Why Shares of Dollar General and Dollar Tree Were Upended on Wednesday

Just when you think shares of discount retailers Dollar General (NYSE: DG) and Dollar Tree (NASDAQ: DLTR) can't move any lower, they find a way. The former fell little more than 5% today, while the latter was down to the tune of 6.5%. Both sell-offs -- rooted in the same reason -- carried their respective stocks to new 52-week lows.

Might this prolonged and persistent weakness be a buying opportunity for patient investors that can stomach some risk? Probably not for most.

Tariff trouble

Don't bother looking for any company-specific news behind Wednesday's tumbles. You won't find it. Rather, look to the nation's biggest news of the past 24 hours.

That's of course the re-election of Donald Trump to the U.S. Presidency. A core component of his platform is the implementation of new tariffs on imports. Although specific details of his plans are scant, the prospect poses a clear threat to names like Dollar General and Dollar Tree (parent to the Family Dollar chain as well), which rely heavily on low-cost imports to fill their store shelves.

That's the theory, anyway, although not an ungrounded one. Each retailer resisted the impact of import tariffs put in place back in 2018 for as long as they could, but eventually succumbed to the inevitable increase in inventory costs. In 2021, Dollar Tree infamously raised its per-item price point from $1 to $1.25.

With their cost burden potentially going up again -- and soon -- both retailers could be forced to make tough pricing and assortment decisions. Shoppers probably won't like either.

Right for some, but not for most

The premise is alarming to be sure. It also holds water.

See, consumers' spending dollars are already being stretched thin, crimping Dollar General's and Dollar Tree's same-store sales growth last quarter, and outright reducing Family Dollar's. Shoppers may not absorb yet another round of price increases. At the same time, these store chains can't simply drop marketable merchandise that draws shoppers to their stores just because profit margins on those goods might reach uncomfortably thin levels. It's a tricky Catch-22 to be sure.

Granted, after a couple years' worth of pronounced weakness, at least some of this risk is arguably already priced into these stocks. Not all of it, though. And, there's an awful lot of sheer uncertainty to digest in the meantime stemming from each chain's continued logistics, inventory, and performance challenges outside of fresh tariff worries.

Although both tickers are due for a rebound from their recently made lows, right now, both are also high-risk speculations that probably aren't a great fit for most people's portfolios.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.