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Goldman Sachs: Dollar Tree Is the ‘Top Pick’ in Food Retail

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Nov. 17 2017, Updated 10:32 a.m. ET

Goldman Sachs prefers dollar stores over grocers

Goldman Sachs analyst Christopher Prykull assumed coverage of retail food stocks on November 14. The analyst assumed a cautious outlook for grocers, mainly due to the increasing online threat and encroachment by larger players. Supervalu (SVU) and Sprouts Farmers Market (SFM) were given a “sell” rating, while Kroger (KR) was rated as “neutral.”

Prykull favored dollar stores and called them relatively “immune.” He was particularly positive on Dollar Tree (DLTR) and named the stock as his top pick.

“We prefer dollar stores over grocers given they appear more immune to the sector’s challenges, for now,” said Prykull.

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What makes Dollar Tree a strong company?

Dollar Tree’s strength comes from its healthy business model that positions the company as a value-oriented food retailer. Its stores are located at convenient locations that are easily accessible to customers. It’s this strength that has driven the company’s positive sales comps for 38 consecutive quarters.

Dollar Tree’s core customers consist of lower-income families. They’re less likely to spend on paying food delivery charges. As a result, the company is somewhat immune to the increasing online threat.

While talking about Dollar Tree, Prykull said, “Convenient locations, a lower-income demographic, value price points, and destination for ‘fill-in’ trips as opposed to ‘stock-up’ trips makes Dollar Tree more immune to potential online encroachment.”

Dollar Tree’s stock market performance

While supermarkets Kroger and Supervalu have fallen 38% and 55%, respectively, to date, Dollar Tree has risen nearly 21% YTD (year-to-date).

It has also outperformed the S&P Food and Retail Index (+2%) and S&P 500 Index (SPX) (+14.6%).

Investors looking for exposure to Dollar Tree through ETFs can consider the SPDR S&P Retail ETF (XRT), which invests 1.3% of its total holdings in the company.

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