The new year could bring the end of a renaissance for two retailers that have outperformed during the Covid era, according to Wells Fargo. Analyst Edward Kelly downgraded Target and Dollar General to equal weight from overweight, saying in a note to clients Thursday that retailers would struggle to replicate their pandemic-era performance this year. "While the consumer overall looks healthy, COVID beneficiaries could struggle to lap historic stimulus and retail-wallet share gains, cost pressures should remain in place for at least the first part of the year, and consensus expectations don't exactly seem low," Kelly wrote. Shares of both companies slumped more than 2% in premarket trading Thursday. Target's sales growth has jumped sharply over the past two years but it could slow significantly this year, according to Wells Fargo. "TGT's epic performance during COVID creates a difficult 2022 set-up, in our view. The company's differentiated model was in the right place at the right time during the pandemic, but lapping the equivalent of 10 years of growth generated in 2020/21 is accompanied by a degree of risk that makes recommending the stock difficult to justify," the note said. Wells Fargo cut its price estimate for Target to $230 per share from $275. The new target is less than 1% above where the stock closed Wednesday. For Dollar General, the company's exposure to low-income consumers could also be a drag as government stimulus slows in 2022, Wells Fargo said. The firm cut its price target on Dollar General to $220 per share from $250. That target is roughly 6% below where the stock closed Wednesday. -CNBC's Michael Bloom contributed to this report.
A shopper leaves a Target store in New York, August 15, 2021.
Scott Mlyn | CNBC
The new year could bring the end of a renaissance for two retailers that have outperformed during the Covid era, according to Wells Fargo.