dollar tree (Nasdaq: DTR) faces a more complex future in a still uncertain consumer environment, especially now that the decision to explore Family Dollar options has demonstrated management's lack of confidence in the struggling business. Paul Lejuez of Citigroup downgraded his rating On the dollar tree (DLTR) to neutral from buy since the two main parts supporting his bullish thesis are less certain, making the risk/reward more balanced.
Lejuez's Buy rating is based on the company's decision to bring on a “proven operator” with CEO Rick Dreiling and introduce multiple price points within the Dollar Tree business to expand its customer base and generate comparable sales.
But the rollout of higher price points was not as smooth as expected, with 25% of next-generation multi-priced stores performing below expectations.
While the Family Dollar transformation has been on shaky ground for several quarters, “we believe the decision to explore strategic alternatives shows that management lacks confidence in fixing the Family Dollar, suggesting more structural problems than previously anticipated,” Loguez said. in a research report on Thursday.
Moreover, Lejuez's confidence in Dreiling is all the more reason to believe Family Dollar is beyond repair. “If Rick Dreiling can't convert (the family dollar), it's hard to say who can,” Lejuez said, adding that the announcement could also disrupt business overall and further complicate efforts to improve DLTR's profitability.
In conjunction with the downgrade to Neutral, Lejeuz cut its price target for Dollar Tree (DLTR) by 26% to $120.