Dollar Discount Stores Trading Higher After Earnings

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Dollar Discount Stores Trading Higher After Earnings

Despite a mixed bag of quarterly data, discount retailers Dollar Tree, Inc. (DLTR) and Dollar General Corporation (DG) are trading higher on Thursday, generating significant buying demand. Dollar Tree failed second-quarter profit projections and cut fiscal year 2020 guidance, causing an early sell-off that was followed by a 5% increase. Dollar General hit all cylinders at once, exceeding projections and boosting 2020 guidance, sparking pre-market gains of up to 8%.

Both firms provided disclaimers with regard to profit and sales expectations, indicating that the figures do not “contemplate or reflect the effect of tariffs bigger than those currently in place,” echoing an industry refrain that has grown common throughout the second quarter earnings season. This strategy represents a business legal choice rather than a political predisposition, with lawyers counseling corporations on how to avoid tariff-induced shortages in future quarters.

Dollar General went public in November 2009 at $22.00 and quickly settled into a trading range that broke to the upside in 2010. The uptrend stalled in the mid-$50s in 2012, resulting in a retreat into the upper $30s that cut the ends for a rising channel that steered price action into the upper $90s peak in 2016. The stock subsequently began a more precipitous slide, finding support in the high $60s soon before the presidential election.

A sell-off that continued into June 2017 successfully challenged the preceding low, completing a double bottom reversal that drew robust buying activity and a rebound wave that reached the 2016 peak in January 2018. It halted at that level for the rest of the year, carving the handle of a cup and handle pattern that resulted in an August breakout. Since then, the stock has fared well, setting a string of new highs in the mid-$140s.

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The retailer’s stock soared past $150 in response to the news, setting an all-time high after the opening bell. Unfortunately, the first advance will throw off short-term overbought readings, which will likely restrict upward for many weeks at the very least. The price range of $145 to $150 might serve as a balancing point in this bilateral pricing structure, with falls that partly or totally fill the opening gap providing low-risk buying chances.

For the most of this decade, Dollar Tree stock has been more volatile than its competition, breaking out above the 2000 high of $16.08 in 2010 and starting a solid uptrend that halted in the mid-$80s in the first quarter of 2015. In the fourth quarter, it dropped down to test breakout support at $60 and then went upward, rebounding to the previous top in May 2016. In September, a summer breakout failed, dropping the stock within five points of its previous low in June 2017.

The stock burst out again in December, then failed again in March 2018, giving up three years of gains when it breached the 2015 high in June and plummeted below $80. It formed a basing pattern at that level before turning upward towards the close of the year, almost completing the third 100% sell-off retracement since 2016. Since the June top, aggressive selling have gained control, giving up two-thirds of the 2019 gains.

The pre-market rally has brought the retailer within 10 points of its June high, but still far below resistance that ranges between $113 and $116. The accumulation-distribution indicator on-balance volume (OBV) seems positive for bulls, having reached an all-time high in April and remaining pretty close to that level despite the summer fall. This speaks good for rising prices, but a sustained breakout will take time, particularly given the four-year track record of technical failures.

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The Bottom Line

Despite very divergent second-quarter profit reports, deep discount retailers Dollar Tree and Dollar General are trading upward in lockstep.

Disclosure: At the time of publishing, the author had no investments in the aforementioned securities.

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