Further upside to Dollar Tree’s (DLTR) stock is likely to be harder to achieve given the company’s declining exposure to a lower income cohort and current valuation, leading Goldman Sachs to downgrade the stock to Sell from Buy and shave 22% off its price target to $103.
Shares opened 3% lower on Thursday, reflecting market reaction to the double downgrade.
Analyst Kate McShane acknowledges management’s efforts to position the company favorably through multi-price strategies and improved store conditions. And while these efforts have resulted in better comp trends and improved margins, declining consumer perception over price and value continue to plague Dollar Tree (DLTR), leaving peers like Ollie’s (OLLI) and Five Below (FIVE) preferred given “improving value propositions and strong merchandising.”
Citing the firm’s internal data on the discount sector, the average household income between Dollar General (DG), Ollie’s (OLLI), Walmart (WMT), Dollar Tree (DLTR), Five Below (FIVE), and Family Dollar is roughly $69K with ~53% of DLTR consumers below this threshold. However, the companies with the most exposure to the lower income consumer are Family Dollar, Dollar General (DG), and Ollie’s (OLLI). Interestingly, these companies also have the lowest average household incomes of the group.
While Goldman and Jefferies have both recently downgraded Dollar Tree (DLTR) to a negative rating (Sell and Underperform, respectively), most Wall Street analysts remain bullish with a Buy rating, including Seeking Alpha’s Quant rating which gives Dollar Tree (DLTR) a Quant score of 3.89 out of 5. Seeking Alpha authors, however, view Dollar Tree (DLTR) more cautiously with a Hold rating.