Wells Fargo lowered its price targets for consumer staples stocks Dollar General (NYSE:DG) and Dollar Tree (NASDAQ:DLTR) in a note to clients Tuesday, citing growing fundamental concerns despite the possibility of better-than-feared Q2 updates.
The bank lowered the price targets for both stocks to $130 from $145 (Dollar General) and $160 (Dollar Tree). They maintained an Equal Weight rating on DG and an Overweight rating on DLTR.
According to Wells Fargo, both companies face significant challenges heading into their Q2 earnings reports, with low investor expectations and increasing risks to their 2024 estimates.
"DG and DLTR are well off recent highs, as most investors see risk to 2024 estimates," Wells Fargo analysts wrote.
They pointed out that Q2 comparable store sales are expected to be weak, driven by concerns around low-end consumer spending and soft July performance, which could impact the second half of the year.
Additionally, rising risks to margins due to mix issues, progress on shrink, and intensifying competition were highlighted as ongoing concerns.
Wells Fargo noted that while Walmart (WMT) and Target (TGT) delivered better-than-expected earnings and positive consumer updates, these results may not be indicative of the outlook for dollar stores.
"WMT's share gains seem to be accelerating given its outsized vendor support," the analysts stated, adding that Walmart's strong traction with higher-income households and its omni-channel model provide it with a unique advantage.
Despite the low bar set for Dollar General and Dollar Tree, Wells Fargo cautioned that fundamental issues are likely to persist even if Q2 results meet expectations.
"Re-engaging investors seems difficult near-term," the analysts said.
The note also expressed particular concern for Dollar General, citing "foundational concerns" and the company's exposure to new labor regulations.
Wells Fargo remains more cautious on Dollar General compared to Dollar Tree, which, despite challenges, still presents some value according to their analysis.