Goldman Sachs Sees Upside In Retail Giants Dollar Tree, Home Depot, Best Buy And Target Despite Tariff, Margin Pressures

Goldman Sachs analyst Kate McShane today puts forward insights from meetings with the management teams of Dollar Tree Inc (NASDAQ:DLTR) and Home Depot Inc (NYSE:HD), along with an analysis of valuations, inventory turns and SG&A ratios for the covered companies.

The note also explores the potential impact of China tariffs on profitability for Best Buy Co Inc (NYSE:BBY) and Target Corp (NYSE:TGT).

The analyst has rated the shares of Dollar Tree with Buy rating and a price forecast of $86.

Dollar Tree management said tariffs typically take three to four months to impact store inventory, providing some buffer before affecting financial results.

While near-term margins may fluctuate, they expect pricing and cost strategies to help maintain strong value offerings. They also mentioned reports of ships idling offshore, awaiting possible tariff developments, said the analyst.

Dollar Tree reports ongoing financial strain among middle- and lower-income shoppers, while upper-income spending remains strong.

A successful holiday season boosted fourth-quarter results, with continued momentum into first quarter, especially in seasonal goods.

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The loss of the Marietta, Oklahoma, distribution center continues to weigh on costs but is expected to reverse once it reopens. Family Dollar's sale is projected to improve free cash flow, noted the analyst.

The analyst gave Home Depot stock a Buy rating and a price forecast of $421.

Home Depot stated most of its imported goods are seasonal, and spring merchandise is already in hand. The next major imports are scheduled for the second half of the year.

Home Depot remains cautious about housing activity in a potential downturn. Management believes buyers have already been sidelined and noted past increases in activity when mortgage rates hover around 6%-6.5%.

Management says their experienced cost teams can assess tariff implications down to the SKU level and will deploy mitigation tactics accordingly. In 2018, Home Depot absorbed two-thirds of a $2 billion tariff impact without price hikes by sourcing alternatives or adjusting operations.

The SRS acquisition has exceeded expectations, adding $1 billion in 2024 revenue. It has enhanced Home Depot's PRO offerings and helped streamline complex project sales and order management systems, including “bill upon delivery” capabilities, said the analyst.

The analyst evaluated tariff impacts on Best Buy and Target under various mitigation and SG&A reduction scenarios.

Without cost cuts, Best Buy would need to raise prices by zero to 5% and Target by 1%-11% to maintain profitability. To match FY2025 earnings estimates, Best Buy must raise prices by 3%-9% and Target by 6%-17%. With a 2% SG&A reduction, those figures ease slightly, noted the analyst.

The analyst is Buy rated on Best Buy and Target with a price forecast of $101 and $142, respectively.

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