Jim Cramer Says Dollar Tree Benefits From Value Seeking Consumers

Dollar Tree, Inc. (NASDAQ:DLTR) is one of the relatively cheap S&P 500 stocks Jim Cramer talked about. Cramer said that it is the only consumer staples stock he likes. He stated:

“After that, there’s Dollar Tree. Now that’s the only member of the consumer staples that I like from this list. I think Dollar Tree can win in this environment as a destination for lower-income consumers who are searching for value. I like that they finally spun off that weaker Family Dollar business. And with the stock selling for less than 15 times next year’s earnings with a 15% growth rate, again, that makes it a buy.”

Dollar Tree, Inc. (NASDAQ:DLTR) operates discount retail stores under the Dollar Tree brand, and provides consumables, household goods, toys, party supplies, and seasonal merchandise. The company’s stores offer low-cost products across everyday, variety, and holiday categories. Cramer discussed the stock in detail during a June episode. He said:

“Discount retailers tend to do better when the consumers’ feeling stretched thin, and you know the consumer’s feeling that way. But Dollar General and Dollar Tree have behaved very differently after reporting earnings over the past couple days… Then today, Dollar Tree reported what I also thought was a pretty good quarter, but its stock got eviscerated, down 8%. What explains the disparity here?… The difference between these two comes down to what they had to say about their ability to control costs and offset the impact of, you bet, go ahead, the president’s tariffs…

Unfortunately, we’re also in the middle of some volatile trade negotiations. President’s tariffs are potentially hurting their ability to keep prices low, and this is why Dollar General soared yesterday and Dollar Tree plummeted today, because Dollar Tree seems to have trouble, let’s say, more trouble with the tariffs… Now, Dollar Tree’s a little different. They also talked about mitigating the damage from the tariffs, but they indicated that they may be having a harder time making that happen.

In their press release, Dollar Tree disclosed that their earnings from continuing operations this quarter could take a 45 to 50% hit, thanks to the tariffs. Although management believes the numbers will re-accelerate later in the year, and they’ll be able to make the numbers in their full-year forecast. But that was dreadful. It was actually shocking.

Now, to be fair, some of that cost pressure has to do with Dollar Tree’s divestment of Family Dollar…. It’s still enough to spook investors, so it didn’t help when, on the conference call, management noted that they absorbed some costs during the brief window when the 145% tariffs on China were in effect. Ouch. This timing issue resulted in $70 million more in cost of goods sold for the second quarter, which they say will be flowing through the system ‘before the full breadth of our mitigation efforts are deployed.’

As a result, we got that concerning note about second quarter profits being ‘meaningfully lower than last year’… While both companies source some of their merchandise from overseas, especially from China, there’s a major difference in how much each company imports directly. See, Dollar General only imports 4% of its goods directly from foreign manufacturers. For Dollar Tree, it’s 40%…

… So let me give you the bottom line: While both these companies might have the word dollar in their names, the subtle differences in their supply chain structure are having a huge impact on their stocks. That’s why Dollar General soared yesterday, and Dollar Tree is now in the [house of pain]. And it’s why you should watch out for the distinction between direct imports and indirect imports in the rest of retail because going forward, it’s really going to matter.”

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Disclosure: None. This article is originally published at Insider Monkey.