In this new tariff world, discount and off-price retailers are rising in favor as the fear of recession grows among shoppers.
On Monday, Citi analyst Paul Lejuez upgraded shares of Dollar General (DG) from Sell to Neutral and upgraded Dollar Tree (DLTR) to Buy from Neutral.
“In the near-term Dollar General does not have the same tariff risk as most others in our retail universe, and may benefit from consumers trading down,” he wrote in a note to clients. Lejuez said only roughly 10% of Dollar General’s sales are affected by tariffs.
About 80% of its sales are food items, most of which are nonperishable items made in the US, like canned soup, beans, and chips, Morningstar analyst Noah Rohr told Yahoo Finance last month.
Lejuez is also keeping an eye on Walmart’s (WMT) investor day this week: “We believe their comments about how they plan to deal with higher costs will be important.”
If Walmart expressed intent to pass on costs to consumers, it would be “positive for Dollar General,” Lejuez said. It would also give the company more room to hike its own prices.
On the flip side, if Walmart plans to compete on price, that would be negative for Dollar General, given the tougher competition. In the last five days, shares of Dollar General are up nearly 6%, compared to the S&P 500’s (^GSPC) more than 10% decline.
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Dollar Tree is another discounter that could benefit, Lejuez said. Tariffs would help it justify increasing price points from $1.25 to $1.50 and $1.75, which are still prices that shoppers could swallow.
Direct imports make up 41% to 43% of Dollar Tree’s total retail value purchases, and China supplies the majority of those imports, per a company filing. Other analysts have cautioned that retailers with a higher mix of discretionary items and general merchandise will be hit harder.
CFRA analyst Arun Sundaram called 2026 a “transitional year” for Dollar Tree, as it’s one of the largest importers in the country with significant sourcing from China and Southeast Asia. It’s also trying to sell Family Dollar, expected to happen in the next few months. He reiterated his Hold rating.
Off-price retailers like TJX (TJX), which owns Marshalls and TJ Maxx, could do well in this environment, Jefferies analyst Corey Tarlowe said in a note to clients.
Dana Telsey of Telsey Advisory Group said TJ Maxx’s “value proposition continues to resonate with consumers, while the beneficial buying environment allows the business to meet the demand of increased traffic both from existing and trade-down customers.”
The company caters to all income groups, especially as they “remain discerning with their discretionary spend,” Telsey wrote in her note.
In late February, TJX CEO Ernie Herrman said on the company’s earnings call that “direct imports for China for us is an extremely small percentage of our business.” In the short term, there might be a “little bit of a cost associated there,” but long term, it “doesn’t become the issue because of the way we approach our buying.”
Off-price retailers like TJ Maxx typically buy inventory from full-price retailers and manufacturers instead of making their own.
UBS analyst Jay Sole also reiterated his Buy rating for TJ Maxx and Burlington Stores (BURL) in a recent note based on the “current macro environment” and its “growth” and “quality” factors.
“With apparel and footwear prices likely headed much higher,” both retailers’ value propositions likely “look even more attractive to consumers, resulting in accelerating market share gains,” Sole said.
Supply chain disruptions caused by the tariffs could also lift discounters. “Companies may have to either cancel orders or clear excess inventory in some other way. Off-Price retailers like TJX and BURL typically outperform in times of dislocation,” Sole added.
CHICAGO, ILLINOIS – FEBRUARY 28: Merchandise is offered for sale at a T. J. Maxx store on February 28, 2024 in Chicago, Illinois. TJX Companies, the parent company of T.J. Maxx, Home Goods, Sierra and Marshall’s, reported fourth-quarter results that beat Wall Street expectations in both revenue and earnings per share. (Photo by Scott Olson/Getty Images) ·Scott Olson via Getty Images
Ross Stores (ROST) is “a better way to play the off-price space and market more generally given uncertainties around the consumer,” per William Blair analyst Sharon Zackfia. She added that her team has “deep confidence” in Ross’s CEO, James Conroy, who joined last fall.
“Conroy laid out a strategy in which he intends to prioritize two areas that have been de-emphasized in recent years, marketing and store experience,” she wrote in a note to clients. Conroy applied a similar playbook during his previous tenure at Boot Barn (BOOT) “with great success.”
Another aspect to look out for over the coming weeks is a boost from tax refunds. Mizuho called out Five Below (FIVE), which it has a Neutral rating on. The average refund amount is up nearly 4% compared to last year, per the IRS.
“Refund cadence and amount tends to normalize by late March and early April,” David Bellinger of Mizuho wrote to clients.
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on X at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
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