Dollar Tree's Upside Squeezed As Shoppers Seek Better Deals
Dollar Tree, Inc. (NASDAQ:DLTR) is trading lower on Thursday.
Doubts are piling up about the retailer’s ability to sustain momentum against rivals that appear to be sharpening their pricing and merchandising.
• DLTR is encountering selling pressure. Review the technical setup here.
Goldman Sachs analyst Kate McShane downgraded Dollar Tree from Buy to Sell, trimming the price target from $133 to $103.
Also Read: Tesla Recalls Powerwall 2 Batteries Over Fire Hazard
Analyst’s Take
McShane cut the rating on Dollar Tree after a strong run by the company. She noted that management improved the chain’s positioning through multiprice changes and better stores, boosting comps and margins.
However, McShane said that long-term margin gains remain possible, but the stock now reflects stronger fundamentals.
She added that upside looked tougher because of pressure on lower-income shoppers and weakening price perception.
McShane also cited her preference for discounters such as Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) and Five Below, Inc. (NASDAQ:FIVE), which show stronger value and merchandising trends.
The analyst highlighted that ahead of Investor Day, the team saw slipping price perception but kept a Buy due to relative strength. McShane believed the event could have been a catalyst for clearer margin plans after exiting Family Dollar. She also viewed the stock as attractively valued at the time.
Since then, she said price perception has worsened while the stock’s valuation has rebounded.
McShane said their work shows the six retailers serve households averaging about $69,000 in annual income.
Roughly 53% of Dollar Tree shoppers fall below that level, she noted.
She said Family Dollar, Dollar General Corp (NYSE:DG) and Ollie’s have the greatest tilt toward lower-income customers and the lowest average household incomes.
By contrast, Walmart Inc. (WMT), Dollar Tree and Five Below drew relatively higher-income shoppers and had less exposure to the lowest-income group, she added.
Recent Trends
McShane noted Dollar Tree posted strong second-quarter same-store sales growth of 6.5%, topping Goldman and consensus expectations.
She added that quarter-to-date comps slowed to about 3.8% into October, when management preannounced at Investor Day.
McShane attributed the deceleration mainly to fewer meaningful seasonal events and consumer fatigue after higher back-to-school apparel costs.
She pointed out that items such as backpacks still sold well despite tighter spending elsewhere.
By comparison, she said Five Below guided third-quarter comparable sales growth of 5% to 7%, signaling confidence through Halloween and the holidays.
DLTR Price Action: Dollar Tree shares are trading lower by 3.22% to $102.77 at publication on Thursday.
Read Next:
Photo: Around the World Photos via Shutterstock