Markets

Dollar Stores Are Facing a ‘Tough Ride' — But One Stock May Be Close to Bottoming Out

Daniel Acker | Bloomberg | Getty Images

Dollar store stocks are feeling the heat.

Heavyweights Dollar Tree and Dollar General reported earnings this week that disappointed investors, with Dollar Tree's stock falling to lows not seen since November 2020. The companies cited ongoing supply constraints and said they expected more freight and transportation issues in the coming months.

While other retail companies have been able to pass higher costs onto their customers as inflation creeps higher, dollar stores are a stark exception, Chantico Global founder and CEO Gina Sanchez told CNBC's "Trading Nation" on Thursday.

"Margins have been expanding unless your whole value proposition is 'We sell stuff cheap,' and that is the whole Dollar General, Dollar Tree story," she said. "As we see these freight costs rising and inflation generally hitting their inventory, they're not able to pass it through and it just makes it more of a struggle."

As consumer spending begins to move away from budget-consciousness, the dollar stores could be entering a difficult phase, said Sanchez, also chief market strategist at Lido Advisors.

"They're getting hit with demand falling at the same time that their margins are getting squeezed. It's going to be a tough ride," she said.

That could create a buying opportunity in Dollar General, Inside Edge Capital Management founder Todd Gordon said in the same interview.

"It really needed to hold about $223 support," right around its recent highs, Gordon said, citing the chart.

"If we close below 220 this week, I think that we're going to go down and maybe test this uptrend support on the chart around 200, which could be a nice buy zone," Gordon said.

Dollar General fell around 1% to just above $223 in early Friday trading.

"Very strong" earnings from the world's largest shipping company, Maersk, fed into Gordon's optimism around the dollar stores.

"They're up 58% year over year in terms of revenue and earnings. They cited this exceptional situation, which is the supply constraint. They're expecting it to continue until the end of the year. They have announced two large acquisitions to kind of ease the supply chain," Gordon said.

"This idea that the supply constraint is transitory I think is real, being confirmed by the largest shipping company in the world," he said. "So, maybe we'll find a bottom and the margins will come back."

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