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Piper Sandler downgrades Dollar Tree amid anticipated hurdles

Published 2024-07-16, 04:26 p/m
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Investing.com - Piper Sandler, a leading investment bank and institutional securities firm, has downgraded Dollar Tree Inc (NASDAQ:Dollar Tree) from Overweight to Neutral, citing potential risks to earnings per share (EPS) in 2024 and 2025 due to execution and tariff-related issues.

Year-to-date, Dollar Tree shares have already seen a significant downturn of 27%, suggesting that much of the negative news is already priced in. However, Piper Sandler analysts believe that the company is uniquely disadvantaged irrespective of the outcome of the Presidential election due to potential tariffs under Trump's administration or changes to the Overtime Rule under Biden's regime.

The analysts highlight that with tariffs appearing more likely, Dollar Tree shares have become challenging to own for anyone with a 12+ month time horizon. Their work on the 2024 EPS bridge suggests that estimates for both 2024 and 2025 may still be too high. Despite high hopes for a turnaround under new management, two years into the process, sales trends have been disappointing.

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In the event of a Trump victory, Dollar Tree faces significant tariff exposure due to its largely fixed price selling model. In 2019/2020, with a modest 7.5% tariff on List 4a items, Dollar Tree experienced a 30 basis points annual EBIT margin pressure. A 60% tariff could result in more than 240 basis points of margin pressure.

With a Biden/Democrat victory, changes to the Overtime Rule, which would raise the minimum salary threshold for overtime eligibility to $58K, could also have a significant impact on Dollar Tree's EPS.

In addition to these political impacts, Piper Sandler's early EPS bridge for 2025 suggests that current consensus estimates may still be too high. Their revised 2025 EPS of $7.49 is below the current consensus of $7.86.

Furthermore, the analysts express concern about the execution risk associated with integrating multiple price points throughout Dollar Tree's stores. The success of a converted store ultimately hinges on the quality of the store manager and store team. This change may take time to show up as a benefit to comparable store sales until execution issues are ironed out.

Piper Sandler analysts downgraded Dollar Tree to Neutral with a price target of $112.

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