Inflation will pound this dollar store, and maybe its stock: Deutsche Bank – Yahoo Finance

Stubbornly hot inflation will be unkind to the bottom line of Dollar Tree, warns Deutsche Bank.

Deutsche Bank analyst Krisztina Katai downgraded her rating on the dollar store to Hold from Buy on Monday, and slashed the price target to $102 from $129.

"We now see more balanced risk/reward, especially with renewed concerns around building inflationary pressures. We remain long-term believers in Dollar Tree's story including the ongoing turnaround at Family Dollar, however, we are incrementally concerned around accelerating cost pressures from both freight and wages, particularly in light of the Dollar Tree banner's fixed $1 price point which limits its ability to absorb higher costs through price increases, putting margins at risk," said Katai in a research note to clients.

Shares of Dollar Tree fell 2% to $97 in pre-market trading Monday. The stock has fallen 8% in the past six months as investors fret about the chain's profit margins amidst considerable inflation in labor and the supply chain. The business is essentially hamstrung in how it could respond to inflationary pressures given its model of selling products mostly at $1 and price sensitive shoppers.

Indications of stress on the model appeared on May 27, points out Katai. That's when Dollar Tree issued 2021 earnings guidance that was 8% shy of the mid-point of analyst estimates.

"Like most retailers, we are currently faced with higher freight costs, both international and domestic worker shortages, and uncertainty related to inflation," cautioned Dollar Tree CEO Mike Witynski on a call with analysts.

Katai now doesn't believe earnings estimates for Dollar Tree on the Street have bottomed. Further markdowns could impact the stock negatively.

"With the sequential worsening in ocean freight rates since the 1Q release we are no longer confident that negative earnings revisions are behind us," said Katai.

Story continues

Everywhere one looks inflation appears to be running hot right now as the U.S. economy powers back from the COVID-19 pandemic triggering shortages in everything from workers to raw materials.

The June Consumer Price Index (CPI) increased at its fastest pace in 13 years.

July's CPI will be released later this week. CPI excluding food and energy is expected to have risen by 4.3% in July over last year, pulling back just slightly from June's 4.5%. Core consumer prices are also estimated to have advanced for the fourteenth consecutive month, or by 0.5% after June's 0.9% monthly gain.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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Inflation will pound this dollar store, and maybe its stock: Deutsche Bank - Yahoo Finance