Piper Sandler downgrades Dollar Tree, says inflation will cut into margins
Rising inflation will keep shares of Dollar Tree pinned down over the next year, according to investment firm Piper Sandler. Inflation readings have consistently beaten expectations in recent weeks, with increased demand from economic reopening creating supply shortages in some industries and companies reporting wage hikes to attract more workers. Analyst Peter Keith downgraded Dollar Tree to neutral from overweight, saying in a note to clients on Thursday that the discount retailer would be hard-pressed to maintain its performance in this environment. "Our downgrade is based primarily on concerns of intensifying inflationary pressures from both freight and wages combined with core-DLTR's inability to pass through price increases - given its fixed $1-only price point," the note said. Piper Sandler calculated that Dollar Tree's margins have been flat or narrowing in recent years, and higher wages should exacerbate the problem. "For wages, low-income wage growth and total wage growth is at the highest levels since DLTR's IPO in 1995. Meanwhile, the job quit rate in the broader retail sector is at a > 20 year high. We estimate a $1/hour pay increase to store associates would represent a $215M headwind," the note said. Piper Sandler dropped its price target for Dollar Tree to $102 per share from $117, implying essentially no upside for the stock. The discount retail's stock has struggled this year, falling 8% over the past three months and still trading below pre-pandemic levels. -CNBC's Michael Bloom contributed to this report.

Pedestrians walk past a Dollar Tree Inc. store in Detroit, Michigan, U.S. Sean Proctor | Bloomberg | Getty Images