Dollar Tree (DLTR) is "managing well" to achieve its fiscal 2026 guidance after a stronger-than-expected Q1, although rising costs and consumer spending pressures continue to limit upside potential, Morgan Stanley said in a note Friday.

The investment bank said customer traffic appears to be "stabilizing" and could improve in H2, while Q1 gross margin expansion of about 125 basis points provides support for the company's full-year margin outlook.

Outperformance in Q1 supports the "achievability" of Dollar Tree's fiscal 2026 targets of about 3.5% comparable sales growth, roughly flat gross margin, and earnings per share of about $6.90 at the midpoint, Morgan Stanley said.

However, margin pressure is expected to increase later in the year as Dollar Tree laps "tariff-related pricing" benefits from the prior year and faces higher freight costs. Potential upside from traffic growth and tariff refunds could be offset by higher freight, wage and liability expenses, according to the note.

Morgan Stanley has an equal-weight rating on Dollar Tree, with the price target raised to $130 from $126.

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