Dollar General (DG) and Dollar Tree (DLTR) face growing challenges amid mounting energy costs and a tough pricing environment, Deutsche Bank said in a Wednesday note.
Dollar Tree is scheduled to release its first-quarter results on Thursday, followed by Dollar General on June 2. Both discount retailers have lost more than 20% each in value so far this year.
"While it's been a rough few months for shares of (Dollar General) and (Dollar Tree), we are incrementally more cautious not only on the low-end consumer ... but also these models' ability to absorb/mitigate rising energy costs at a time consumers seek affordability," Deutsche Bank analyst Krisztina Katai said.
Gasoline and crude oil prices have surged due to supply disruptions caused by the Middle East conflict.
Deutsche Bank downgraded its rating on Dollar General to hold from buy, and lowered the price target to $110 from $170.
Shares of Dollar General "may be unable to outperform this year as numerous headwinds impact results," Katai said.
The biggest challenge is for Dollar General to expand gross margin amid diesel cost pressures, at a time of "a sharp food retail pricing environment" led by major retailers Walmart (WMT), Kroger (KR), and Target (TGT), Katai said.
Deutsche Bank reiterated its hold rating on Dollar Tree, with a price target of $99.
While discretionary reads have been favorable, Dollar Tree is "at risk of losing share given value perception challenges with the rapid expansion of multi-price, and increased reliance on holidays/occasions to drive traffic/sales," Katai said. "Moreover, this plays out against a backdrop of rising costs."
Price: $104.95, Change: $+1.34, Percent Change: +1.29%
