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BofA Downgrades Dollar Tree, Cites Potential For Margin Risk

January 23, 2020 3:00 pm
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BofA Downgrades Dollar Tree, Cites Potential For Margin Risk

The bullish case for Dollar Tree, Inc. (NASDAQ:DLTR) can no longer be justified as benefits from Family Dollar remodels are unlikely to be large enough to offset a gross margin impact, according to Bank of America.

The Analyst

Robert Ohmes downgraded Dollar Tree from Buy to Neutral with a price target lowered from $105 to $95.

The Thesis

Dollar Tree's Family Dollar H2 format remodels so far has resulted in comp lifts of around 10% to 12% but at the expense of a higher mix of low-margin consumable goods, Ohmes wrote in a note. While it's clear more consumers are coming to the stores, they're mostly bringing a fixed amount of money and are on a tight budget. As such, the Street's fiscal 2021 estimates appear to be too high and could be revised lower as the year progresses.

Ohmes said Dollar Tree implemented several management changes that pose additional risks for the retail brand. For example, former Family Dollar President Duncan Mac Naughton resigned, which prompted management to combine both the Dollar Tree and Family Dollar's merchandising, sourcing and store operations under an Enterprise-wide leadership.

Granted, Dollar Tree has an "impressive" merchandise track record, but the combination of the two businesses brings new complexity in merchandising given a different client profile for each store.

Price Action

Shares of Dollar Tree were trading lower by 1.77% at $88.28.

Related Links:

Dollar Tree's Q3 Margins Disappoint Analysts, Yet They Maintain Bullish Ratings

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