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A Moat Downgrade for Dollar Tree

Investors should watch Dollar General, which remains worthy of a narrow economic moat rating.

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Zain Akbari: We believe that Dollar Tree and Dollar General should continue to benefit from their value-oriented, convenient positioning even in an increasingly digital retail landscape. However, we contend that while Dollar General's portfolio of advantaged locations and favorable cost standing are worthy of a narrow economic moat rating, we now reach a different conclusion for Dollar Tree, a reflection of its troubled Family Dollar unit. 

While its namesake banner has advantages borne of its differentiated, everything-for-a-dollar format, we believe that Family Dollar competes for an especially price-sensitive consumer in areas with more competitive alternatives than Dollar General's more rural and small-town focused store network. While we expect Family Dollar's performance to improve as Dollar Tree's management team continues to integrate the two chains' supply chain and distribution capabilities as well as their corporate functions, we do not anticipate the unit's adjusted operating margin will rise much further than the mid-single-digits, only a little above its 4% two-year average. As a result, we now assign a no-moat rating to Dollar Tree.

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