Inflation will hammer this dollar store, and maybe its stock: Deutsche Bank
Stubbornly high inflation will not be good for Dollar Tree’s financial results, warns Deutsche Bank.
Deutsche Bank analyst Krisztina Katai downgraded his rating on the dollar store to Hold to Buy on Monday, and lowered the price target to $ 102 from $ 129.
“We are now seeing a more balanced risk / reward ratio, especially with renewed concerns about creating inflationary pressures. We remain confident in the long term history of Dollar Tree, including the ongoing turnaround at Family Dollar, however, we are increasingly concerned about accelerating cost pressures on both freight and wages. , especially in light of the Dollar Tree banner’s fixed price of $ 1 which limits its ability to absorb higher costs through price increases, putting margins at risk, ”Katai said in a note from research to customers.
Dollar Tree shares fell 2% to $ 97 on the pre-market Monday. The stock has fallen 8% in the past six months as investors worried about the chain’s profit margins amid sizable labor and supply chain inflation. The company is essentially crippled in how it might react to inflationary pressures given its predominantly $ 1 product sales model and price sensitive buyers.
Hints of stress on the model emerged on May 27, Katai said. That’s when Dollar Tree released a profit forecast for 2021, 8% below the midpoint of analyst estimates.
“Like most retailers, we are currently facing higher transportation costs, shortages of international and domestic workers, and uncertainty about inflation,” warned Mike Witynski, CEO of Dollar Tree, at the meeting. ‘a call with analysts.
Katai doesn’t now think earnings estimates for Dollar Tree on the Street have bottomed out. Other markdowns could have a negative impact on the title.
“With the sequential worsening of ocean freight rates since the first quarter release, we are no longer convinced that negative earnings revisions are behind us,” Katai said.
Everywhere you look, inflation seems to be skyrocketing right now as the US economy returns from the COVID-19 pandemic – triggering shortages in everything from workers to raw materials.
The June Consumer Price Index (CPI) rose at its fastest pace in 13 years.
The July CPI will be released later this week. The CPI excluding food and energy is expected to have risen 4.3% in July from a year ago, declining slightly from 4.5% in June. Consumer staples are also estimated to have advanced for the fourteenth consecutive month, 0.5% after June’s monthly gain of 0.9%.
Brian Sozzi is an editor and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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