In a move that has rattled investors, Dollar Tree has significantly reduced its full-year earnings and sales forecasts due to the ongoing challenges faced by its customers amidst rising prices. As a result, the company's shares experienced a sharp drop of more than 20% on Wednesday, after already hitting a 52-week low the prior day.

The decline in Dollar Tree's stock value comes in the wake of a disappointing quarter for rival bargain chain Dollar General, which also experienced its largest single-day slump ever. It seems that the struggles faced by dollar stores are further exacerbated by behemoth retailers like Walmart and Target, who have acknowledged that their customers are feeling the pinch and have subsequently started slashing prices.

One of the main issues faced by discount stores like Dollar Tree is that larger retailers, such as Target, are now offering competitive pricing on groceries, a key category for dollar store shoppers. This has made it increasingly difficult for bargain stores to attract customers who prefer the convenience of one-stop shopping at these mega chains.

According to Jharonne Martis, director of consumer research, analytics, and AI at LSEG, "Dollar stores have lost market share to larger retailers that have broadened their offerings and gained customer loyalty through everyday low prices."

However, the economic headwinds affecting Dollar Tree are not limited to its low-income customers. Company executives have noted that the impacts of inflation, interest rates, and other macro pressures are now being felt by their middle and upper-income customer base as well.

Consequently, Dollar Tree has adjusted its full-year earnings guidance to a range of $5.20 to $5.60 per share, down from the previous range of $6.50 to $7. Additionally, the company now anticipates annual sales within the range of $30.6 billion to $30.9 billion, down from the initial projection of $31 billion to $32 billion. These revised numbers fall short of Wall Street expectations and are reflected in the dramatic decline of the retailer's stock value.

For the second quarter, Dollar Tree reported adjusted revenue of $7.37 billion, which fell short of the $7.5 billion forecasted by analysts. The company's earnings for the period ending on August 3 stood at $132.4 million, or 62 cents per share. However, excluding certain items, earnings stood at 67 cents per share, falling significantly short of Wall Street projections by 36 cents.

While inflation may be slowing down, Americans continue to grapple with higher prices for essentials like gas, food, and housing compared to pre-pandemic levels. As a result, Dollar Tree is expecting adjusted earnings between $1.05 and $1.15 per share for the third quarter, with revenue projected to be within the range of $7.4 billion to $7.6 billion. These figures, too, fall short of Wall Street's expectations of per-share earnings of $1.31 and revenue of $7.58 billion.

In addition to external challenges, Dollar Tree is also grappling with internal issues that have hindered its growth. The company recently announced the closure of nearly 1,000 stores, with the majority of them being Family Dollar locations. The struggles faced by Family Dollar have played a significant role in the decline of Dollar Tree's overall net income.

Neil Saunders, managing director of GlobalData, opined that "The overall impression is that Dollar Tree has quickly moved from a company that was advancing to one that is simply treading water. Though, to be fair, most of this is because of the troubles at Family Dollar."

As Dollar Tree works to navigate these challenges, it remains to be seen how the company will adapt its strategy and regain its footing in the retail market.