Shares of discount chain Dollar Tree Inc. have experienced a decline of 17.9% so far this year. Concerns primarily revolve around cautious consumer spending, competition from online discounters worldwide, and the possibility of the company having to invest more to attract employees and reduce prices to remain competitive.
Despite these challenges, there is good news for Dollar Tree as analysts at Goldman Sachs have recently upgraded the stock. They believe that the company stands to benefit from a spending rebound in the coming year, particularly among lower- and middle-income consumers. Additionally, Dollar Tree has managed to retain millions of newer customers who are constantly on the lookout for great bargains.
This positive development has had an immediate impact on Dollar Tree’s stock value, as it rallied by 4.5% during afternoon trading. This surge represents the largest percentage increase since November 10.
According to the analysts at Goldman Sachs, Dollar Tree has successfully gained market share and increased foot traffic at both its namesake stores and Family Dollar stores over the past few quarters. They are also optimistic about an improved discretionary cash flow outlook for lower and middle-income consumers in 2024.
Furthermore, the analysts expect the sales momentum to continue due to the attraction of approximately 5 million new customers over the past year. Interestingly, around half of these customers have household incomes exceeding $125,000. On average, they visit Dollar Tree stores around five times after their initial trip.
Overall, despite the recent challenges, Dollar Tree’s potential to capitalize on a spending rebound among lower- and middle-income consumers, alongside its expanding customer base, shows promise for improved performance in the future.
Ocean Freight Costs and Discretionary Spending
The recent supply-chain crunch that caused a surge in shipping costs in 2021 and 2022 has subsided, resulting in a decline in ocean freight costs, according to analysts. Looking ahead, they anticipate a boost in discretionary spending during the back-to-school and holiday seasons in the second half of the year. Dollar General Corp. (DG), a competitor of Dollar Tree, may be preoccupied with its own turnaround efforts and the return of its former CEO.
Consumer Struggles and Growing Competition
Dollar Tree received a cautious outlook from the analysts as customers continue to face challenges associated with price increases for essential goods, higher borrowing costs, and the resumption of student-loan payments after a pandemic-induced pause. The analysts also highlighted the “increasing pressure” posed by discount e-commerce platforms like Temu, which made its entry into the U.S. market last year. Temu’s parent company, PDD Holdings Inc. (PDD), originally based in China, relocated to Ireland earlier this year.
Concerns and Confidence in the Retail Sector
The analysts expressed their observations regarding a recent decline in investor sentiment towards various retail companies due to concerns about consumers’ overall financial well-being with the resumption of student-loan payments and the rise in gas prices. Nevertheless, they maintained a positive outlook on the retail sector, citing a still-strong labor market as a basis for their constructive stance.