Will Tariffs Impact Dollar Tree? Deutsche Bank Thinks So

Deutsche Bank downgraded Dollar Tree (DLTR) stock to a “hold” from a “buy” yesterday. It believes that the newly announced 10% tariffs on $300 billion worth of Chinese imports will negatively affect the discount retailer. The new tariffs are set to come into effect on September 1. Also, Deutsche Bank thinks that Dollar Tree is fairly valued with a balanced risk-return profile.

Deutsche Bank lowered its price target for Dollar Tree stock to $99 from $106. Despite Dollar Tree’s turnaround efforts, Deutsche Bank isn’t confident about the prospects of the company’s Family Dollar business. The company acquired Family Dollar in 2015.

The rating downgrade and US-China trade tensions dragged Dollar Tree stock down 4.1% on August 5. The stock of rival Dollar General (DG) fell 0.8% on the day. Dollar Tree and Dollar General have risen 2.8% and 22.7%, respectively, YTD (year-to-date). Dollar Tree stock lags the 13.5% YTD rise of the S&P 500.

In its first-quarter press release, Dollar Tree stated that its 2019 outlook took into consideration the impact of the 25% tariff on Chinese imports. However, the company indicated that any further tariffs would affect its business and consumers.

In contrast to Deutsche Bank, JPMorgan Chase upgraded Dollar Tree stock to “overweight” from “neutral” on June 11. JPMorgan also raised its price target for Dollar Tree stock to $122 from $82.

Will Tariffs Impact Dollar Tree? Deutsche Bank Thinks So

Dollar Tree’s first-quarter performance

Dollar Tree’s first-quarter adjusted EPS fell 4.2% to $1.14. Higher investments in growth initiatives dragged on its EPS. The company’s first-quarter sales increased 4.6% to $5.81 billion. The contribution from new stores and SSSG (same-store sales growth) of 2.2% drove its top line growth in the quarter. The Dollar Tree banner’s SSSG was 2.4%. The Family Dollar banner benefited from the company’s transformation initiatives. Its SSSG was 1.9% in the quarter.

The company exceeded analysts’ sales expectation of $5.78 billion and was in line with its earnings estimate. In comparison, Dollar General’s adjusted EPS rose 8.8% to $1.48 with an 8.3% rise in sales to $6.62 billion.

Ratings for Dollar Tree stock

Of the 28 analysts covering Dollar Tree stock, 17 had a “buy” recommendations on August 5. Eleven analysts had “hold” recommendations, while none had “sells.” The consistent performance of Dollar Tree banner stores has been a key growth driver for Dollar Tree. However, the Family Dollar business has been weak. The company is taking several aggressive measures to improve its Family Dollar business. These measures include renovating its stores and re-bannering some of the Family Dollar stores to the Dollar Tree banner.

The company is also testing multiple price points with merchandise priced at values greater than $1. On August 5, Dollar Tree was trading at a 12-month forward PE multiple of 17.3x. Dollar General’s forward PE was 19.5x. Currently, analysts expect Dollar Tree’s sales to rise 3.9% to $23.7 billion in fiscal 2019. The company’s adjusted EPS are expected to fall 5.3% to $5.16.

In comparison, analysts have higher growth expectations for Dollar General. They expect its sales to rise 7.4% to $27.5 billion and its adjusted EPS to rise 8.4% to $6.47. Higher tariffs and any further escalation in the US-China trade war are expected to put pressure on retailers.