Company Reports

Dollar Tree’s namesake banner boasts an impressive track record of strong top-line growth and steady margins despite operating in densely populated suburban markets where plentiful shopping alternatives exist nearby. The banner’s wide assortment of products priced at $1.25 or less has seemingly resonated with consumers due to its treasure hunt experience and price points that conform to shoppers operating on a tight budget.

No-moat Dollar Tree's fiscal 2023 fourth-quarter results landed mostly in line with our expectations—revenue expanded nearly 12% to $8.6 billion and adjusted operating margin improved 70 basis points to 8.7%—led by strong performance at the firm's namesake banner. However, the stock suffered a precipitous 14% decline as its Family Dollar segment grappled with reduced spending capacity from its core low-income consumer. Upon Rick Dreiling's ascension to CEO last year, management has stressed the need for operational improvement and store rationalization at the floundering banner, which seemingly culminated in plans to close 970 underperforming Family Dollar stores (about 12% of the banner's store base), with 600 of these closures planned for the first half of fiscal 2024. The firm incurred a nearly $600 million noncash charge from the strategic review and added a $2 billion write-down of goodwill and intangible assets associated with Family Dollar.

Dollar Tree’s namesake banner boasts an impressive track record of strong top-line growth and steady margins despite operating in densely populated suburban markets where plentiful shopping alternatives exist nearby. The banner’s wide assortment of products priced at $1.25 or less has seemingly resonated with consumers due to its treasure hunt experience and price points that conform to shoppers operating on a tight budget.

No-moat Dollar Tree posted third-quarter results that modestly trailed our expectations as inflationary pressure and reduced fiscal stimulus weighed on discretionary spending for low-income consumers. Amid an uncertain demand backdrop and the firm's commitment to aggressively investing in operational improvements, we maintain our view that financial performance will likely be choppy in the near term. As such, we do not plan to alter our $110 fair value estimate materially.

Dollar Tree’s namesake banner boasts an impressive track record of strong top-line growth and steady margins despite operating in densely populated suburban markets where plentiful shopping alternatives linger nearby. The banner’s wide assortment of products priced at $1.25 or less has seemingly resonated with consumers due to its treasure hunt experience and price points that conform to shoppers operating on a tight budget.

We raise our fair value estimate for no-moat Dollar Tree to $110 per share, from $104, primarily due to a slight uptick in our free cash flow conversion expectations, partially offset by a modest pullback in our top-line outlook for the Family Dollar banner. Still, we view shares as fairly valued.

Dollar Tree's namesake banner has a long history of strong performance, enabled by its differentiated value proposition, but aside from a brief surge during the pandemic era, its Family Dollar unit has struggled to generate top-line and margin growth. We suspect the Dollar Tree banner is better positioned in the long term, but do not believe the aggregated firm benefits from a durable competitive edge, as competitive pressure in a fast-changing retail environment amid minimal switching costs limits results.

No-moat Dollar Tree's strategic roadmap remains sound, but cautious consumer spending and heightened sensitivity to price increases drove another quarter of tight margins, with no near-term turnaround catalyst apparent. We didn't see anything particularly striking in the second-quarter results—not enough to justify the market sending the shares down 10% after the earnings release—and expect to leave our $105 fair value estimate relatively unchanged as we balance time value with tighter margin guidance than we'd previously assumed. The shares continue to look overvalued.

We don't expect to make any material changes to our $105 fair value estimate for no-moat Dollar Tree after digesting the firm's June 21 investor day presentation and midterm guidance, with larger near-term investments offsetting our expectation for a modest bump in medium-term comparable-store sales. Management's midterm forecast for $10-plus in 2026 diluted EPS and operating margins of 14%-15% at Dollar Tree and 5%-plus at Family Dollar largely aligns with our own forecasts, while its targeted $2.3 million in capital expenditures in 2024-25 is approximately $1.3 billion higher than our prior forecast, offsetting the sales accretion. While we appreciate the potential same-store sales lift from multiprice inventory, we foresee heightened competition as the firm pushes into denser, urban markets, which suggests that the target for mid-single-digit annual same-store sales growth is aggressive. The shares jumped about 5% after the presentation and continue to trade at about a 35% premium to our intrinsic valuation.

Dollar Tree's namesake banner has a long history of strong performance, enabled by its differentiated value proposition, but aside from a brief surge during the pandemic era, its Family Dollar unit has struggled to generate top-line and margin growth. We suspect the Dollar Tree banner is better positioned in the long term, but do not believe the aggregated firm benefits from a durable competitive edge, as competitive pressure in a fast-changing retail environment amid minimal switching costs limits results.

Dollar Tree's namesake banner has a long history of strong performance, enabled by its differentiated value proposition, but, aside from the pandemic era, its Family Dollar unit has struggled to generate top-line and margin growth. We suspect the Dollar Tree banner is better positioned in the long term, but do not believe the aggregated firm benefits from a durable competitive edge, as competitive pressure in a fast-changing retail environment amid minimal switching costs limits results.

Although no-moat Dollar Tree’s shares plummeted by a midteens percentage in the wake of its first-quarter (ended April 29) earnings announcement, as theft and heightened sales of less-lucrative consumables weighed on margins, we plan to reduce our $113 per share valuation by only a mid-single-digit percentage. While we believe the company’s new leadership (with Richard Dreiling becoming CEO in late January) will improve performance, we had suspected sentiment was assuming a sharp, linear turnaround, and we attribute the difference between our reaction and the shares’ trading price slide to overinflated expectations. Our long-term forecast (mid-single-digit revenue growth rates against high-single-digit operating margins over the next decade) is intact.

Dollar Tree's namesake banner has a long history of strong performance, enabled by its differentiated value proposition, but, aside from the pandemic era, its Family Dollar unit has struggled to generate top-line and margin growth. We suspect the Dollar Tree banner is better positioned in the long term, but do not believe the aggregated firm benefits from a durable competitive edge, as competitive pressure in a fast-changing retail environment amid minimal switching costs limits results.

No-moat Dollar Tree announced a sweeping, pull-forward investment of $430 million in fiscal 2023 and materially boosted its near-term capital expenditure expectations (to $2 billion or 6.5% of sales, from the 4% average it has expended historically). Even though we view such spending as prudent, these efforts stand to strangle near-term profitability, overshadowing the firm’s otherwise solid fourth-quarter finish (a 7.4% comparable-store sales increase and 70 basis points of gross margin expansion to 30.9%).

Our $118 per share valuation of no-moat Dollar Tree should not change in the aftermath of the announcement that Rick Dreiling will be installed as CEO, replacing Mike Witynski, as of Jan. 29. Dreiling has served as the company’s executive chairman since activist investor Mantle Ridge took a role on the company’s board of directors and was made a part of the leadership team largely because of his successful tenure as the head of narrow-moat Dollar General from 2008 to 2015. So, to us, the move is not a large surprise.

Dollar Tree's namesake banner has a long history of strong performance, enabled by its differentiated value proposition, but, aside from the pandemic era, its Family Dollar unit has struggled to generate top-line and margin growth. We suspect the Dollar Tree banner is better positioned long-term, but do not believe the aggregated firm benefits from a durable competitive edge, as competitive pressure in a fast-changing retail environment amid minimal switching costs limits results.

Our $123 per share valuation of no-moat Dollar Tree should fall by a mid-single-digit percentage (not far from the trading price’s reaction) after it announced third-quarter results. While results were fair (including an 8% revenue uptick that beat our 7% mark), management suggested investments and price moves will weigh on fourth-quarter results. We believe the factors at play are transitory and continue to expect mid-single-digit revenue growth rates against high-single-digit operating margins over the next decade. We suggest investors await a more compelling entry point, as we believe the trading price affords little margin of safety considering an ongoing turnaround.

Dollar Tree's namesake banner has a long history of strong performance, enabled by its differentiated value proposition, but, aside from the pandemic era, its Family Dollar unit has struggled to generate top-line and margin growth. We suspect the Dollar Tree banner is better positioned long-term, but do not believe the aggregated firm benefits from a durable competitive edge, as competitive pressure in a fast-changing retail environment amid minimal switching costs limits results.

Dollar Tree's namesake banner has a long history of strong performance, enabled by its differentiated value proposition, but, aside from the pandemic era, its Family Dollar unit has struggled to generate top-line and margin growth. We suspect the Dollar Tree banner is better positioned long-term, but do not believe the aggregated firm benefits from a durable competitive edge, as competitive pressure in a fast-changing retail environment amid minimal switching costs limits results.

Our $127 fair value estimate for no-moat Dollar Tree should fall by a mid-single-digit percentage considering our more sanguine take on the company's second-quarter results and diminished second-half expectations than the stock price’s high-single-digit swoon on Aug. 25. We suspect the difference reflects that the market had been assuming a high degree of execution in the chain’s early-stage turnaround efforts under a reconstituted board of directors and executive suite. We still suggest investors await a more attractive entry point. Our long-term mid-single-digit yearly top-line growth and high-single-digit operating margin forecasts are intact.