Dollar Tree (NASDAQ: DLTR) experienced a sharp decline in premarket trading on Thursday, with shares falling 7.5% to $122.30, erasing approximately $1.9 billion in market capitalization. The drop followed the company's third-quarter adjusted earnings guidance, which came in significantly below analyst expectations, overshadowing a strong second-quarter performance.
The discount retailer projected adjusted earnings per share (EPS) for the third quarter in the range of $0.80 to $0.95, with a midpoint of $0.875. This is 37.5% below the consensus estimate of $1.40. The company attributed about $0.50 of the shortfall to a planned reinvestment of tariff refunds, a move that investors appear to view with skepticism.
In the second quarter, Dollar Tree reported adjusted EPS of $1.31, which included a boost from tariff refunds. These refunds contributed 650 basis points to the operating margin, helping operating income surge to $690 million, nearly triple the previous year. The operating margin expanded by 900 basis points to 14.1%, with tariff refunds accounting for 72% of that growth.
The company booked $383 million in IEEPA refunds for the quarter. After accounting for reinvestment costs and certain duties, the pre-tax benefit was approximately $333 million. However, the $1.9 billion drop in market value is 5.7 times larger than that net benefit, indicating that investors are concerned about the sustainability of these gains.
Comparable store sales rose 3.7% in the second quarter, driven by a 3.3% increase in average ticket size, while store visits edged up just 0.4%. Total sales grew 7.0% to $4.89 billion, surpassing expectations. Despite the positive results, the forward-looking guidance weighed heavily on sentiment.
The market reaction was starkly different for Dollar General (NYSE: DG), which saw its shares surge 13.3% premarket after raising its full-year sales forecast. Both retailers exceeded quarterly sales estimates, but Dollar General's improved outlook contrasted sharply with Dollar Tree's cautious stance.
Dollar Tree kept its full-year sales outlook unchanged at $20.5 billion to $20.7 billion, while raising its adjusted EPS forecast to $7.70 to $8.05, which incorporates approximately $0.60 from tariff refunds. The company repurchased $605 million worth of shares during the quarter and ended with $1.1 billion in cash, with an additional $2.5 billion authorized for future buybacks.
Analysts remain cautious, with a consensus Hold rating and an average price target of $127.90, which is 4.6% above the premarket price. Only 40% of analysts recommend Buy or Strong Buy, while 20% rate the stock as Sell. The upcoming third quarter will be a key test, with sales projected between $5.0 billion and $5.1 billion.
Investors will be watching closely to see if the reinvestment of tariff refunds translates into higher traffic and sustained profitability, or if the company's cautious outlook signals deeper challenges ahead.
