Goldman says it’s time to buy this dollar store chain that’s fallen 20% this year

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Dollar Tree ‘s investments into improving its store experiences for consumers are finally paying off, according to Goldman Sachs. The Wall Street investment bank upgraded shares of the discount retailer to buy from its previous neutral rating, although it lowered the stock’s price target to $137 from $150, citing an increasingly competitive environment. The updated forecast still implies potential 24% upside from the stock’s $110.10 close Monday. Dollar stores have been recently slammed by deteriorating consumer fundamentals and investor sentiment, as gas prices have risen and student loan payments resumed. Dollar Tree, for example, has seen its stock slide 22% since the start of the year. DLTR YTD mountain DLTR YTD chart Still, Goldman analyst Kate McShane forecasts the potential for strong earnings growth for Dollar Tree, arguing that an influx of “sticky new customers” and an improving discretionary cash flow outlook for lower- and middle-income consumers should help it gain market share. McShane noted that Dollar Tree’s “recent investments in price, labor and merchandising” should also serve as catalysts. McShane added that lower freight costs should provide yet another tailwind, helping to lift pressure on company margins in the second half of 2023. “While incremental price and labor investments remain a concern for investors, the expected tailwind from lower freight costs should be a greater offset vs peers, noting DLTR’s higher exposure to imports,” she wrote. All in all, McShane believes that Dollar Tree’s multi-year initiatives should propel the company forward to generate its targeted earnings of $10 per share in 2026. Reaching that goal implies compounded annual growth of 19% in earnings per share — “well above most broadline/dollar store peers” — but might yet prove conservative estimate, she noted. — CNBC’s Michael Bloom contributed to this report.