Should You Buy Dollar Tree Stock at Its 9-Year Low?

Dollar Tree 's (NASDAQ: DLTR) stock sank to its lowest levels in nearly nine years after it posted its latest earnings report on Sept. 4. For the second quarter of fiscal 2024, which ended on Aug. 3, the discount retailer's net sales grew only 0.7% year over year to $7.37 billion and missed analysts' estimates by $100 million. Its adjusted EPS dropped 26% to $0.67 and broadly missed the consensus forecast by $0.37.

Those headline numbers were ugly, but could it be a contrarian play for patient investors? Let's dig deeper into Dollar Tree's biggest problems to find out.

Image source: Getty Images.

What happened to this resilient retailer?

For many years, Dollar Tree was considered a recession-proof retailer. It survived the retail apocalypse , continued to open new brick-and-mortar stores as other retailers retreated, and grew at a steady pace through economic downturns.

Dollar Tree's troubles began after it acquired its competitor Family Dollar in 2015. Back then, Dollar Tree still sold all its products for $1, while Family Dollar sold most of its products for less than $10. Dollar Tree's namesake brand defended its niche with its lower price point, but Family Dollar struggled to keep pace with Amazon and discount superstores like Walmart (NYSE: WMT) and Target (NYSE: TGT) .

As a result, Family Dollar's slowdown offset Dollar Tree's steadier growth while compressing the combined company's gross margins. To address that problem, it shuttered hundreds of Family Dollar stores, added Dollar Tree sections to some Family Dollar stores, and converted others to Family Dollar/Dollar Tree "combo" stores.

But as Dollar Tree executed that costly turnaround strategy, rising tariffs on Chinese goods, soaring inflation, and persistent theft further throttled its sales and eroded its margins. That pressure drove the company to raise Dollar Tree's base prices from $1 to $1.25 in 2021 and $1.50 earlier this year. It also started selling a broader range of pricier products by lifting its price ceiling to $5 in 2023 and $7 this year. But despite those efforts, the company's annual gross margin still shrank from 35.3% in fiscal 2014 (before it bought Family Dollar) to 30.4% in fiscal 2023.

What happened to Dollar Tree over the past year?

In fiscal 2023, Dollar Tree's net sales rose 8%. Its enterprise same-store sales grew 4.6%, driven by Dollar Tree's 5.8% growth and Family Dollar's 3.2% growth. But over the past year, both banners lost their momentum.

Data source: Dollar Tree.

That slowdown suggests Dollar Tree's new multi-price strategy isn't bringing in more shoppers. It's also growing slower than Walmart U.S. and Target, which reported 4.2% and 2% comps growth, respectively, in their latest quarters. On the bright side, it's still growing slightly faster than its top competitor, Dollar General (NYSE: DG) , which squeezed out only 0.5% same-store sales growth in the second quarter.

However, Dollar Tree's total store count dipped 0.5% year over year to 16,388 at the end of the first half of fiscal 2024. That's a troubling reversal of its expansion from 13,851 locations in fiscal 2015 to 16,774 locations in fiscal 2024.

What's next for Dollar Tree?

Dollar Tree's slowdown was already worrisome, but it expects those headwinds to persist in the second half of the year. It now expects its net sales to rise only 0%-1% for the full year, compared to its previous guidance for 1%-5% growth, and it slashed its full-year adjusted EPS outlook from 10%-19% growth to a 5%-12% decline.

It attributed those reductions to its messy earnings miss in the second quarter, a "more conservative sales outlook" for the rest of the year, incremental costs for converting 99 Cents Only's defunct stores (which it acquired earlier this year) to Dollar Tree stores, and higher depreciation and amortization costs at its existing locations.

Is it the right time to buy Dollar Tree?

At $66, Dollar Tree might seem cheap at 12 times the midpoint of its adjusted EPS guidance. Dollar General trades at 14 times forward earnings, while Walmart and Target have even higher forward multiples of 31 and 16, respectively.

But Dollar Tree deserves that discount valuation, for obvious reasons. Its namesake brand is losing its momentum, Family Dollar is still struggling, and it's diluting its own brand appeal and narrowing its own moat by raising its prices. Dollar Tree also doesn't pay dividends, as Dollar General, Walmart, and Target do.

So for now, I can't consider Dollar Tree a contrarian buy. It's trading near a nine-year low because it hasn't solved the problems that started nine years ago, and it will face tough macro and competitive headwinds for the foreseeable future.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Target, and Walmart. The Motley Fool has a disclosure policy .