Dollar Tree Plunges as Outlook Renews Fears About Discounters

(Bloomberg) -- Dollar Tree Inc. plummeted after saying profit this year would fall well below expectations, rattling investors who are concerned about Trump administration plans to reduce food-stamp benefits.

The shares fell as much as 16 percent Wednesday, the steepest intraday plunge since August 2012, and making them the worst performer in the S&P 500 Index. Shares of other discounters, such as Dollar General Corp., Ross Stores Inc. and Walmart Inc., fell as well, just a day after Target Corp.'s stock declined on concerns about its ability to keep pace with Amazon.com Inc.

“After two straight rock-star quarters, Dollar Tree fell short of expectations in the fourth quarter,” RBC Capital Markets analyst Scot Ciccarelli said in a note.

Discount retailers like Dollar Tree, which also operates the Family Dollar chain, have been a bright spot in the U.S. retail landscape thanks to a simple formula of selling everyday goods at low prices to less affluent customers. But Trump's proposal to slash cash payments under the Supplemental Nutrition Assistance Program and substitute them with packages of food could threaten those sales, which comprise about 5 percent of their revenue.

Dollar Tree said full-year profit would range between $5.25 a share and $5.60 a share, below analysts' expectations of more than $6 a share. The company's first-quarter earnings guidance also fell below analysts' estimates.

The disappointing profit forecast was fueled in part by elevated labor and transportation costs, the company said on a call with analysts. But it was also due to Dollar Tree's decision to plow a chunk of its expected tax-cut windfall back into its business, as other retailers like Walmart have done.

The company said Wednesday it would spend $100 million of its expected $250 million in tax savings to boost hourly wages and training for employees, along with establishing paid maternity leave for eligible workers.

“We're going to invest in our people,” Dollar Tree Chief Executive Officer Gary Philbin said on the call. “I believe hiring more associates at store level, driving more hours into our stores, will create a better shopping experience.”

While higher pay will impact profitability, Loop Capital analyst Anthony Chukumba said it was still “a correct strategic move.”

Retailers are feeling pressure to raise wages and improve benefits as the U.S. job market remains tight. Target announced on Tuesday a plan to hike its companywide minimum wage to $12 per hour this spring, while Walmart has also said it's increasing pay.

‘Below Consensus'

Dollar Tree's less-optimistic outlook overshadowed another quarter of comparable-store sales increases at both the Dollar Tree and Family Dollar banners.

“Ultimately, underlying fundamentals are encouraging, in spite of the outlook that is below consensus,” Bradley Thomas, an analyst at KeyBanc Capital Markets, said in a note.

To contact the reporter on this story: Matthew Boyle in New York at mboyle20@bloomberg.net.

To contact the editors responsible for this story: Crayton Harrison at tharrison5@bloomberg.net, Jonathan Roeder, Nick Turner

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