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Even as Competitive Pressures Rise, Dollar Tree Keeps Its Edge

We marginally lowered our fair value estimate for the retailer following news that Amazon intends to purchase Whole Foods, but we still think Dollar Tree has a narrow moat.

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 Dollar Tree (DLTR) is a leading operator of discount variety stores, blending value and convenience across its more than 14,000 stores. However, the firm's enhanced scale position also reflects steps to scoop up another leading dollar store peer, Family Dollar, in July 2015.

The benefits of the Family Dollar acquisition span both cost and revenue synergies. For one, management targets achieving $300 million of annual run-rate synergies by July 2018, which strikes us as reasonable. Although, we don't anticipate the entirety of these savings will fall to the bottom line, but rather will be utilized to lower prices as a means to drive traffic and offset intense competition. But not only can the firm extract cost synergies from better procurement and SG&A efficiencies, we portend the combined business stands to produce revenue synergies by re-bannering existing stores and opening units that more effectively cater to the surrounding demographics. Given the Dollar Tree banner serves mostly middle-Americans in suburban locations with $1 price points, and Family Dollar serves urban and rural customers that maintain low incomes at many price points, we think the consolidated firm can target a broader range of customers and geographies.

John Brick, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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