Citigroup Upgrades Dollar Tree to Buy on Tariff Price Hike

Citigroup has upgraded its rating for Dollar Tree to "buy" from "neutral," citing the company's potential to become a standout winner in the new tariff landscape. The new tariff structure in the United States provides Dollar Tree with a justification to raise prices on most of its products to above $1.25, a move that analysts believe will make the discount retailer a "dark horse winner" in the new tariff environment.

Paul Lejuez, an analyst at Citigroup, noted that while Dollar Tree has previously attempted to manage the impact of Chinese tariffs within its current pricing framework, the higher tariff regime now offers additional cover for the company to expand its price points from $1.25 to between $1.50 and $1.75. Lejuez also highlighted that during Dollar Tree's last price increase, its profit margins for the fiscal years 2022 and 2023 were 9% and 6%, respectively, with the pre-tax profit margin expanding by 220 basis points since 2021.

The Redfox Capital Ideas analysis group concurred with this assessment, stating that through its multi-price point strategy, consumers are likely to purchase more products priced at $3 and $5. This indicates that the multi-price point strategy has successfully shaped consumer perceptions, making products in the $3 to $5 range appear to be good value purchases.

In addition to Dollar Tree, Citigroup also upgraded its rating for Dollar General, another competitor, due to the minimal impact of tariffs on its sales, which account for only about 10% of its total revenue. Analysts agreed that both Dollar Tree and Dollar General should be rated as "buy."

In the current environment, Dollar General's value-oriented business model is expected to help it avoid significant pressure from potential consumer fatigue. Consequently, Lejuez upgraded his rating for Dollar General from "sell" to "neutral," with a target price of $101.