Shares of discount retailer Dollar Tree (DLTR) dipped as much as 10% today on news that its revenue target will be at the lower end of its guidance. We view these normal hiccups as good opportunities to purchase shares of a well-run retailer at a good discount.
Management Cites the Usual Retailer Boilerplate
On the Q3 call, management forecasted sales to be $1.71-$1.75 billion, while analysts forecasted sales to be near the high end, at $1.75 billion. Today, management announced they expect revenue closer to $1.71 billion, citing the traditional macro-economic reasons for the miss: consumer spending and higher gas prices. When in doubt, cite these two culprits. On the one hand, we yearn for a management team that has the courage to simply tell investors: "sales forecasts are noisy." On the other hand, these low-hanging buy-on-dip opportunities would occur less frequently if they were to do so.
Forecasting an Inexact Science
The market is generally unforgiving to earnings misses, often overdoing the news. When the management team reaffirmed its guidance, the stock dropped 10% in response. Even if you consider the drop to be downward guidance, sales were adjusted a mere 2%. The market impact seems disproportionate relative to the announcement. The reality is that short-term traders with tight risk limits were likely either taking profits or stopped-out of their position. When stocks dip big on minor news, long-term investors should take a second look.
At worst, Dollar Tree announced a slight top-line miss today. But its fundamentals remain strong: Dollar Tree did not miss a fashion cycle, nor did it make an operational stumble. So this quarter's top-line is a little soft - it happens. When purchasing shares of a company, we expect a few misses here and there.
Guidance is not an exact science. The key is to realize that Dollar Tree's bottoms-up fundamentals remain strong. In a weak economy, people tend to bargain hunt, and Dollar Tree is well-known for its bargains. Dollar Tree will continue to grow over the years as it expands into new areas. At a P/E of 19 and forecast growth of 18%, Dollar Tree is an attractively priced retailer.