Dollar Tree has lost a major advantage: analyst advised to sell the chain's stock

Analysts at Jefferies have taken a bearish stance on the shares of Dollar Tree, a US discounter chain. They believe the company has lost its key advantages amid growing competition and pressure on margins. Strong rivals like Walmart and Dollar General are taking away customers, and the once simple business model that was an important differentiator for the company has changed.

Jefferies has downgraded Dollar Tree from a neutral "Hold" rating (Hold) to a recommendation to sell the retailer's shares (Underperform), Barron's reports. Analysts sharply reduced the target price of the company's securities - from $110 to $70. The new target suggests a decline of more than 20% from the last close on Monday, October 6.

At the auction on October 7, quotes of Dollar Tree fell by 2.3%, and over the past three months they have lost about 18%. Nevertheless, the company still manages to maintain positive dynamics this year - its value has increased by 14% since January.

Analysts attributed their decision to an unfavorable combination of factors - Dollar Tree simultaneously faced increased competition, pressure from Donald Trump's duties and shrinking margins, Barron's wrote.

As found in Jefferies, that when buying the same goods, the average check in the largest retail chain Walmart was lower than in discounters Dollar Tree. At the same time, 87% of Dollar Tree stores in the U.S. are located within five miles of Walmart, and 83% - near the points of another competitor, Dollar General, notes Barron's.

Dollar General is expanding its $1 product line to 2,000 items and launching fresh produce sales in more than 5,400 stores, Walmart is leveraging scale and omnichannel sales, and Five Below is accelerating growth by developing a "treasure hunt" model that drives impulse buys, listed Jefferies analyst Corey Tarlow, quoted by CNBC.

Dollar Tree, against this backdrop, introduced a tiered pricing model with items priced from $3 to $7. This added complexity to store management and reduced the quality of the customer experience, eroding what had previously been the brand's core strength - simplicity, Tarlow explains. "Dollar Tree's uniqueness is eroding," he believes, "Inflation, management decisions and fees have turned a simple business model into a complex one.

Jefferies' recommendation to sell Dollar Tree shares is among the rare ones on Wall Street. Only three analysts are bearish on the company, MarketWatch shows . 12 recommend buying the discounter's shares, and the same number advise holding them in a portfolio. The consensus target is quite optimistic - it suggests Dollar Tree's value has the potential to rise more than 30% from its closing level on Oct. 6.

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