Dollar Tree does not limit its prices to a dollar, nor does it cater exclusively to low-income customers.
The Wall Street Journal reported last summer that in first-half 2023, visits to dollar stores by people earning more than $100,000 increased 4% from late 2022. Morning Consult surveys also showed that high-income households were 15% more likely to shop at dollar stores than they were in June 2022.
Dollar Tree said on March’s full-year 2023 earnings call that the company was able to attract new and higher-income customers, which led to “strong gains in traffic and market share.”
The company also planned earlier this year to add more than 300 items at price points ranging from $1.50 to $7, with $5 being the former price cap.
But the growth story didn’t continue this summer.
Dollar shops face loss of high-income customers
Two of the most famous budget-friendly retailers, Dollar Tree (DLTR) and Dollar General (DG) , both reported earnings and revenue missed Wall Street estimates for the summer quarter.
Dollar Tree reported adjusted earnings of 67 cents for the quarter ended Aug. 3, below analysts' expectations of $1.06. Revenue came in at $7.37 billion, missing the consensus forecast of $7.5 billion.
Related: Dollar Tree’s new price strategy prompts analysts to revise targets
The retailer now projects adjusted earnings per share of $5.20 to $5.60 on full-year net sales between $30.6 billion and $30.9 billion. The numbers are below its previous guidance of EPS of $6.50 to $7 on $31 billion to $32 billion in sales.
Dollar Tree Chief Executive Rick Dreiling said the company faced “pressures from a challenging macro environment,” which affected the purchasing behavior of its middle- and higher-income customers.
“Beginning this quarter, we started to see inflation, interest rates, and other macro pressures have a more pronounced impact on the buying behavior of these customers,” Dollar Tree Chief Operating Officer Mike Creedon said on the earnings call.
On Aug. 28, Dollar Tree’s major competitor, Dollar General, also reported disappointing financial results and lowered its full-year earnings outlook. CEO Todd Vasos attributed the softer sales trends to “a core customer who feels financially constrained.”
In a column for TheStreet Pro, Stephen Guilfoyle, a veteran Wall Street trader whose career began on the exchange in the 1980s, compared Dollar Tree stock with its slightly higher-end rivals Walmart (WMT) and TJX (TJX) , which both beat estimates.
Related: Analyst is "increasingly pessimistic" about Dollar General stock
“The dollar-themed stores cannot compete as their margins are squeezed, and given their focus, it is more difficult for them to raise prices without losing those consumers,” said Guilfoyle.
Analysts lower Dollar Tree stock price targets
Barclays analyst Seth Sigman lowered Dollar Tree’s price target to $81 from $128 and maintained an equal-weight (effectively neutral) rating. He cited disappointing Q2 earnings that largely reflected weaker sales seen in other dollar store chains.
“The outlook was revised to reflect the sales shortfall, along with some other incremental pressures, some of which seem transitory,” the analyst said.
JP Morgan downgraded Dollar Tree stock to neutral from overweight, with a price target of $70, down from $111, The Fly reported.
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The firm attributes the downgrade to factors including profitability concerns following the Q2 earnings miss and reduced guidance.
Citi lowered Dollar Tree’s stock price target to $64 from $120 and kept a neutral rating.
Truist lowered Dollar Tree's price target to $79 from $140 and affirmed a buy rating following the Q2 earnings, The Fly reported.
Besides the costs reflected in the company's guidance, Dollar Tree's sales have been hurt as macroeconomic pressures have spread, and investors are concerned about "increased competitive challenges," the investment firm's analyst told investors in a research note.
However, Truist says that the stock is “fully discounting the negatives at these levels," and the firm says it's a buy for patient investors.
Related: Veteran fund manager sees world of pain coming for stocks
