Dollar Tree, Five Below downgraded at KeyBanc on China import exposure

Investing.com -- KeyBanc Capital Markets analysts revised their ratings for Dollar Tree (NASDAQ:DLTR) and Five Below (NASDAQ:FIVE) stocks, downgrading both to Sector Weight from Overweight.

The move is primarily driven by concerns over potential tariff impacts and ongoing management transitions within both companies.

KeyBanc cited the risk of higher long-term rates affecting the housing market, noting a rise in 10-year yields to 4.43%, the highest since June 2024.

Despite the possibility of further rate cuts by the Federal Reserve, there is worry that mortgage rates may not decline sufficiently to aid a housing market recovery. This outlook casts a shadow over home improvement retailers like Home Depot (NYSE:HD) and Lowe's Companies (NYSE:LOW), according to analysts.

They also highlighted the potential for increased tariffs to benefit domestic mattress and furniture producers while posing a threat to import businesses and dollar stores.

KeyBanc anticipates that companies with a significant manufacturing presence in the US, such as Tempur Sealy (NYSE:TPX) International, Sleep Number (NASDAQ:SNBR) Corp., Purple Innovation (NASDAQ:PRPL), La-Z-Boy (NYSE:LZB) Incorporated, and Ethan Allen (NYSE:ETD) Interiors, may gain an edge over competitors that rely more heavily on imports.

“As it related to China tariffs, we see elevated risk for import businesses and the dollar stores,” analyst Bradley B. Thomas said in the note.

The downgrades of DLTR and FIVE reflect concerns about their exposure to China imports.

Dollar Tree, in particular, is vulnerable with 40% of its sales reliant on imported goods from China.

Five Below faces similar risks, with an estimated 60% of its products sourced from China, including both direct and indirect imports.

“Both companies were fairly effective at mitigating tariffs in 2018-2019, but we believe the current potential is for higher tariffs and operationally both companies are not performing as well,” analysts wrote.

“As such, we move to the sidelines as we await further evidence of improved fundamentals and greater clarity on potential tariffs and the ability to offset them,” they added.

In contrast, KeyBanc sees stocks like Walmart (NYSE:WMT) and Ollie's Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) as well positioned for the consumer environment next year.