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Investing.com -- Goldman Sachs cut Dollar Tree to Sell from Buy, saying the retailer’s improving fundamentals are now fully reflected in its valuation and warning of fresh concerns around value perception among lower-income consumers.
“We are downgrading DLTR to Sell from Buy,” analyst Kate McShane wrote. “While we think the company still has room for margin improvement over the long term, we think the stock is now pricing in its better fundamentals.”
Goldman Sachs explains that three main concerns are driving the downgrade: “1) concerns around the lower income consumer, 2) a declining consumer perception on price and value, and 3) our preference for other discounters with improving value propositions and strong merchandising (OLLI and FIVE).”
The bank noted that while Dollar Tree’s multi-price initiative and improved store conditions have bolstered same-store sales and margins, those gains are increasingly offset by consumer sentiment trends.
“Since the Investor Day, price perception has continued to decline and the stock valuation has recovered,” McShane stated.
McShane also cited findings from Goldman’s partnership with GS Data Works, which examined income exposure across dollar store chains.
“We found that the average household income between the six companies is ~$69k and ~53% of DLTR consumers are below this threshold,” the note said, indicating that Dollar Tree has meaningful exposure to the financially constrained consumer segment.
Goldman concluded that while Dollar Tree has made operational progress, “upside to the stock gets harder” from current levels as investors turn toward discounters like Ollie’s Bargain Outlet and Five Below, which it said have “improving value propositions.”