Ahead of next week's pivotal rate decision, we're still in winners & losers season. Retail is rounding out our earnings calendar and things are looking pretty bleak for discounters.

Dollar Tree is in freefall thanks to margins basically evaporating. While plenty of consumers are opting to buy from discounters, too many of their core customers are using them as a store of last resort. The result is dollar stores being forced to sell low-margin goods. Those margins are only getting lower as production costs and outright theft continue to spike.

Specialty retailers like Petco are thriving as other consumers recover though, so this market is nothing if not a mixed bag.

Let's dive into the specific stories driving the price action today and try to understand what's next for this market.

Dollar Tree Burns $2 Billion Closing Stores

Dollar Tree will completely undo their progress in 2023 by closing 600 stores. Can it save the business?

BREAKING NEWS

Under the weight of immense margin pressure, Dollar Tree is going for the nuclear option by closing 600 stores in the next 3 months. Inflated prices, bad sales, and soaring theft are crushing their ability to profit. Can they save their business?

WHAT HAPPENED

Dollar Tree reported earnings this morning and it just wasn’t pretty. While the budget retailer managed to pull in $749 million of adjusted net income from $8.63 billion in revenue for Q4—they have bigger problems. Dollar Tree hit themselves with near $2 billion in charges related to re-optimizing all their stores. The stock is burning down in early trading because Dollar Tree needs to make some deep cuts.

EMERGENCY FINANCIAL SURGERY

Dollar Tree is looking to close around 600 Family Dollar locations within the first half of 2023. The even more budget brand has been drastically underperforming and is barely worth operating. This is a classic story in the dollar store space. More customers are being forced to shop at brands like Family Dollar for consumables and essentials—items that are much lower margin for stores. That pressure has amplified at Family Dollar while rising production costs compress margins even further. Dollar Tree’s only choice is cutting those 600 stores and letting an additional 410 close once their lease term ends. This adds up to more than 10% of all Family Dollar locations. Dollar Tree incurred a $549 million charge to pull off this review.

At the same time, Dollar Tree stores are improving their mix of discretionary purchases. This means overall margins can improve so long as they aren’t held back by underperforming Family Dollar locations. So, management feels pretty upbeat about their long-term outlook.

WHY IT MATTERS

Stores like Dollar Tree are a key indicator about how inflation is hitting the broader economy. Dollar stores are the ground floor of retail for consumers hit particularly hard by higher prices. We’re encouraged by the overall rise of discretionary spending at Dollar Tree locations—but shrink and other pressures are just sapping the strength out of the stock. These cuts are deep too—Dollar Tree added a total of 641 new locations in 2023. These Family Dollar cuts effectively undo nearly a whole year of growth. Maybe Dollar Tree can improve from here, but the market needs to see more first. Dollar Tree shed over 8% in early trading.

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