Wells Fargo Lowers Price Targets for Dollar Stores

Wells Fargo has reduced its price targets for consumer staples stocks Dollar General (NYSE:DG) and Dollar Tree (NASDAQ:DLTR) in a client note released on Tuesday. This decision stems from growing fundamental concerns, even in light of the potential for better-than-expected Q2 updates.

The bank has lowered the price target for Dollar General to $130 from $145, and for Dollar Tree to $160 from its previous target. They have maintained an Equal Weight rating on Dollar General (DG) and an Overweight rating on Dollar Tree (DLTR).

Earnings Concerns

As both companies prepare for their Q2 earnings reports, Wells Fargo notes significant challenges ahead, characterized by low investor expectations and increasing risks to 2024 estimates. The analysts indicate:

“DG and DLTR are well off recent highs, as most investors see risk to 2024 estimates.”

Weak comparable store sales are anticipated, primarily due to worries regarding low-end consumer spending and a soft performance in July, factors that may adversely affect the second half of the year.

Ongoing Risks

Additional concerns include rising risks to margins stemming from mix issues, challenges related to shrink, and intensifying competition.

Wells Fargo contrasts the situations at Dollar General and Dollar Tree with those at Walmart (NYSE:WMT) and Target (TGT), which have delivered unexpectedly strong earnings and positive consumer updates. This may not necessarily reflect the outlook for dollar stores. According to the analysts, “WMT’s share gains seem to be accelerating given its outsized vendor support,” noting Walmart’s success with higher-income households and its omni-channel model.

Future Outlook

Despite the lower expectations for Dollar General and Dollar Tree, Wells Fargo warns that fundamental issues are likely to linger, even if Q2 results align with expectations. They assert:

“Re-engaging investors seems difficult near-term.”

Particular concern has been raised for Dollar General due to what the analysts describe as “foundational concerns” and the company’s vulnerability to new labor regulations. Overall, Wells Fargo maintains a more cautious stance on Dollar General compared to Dollar Tree, which still offers some value according to their analysis.