KeyBanc Downgrades Dollar Tree and Five Below

Investing.com — KeyBanc Capital Markets analysts have downgraded their ratings for Dollar Tree (NASDAQ: DLTR) and Five Below (NASDAQ: FIVE) stocks from Overweight to Sector Weight.

Reasons for Downgrades

The downgrades arise from concerns regarding:
– The impact of potential tariffs
– Ongoing management transitions in both companies

KeyBanc also noted the rising long-term rates affecting the housing market, with a noted increase in 10-year yields to 4.43%, the highest since June 2024.

Despite expectations of further rate cuts from the Federal Reserve, there are worries that mortgage rates may not drop adequately to facilitate a housing market recovery. This creates challenges for home improvement retailers like Home Depot (NYSE: HD) and Lowe's Companies (NYSE: LOW).

Tariff Impact on Businesses

Analysts indicated that increased tariffs could benefit domestic manufacturers while posing risks to import businesses and dollar stores. Companies with significant US manufacturing, like Tempur Sealy (NYSE: TPX) International and La-Z-Boy (NYSE: LZB) Incorporated, might gain an advantage.

Bradley B. Thomas, an analyst, expressed that the risks of tariffs are elevated for import businesses and dollar stores like Dollar Tree and Five Below.

Exposure to China Imports

• Dollar Tree relies on imported goods from China for 40% of its sales.
• Five Below faces a similar predicament, sourcing approximately 60% of its products from China.

Although both companies effectively mitigated tariffs in 2018-2019, analysts believe they are now facing higher tariffs, while their operational performance is below par.

The analysts state, "We move to the sidelines as we await further evidence of improved fundamentals and greater clarity on potential tariffs and the ability to offset them."

Future Outlook

Conversely, KeyBanc believes stocks such as Walmart (NYSE: WMT) and Ollie's Bargain Outlet Holdings, Inc. (NASDAQ: OLLI) are well-positioned for the consumer environment in the coming year.