The downgrade comes after the Chesapeake, VA-based discount retailer reported disappointing results for the 2016 second quarter yesterday.
"Same-store sales at Dollar Tree slowed sequentially and were the weakest they've been since 4Q13, while Family Dollar, which enters the reported comp base in 4Q16, turned negative after three positive quarters," the firm wrote in an analyst note.
Same-store sales rose by 1.2% during the period, while Wall Street was looking for growth of 2.4%.
"The sales miss wasn't huge, and earnings held up reasonably well, but we expect the downshift at Dollar Tree, which could continue, and a more challenging outlook for Family Dollar, to limit valuation on a stock that has enjoyed one of the highest multiples in retail," MKM added.
However, RBC Capital Markets said yesterday's slump in the stock was "completely unwarranted" and recommends aggressively buying shares, the Fly reports. The firm added that Family Dollar margins have "strong upward momentum."
Shares of Dollar Tree were higher in mid-morning trading on Friday.
Separately, TheStreet Ratings Team has a "Buy" rating with a score of A- on Dollar Tree stock.
The company's strengths can be seen in multiple areas, such as its robust revenue growth, good cash flow from operations, increase in net income, solid stock price performance and growth in earnings per share.
Recently, TheStreet Ratings objectively rated this stock according to its "risk-adjusted" total return prospect over a 12-month investment horizon. Not based on the news in any given day, the rating may differ from Jim Cramer's view or that of this articles's author.
You can view the full analysis from the report here: DLTR