Dollar Tree Cut To Underperform At Credit Suisse, Family Dollar Acquisition Has Concerns

• Dollar Tree shares have sold off from the $80 level in July on disappointing quarterly results and concerns over slowing momentum.
• Edward Kelly of Credit Suisse on Thursday downgraded Dollar Tree to Underperform with a $60 price target.
• Kelly noted it is "clear" the Family Dollar acquisition is off to a disappointing start and the stock could see further downside.

Edward Kelly of Credit Suisse downgraded shares of Dollar Tree, Inc. (NASDAQ: DLTR) to Underperform from Neutral with a price target lowered to $60 from a previous $70, given the analyst's "cautious" view of the company's acquisition of Family Dollar.

Kelly has concerns related to execution risk, management's ability to turn around the "perennially poor performing" asset, and its overall strategic shift. The analyst added that the Street may also be "underestimating" the amount of investments needed at Family Dollar to improve the segment's longer-term results. As such, he suggested that the stock could see even further downside.

Related Link: What The Street Thinks Of Dollar Tree Now

Kelly went on to suggest that it is "clear" that the recent Family Dollar transaction is not "living up to initial expectations" and the merger is "off to a disappointing start." The analyst cited Dollar Tree's most recent quarterly results in which management "uncharacteristically" chose not to provide earnings guidance and was also "unwilling" to reiterate its previous full-year accretion guidance.

At the same time that Family Dollar is showing signs of concerns, Kelly noted that Core Dollar Tree's momentum is also "challenged" in the near-term. Specifically, the company is up against its most difficult sales comparisons in the second half of the year, while management "surprisingly" suggested that cannibalization from Family Dollar conversions is a headwind.

Finally, Kelly pointed out that Dollar Tree's stock has historically been "highly" correlated with its comp momentum and the analyst is expecting comp growth could slow to 1 to 2 percent over the next few quarters from 2.4 percent last quarter and a peak of 5.9 percent in the third quarter of last year. As such, the stock does not represent an "attractive" investment based on comp momentum.