It could be a rough session for Family Dollar shares after Bank of America Merrill Lynch lowered its rating on the stock to underperform and dropped its 12-month price target to $60 from $71, citing rising concerns about the off-price retailer's strategy and execution abilities.
"Given the performance that the stock has had (+22% in the last 4M), expectations are very high ... but execution risk is even higher, in our view," the firm said. "While we remain very positive on the dollar store subsector, we continue to prefer
, which we believe will be the long-term beneficiary in retail."
B of A thinks the company could disappoint in its fiscal fourth quarter ending in August.
"We expect margins to fall faster than comps can accelerate, causing earnings growth to lag and capping further valuation multiple expansion," the firm said. "In particular, our scenario analysis on the impact of tobacco sales suggests significant margin erosion. For every 5% of transactions which include tobacco, we estimate the blended GP could decline by ~50bp."
Written by Michael Baron in New York.
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