Should You Buy Dollar Tree on the Dip?

Dollar Tree (NASDAQ: DLTR) recently released its third-quarter results in what was a challenging period for the company. Although it generated earnings per share of $1.08, that was below market expectations of $1.13 per share and down 8.5% year over year. The bigger concern for investors, however, was the company's weak forecast for the remainder of the year, which it says has been impacted by tariffs and the trade war with China. For the fourth quarter, Dollar Tree is projecting earnings per share to come in between $1.70 and $1.80, which is nowhere near analyst expectations of $2.02.

As a result of the disappointing guidance for the last quarter of the year, Dollar Tree's shares plunged on the news, falling more than 15%. The stock's year-to-date gains have effectively been wiped out. However, this could be a good opportunity for investors to jump back in and buy the stock at a reduced price.

An aisle in a store.

Image Source: Getty Images.

Don't let the trade war scare you

In the short term, Dollar Tree is going to be impacted heavily by tariffs and the trade war with China. According to its press release, the company believes that "tariffs will increase its cost of goods sold by approximately $19 million, or $0.06 per diluted share, in the fourth quarter of 2019 if tariffs are fully implemented."

However, over the long term, Dollar Tree will be able to adapt and minimize the impact of these headwinds. If the tariffs don't go away in the near future, Dollar Tree can still find a way to adjust its business to reflect the changing geopolitical conditions. The company's CEO, Gary Philbin, recently stated, "We are moving some product out of China, we're sourcing to elsewhere, we are redesigning product."

Dollar Tree is prepared to make significant changes to its business to be able to improve its margins, and that's why investors shouldn't be too worried about the stock's disappointing outlook for one quarter. The company is in a good position to be able to recover from this roadblock.

Plenty of reasons to stay bullish

Overall, Dollar Tree still produced solid numbers in its third quarter. The company's same-store sales were up 2.5% year over year, and its top line increased 3.7%. Despite the challenges facing the company, Dollar Tree has remained focused on growth, opening 165 new stores during the quarter. It has also continued to renovate hundreds of stores in an effort to drive even more sales growth.

In 2020, the company is planning to complete even more renovations, in particular for its Family Dollar locations, with more than 1,000 getting a face lift in the new fiscal year. The new "H2 model" stores have been very successful, generating stronger sales and bringing in more traffic as well. Once the renovations are complete, Dollar Tree's numbers could look a whole lot stronger, especially if tariff-related problems are resolved by then as well.

The stock looks like a solid buy today

Investors shouldn't be swayed by one or two bad quarters. Dollar Tree is a strong, profitable business that has fallen victim to variables outside its control. The company's efforts to redesign its stores and to source products from different parts of the world are great examples of how Dollar Tree is repositioning itself for success.

The large decline on earnings day is uncharacteristic of the stock, as Dollar Tree normally doesn't see that much volatility. The issues the company faces aren't likely to last over the long term, and that's why buying the stock on weakness today could be a great move.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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