Discount retailer Dollar Tree's core business model is a lightning rod for tariff impact, according to Credit Suisse.
With direct imports from China on 40% to 42% of its merchandise, Dollar Tree is the perfect candidate to get hit hard by the trade war, the firm said. Despite this exposure, the stock may have fallen too much too fast given there is still a good chance for a trade deal, the analyst said.
"As we have noted previously, DLTR is regarded as the 'poster child' for tariff impact, given its prescribed $1 single price point at the Dollar Tree banner," Judah Frommer wrote in a note to clients on Thursday.
"Even after stripping out this upside to 2020 EPS (~$0.32 we estimate), the selloff in the stock may be overdone," the analyst added
The retailer's stock has underperformed its peers, falling more than 8% since the trade tensions heightened in the beginning of May. Last week, President Trump hiked tariffs on $200 billion worth of Chinese goods and China retaliated with tariffs on $60 billion worth of imports.
"Approximately 9% of products, measured by sales volume, would have been affected" when the initial 10% tariffs were implements, according to the company's most recent 10-K filing.
Credit Suisse said Dollar Tree would undoubtedly be hit hard if the U.S. decides to further raise tariffs on a broader basket of goods including toys, greeting cards and small electronics. However, the bank stands by its 70% likelihood of a deal getting passed between the two countries, eventually reversing the latest tariffs.
"Our updated "Grey Sky" downside scenario price of $82 embeds an assumption for incremental 25% tariffs on another ~20% of goods in the Dollar Tree banner measured by sales volume, which would reduce our 2020 EPS by approximately $1," said Credit Suisse.
Credit Suisse has a target price of $115 on Dollar Tree's stock and an outperform rating.
With about 7,000 Dollar Tree locations and more than 8,000 Family Dollar locations across the country, the discount retailer has been restructuring since the start of the year. Dollar tree previously said it is closing more than 390 Family Dollar locations.
Despite its recent sell-off, Dollar Tree's stock is up more than 10% year to date.
— With reporting from Michael Bloom.