Are Dollar Stores Finally a Sell? (DLTR, NDN, FDO)

The ever-weakening economy is driving consumers to lower and lower priced goods.  It is called the "trade-down economy" where people buy cheaper goods rather than nothing at all.  That is great for the dollar stores.  But this morning there was a downgrade of Dollar Tree Inc. (NASDAQ: DLTR) by Goldman Sachs which might raise some eyebrows.

Goldman Sachs cut its rating to sell from neutral.  It also added thedollar chain operator to its Conviction Sell List. No company wants to be on that list.  It even has the ringthat analysts have grown so negative on the stocks now that they mightbe killing even the good stocks.

The call is somewhat on valuations and somewhat on growth prospects,but it still has shares down almost 4% at $42.00.   This has been oneof the great performers as its 52-week trading range is $20.72 to$44.11.

This fallout from the call is also nailing competitor 99 Cents Only Stores (NYSE: NDN), whoseshares are down almost 5% at $10.86 today.  Another competitor, FamilyDollar Stores Inc. (NYSE: FDO), is down over 3% at $24.48.

What is interesting is that Dollar Tree is still expected to growearnings by almost 10% to $2.75 from this year to next (i.e., Jan-2010)to $2.75 EPS and revenues by about 8% to $5.04 billion.  UBS juststarted Dollar Tree last week with a neutral rating, yet another signthat analysts do not want to chase stocks.

The valuations on these are elevated compared to the past during thegood times.  But what is interesting is that Dollar Tree has had ahistory of beating earnings estimates.  If that continues, then GoldmanSachs may look like it was just throwing out the good with the bad.And if Dollar Tree does poorly from here at this point, then it ishopefully because consumers can afford to buy goods for $2.00 andhigher rather than $1.00.

Jon C. Ogg
December 22, 2008