The institutional interest in Dollar Tree (NASDAQ: DLTR) and Dollar General (NYSE: DG) are both very high at 98% and 95% but there is a difference in the activity that has Dollar General set up to outperform in the back half of the year. While the institutional activity in both names was vigorous in Q2 and net-bearish, the trend in activity coming into Q3 is not the same. The institutions are still shedding Dollar Tree but have begun to reaccumulate Dollar General for more reasons than one. Both companies put in solid results for the 2nd quarter and are favored among retailers in the current environment but one is clearly in command of the market while the other is struggling to keep up.
The Dollar Stores Grow In Q2
The dollar stores both grew in Q2 2022 with Dollar Tree advancing its earnings by 6.8% and Dollar General by 8.0%. Aside from the difference in growth, Dollar General also outperformed the consensus estimates while Dollar Tree did not. The margins of error are small but still a telling indication of business health, especially in conjunction with the earnings and the guidance. In regard to the margin, both companies reported a margin improvement versus last year but Dollar Tree warned of pressure while Dollar General raised its guidance for earnings. In regard to the 2nd quarter results, Dollar Tree grew earnings by 30.1% but the GAAP EPS was only in line with the consensus while Dollar General’s earnings grew a smaller 10% but outpaced the consensus by a nickel.
Turning to the guidance, Dollar Tree lowered its guidance for both Q3 and the full year to a range below the consensus figures. This led shares down sharply in the wake of the report and Dollar General followed suit but its decline was mitigated by a different outlook. Dollar General is expecting strength to carry into the back half of the year and raised guidance for revenue and earnings. The revenue guidance is well above the consensus figure while the earnings outlook is less robust but still offers some potential for an upside surprise. The takeaway is that Dollar Tree’s guidance was already factored into the price action while Dollar General’s wasn’t.
Capital Returns Slow At Dollar Tree
One reason for the expected margin pressure at Dollar Tree is the company’s plans to increase investment in the company in order to boost sales and earnings down the road. This is a wise move but will weigh on the share prices as well as the company’s ability to repurchase shares. The repo authorization had $2.25 billion left at the end of the quarter with no purchases made and it is likely the pace will slow while the company works on growth. Dollar General, on the other hand, repurchased $0.349 billion worth of shares during the quarter and upped the repurchase allotment by $1 billion bringing it back to the $2 billion mark. That should be supportive of the share prices and help the stock outperform its competitor over the next two quarters and the analysts are supporting the stock as well.
Both companies are pegged at a Moderate Buy by the analyst but there is a significant difference in their activity. The analysts are lowering price targets at Dollar Tree and raising them at Dollar General with comments to the effect that Dollar General should outperform through the end of the year while Dollar Tree gets itself set up to outperform in 2023.
The Technical Outlook: Dollar General To Take The Lead
The dollar stores have been trending higher in tandem with each other since the pandemic bottom in 2020. The difference is that Dollar Tree has shown far more volatility and it looks like Dollar General is about to make a bullish crossover in price action. Assuming the market dynamics that are in place remain in place, Dollar General should take the lead soon, and lead the pair higher over the next 6 months or so.