Dollar Tree shares fall on downgrade

NEW YORK -- Shares of discount store chain Dollar Tree fell on Friday after an analyst downgraded the stock on weakening sales trends.

THE SPARK: Jefferies analyst Daniel Binder said in a note to investors that revenue in stores open at least one year, a key retail metric, have been decelerating at Dollar Tree. He downgraded the stock to "Hold" from "Buy."

THE BIG PICTURE: Dollar stores, which offer a wide variety of products from beach toys to vitamins, have done well throughout the recession and its aftermath, attracting budget-conscious customers with low prices. But now Dollar Stores are facing tough comparisons with a year ago.

THE ANALYSIS: At a conference on Thursday, Dollar Tree Inc. management said that sales in the third quarter have been at the low end of its expectations, implying a 3 percent increase in revenue in stores open at least one year. That compares to a 4.8 percent rise in the same period last year.

"There is certainly a possibility that higher gas prices, uncertainty around the election and the economy are causing customers to pull in spending at Dollar Tree, but we also think there could be other forces at work, which include increased competition from Wal-Mart and other extreme value price retailers," Binder wrote. He lowered his price target to $41 from $58.

Meanwhile, Wedbush analyst Joan Storms kept her "Outperform," rating on the stock, but lowered her price target to $52 from $57. She said the company has a number of positives going for it, such as Canada expansion and better utilization of e-commerce, but added that near-term revenue pressure could extend into the fourth quarter.

SHARE ACTION: Shares fell $2, or 4.6 percent, to $41.28 in afternoon trading. The stock had been down 24 percent since the beginning of the year.