The stocks of dollar stores are feeling the heat.
Heavyweights Dollar Tree and Dollar General reported gains this week that disappointed investors as Dollar Tree shares fell to a low since November 2020. The companies mentioned persistent delivery bottlenecks and expected further freight and transport problems in the coming months.
While other retailers have been able to pass higher costs on to their customers due to rising inflation, dollar stores are a big exception, Gina Sanchez, founder and CEO of Chantico Global, told CNBC’s “Trading Nation” on Thursday.
“Margins have gone up unless your entire value proposition is ‘We sell things cheap,’ and that’s the whole story of Dollar General, Dollar Tree,” she said. “As we see these freight costs rise and inflation generally hit their inventory, they can’t pass that on and it just makes it harder.”
As consumer spending begins to drift away from budget consciousness, dollar stores could enter a difficult period, said Sanchez, also chief marketing strategist at Lido Advisors.
“They are being hit by falling demand while their margins are being cut. It’s going to be a tough ride,” she said.
This could create a buying opportunity for Dollar General, Todd Gordon, founder of Inside Edge Capital Management, said in the same interview.
“It really had to hold support around $ 223,” Gordon said, citing the chart at its recent highs.
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“If we close below 220 this week, I think we will go down and test that uptrend support on the chart at 200, which could be a nice buy zone,” said Gordon.
Dollar General fell around 1% to just over $ 223 in early Friday trade.
“Very strong” profits from the world’s largest shipping company Maersk added to Gordon’s optimism about the dollar stores.
“They are up 58% year-on-year in sales and earnings. They named this extraordinary situation, which is the restriction on supply. They expect it to last through the end of the year. They have announced two major acquisitions to add to the supply chain facilitate, “said Gordon.
“This notion that the supply restriction is temporary is real in my opinion and is being confirmed by the largest shipping company in the world,” he said. “So maybe we can find a bottom and the margins will come back.”
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