, despite the near-term pressure which impacted our first quarter sales results and is anticipated to impact our full-year sales and EPS,” said Chief Executive Officer Jeff Owen.

The action in this stock has been quite interesting, as Wall Street seemed to have only very marginally discounted the name in the wake of DLTR’s earnings – which was unusual. Then, when DG reported sharing the same downbeat story as DLTR, the stock was absolutely hammered. Clearly, shareholders were caught unprepared here. 

There are some interesting macroeconomic takeaways from these two companies’ earnings reports, and they’re not encouraging – it would seem the lower-end consumer is hurting. In fact, DG’s CEO said that his company’s customers have been turning to food banks. Whether the forces – significant inflation and credit contraction – that are taking a bite out of low-income consumers’ spending will ripple through the rest of the economy is yet to be seen, but it is a worrisome development and this is exactly where it would show up first. 

Nevertheless, Dollar General is actually a tremendous brick-and-mortar retailer with a robust history of creating shareholder value. It’s been a great stock for its investors, but the whipsaw in sentiment here and a real lack of visibility in terms of forward-looking macroeconomic conditions could see a sustained downdraft in this name. 

From a technical perspective, this chart has been completely broken in the wake of Thursday’s plunge. In order to find a support area to the downside, one would have to go back to Spring 2020. 

The share price had been in a descending channel formation heading into this earnings report and has since dropped sharply. Given the magnitude of this move, however, only very aggressive traders will want to put on a big short position as early as Friday morning. The intuitive move here, however, is to sell any snapback rally in this name. 

Featured photo by Kenny Eliason on Unsplash.