Dollar Tree: Financial Results Should Improve Amid Strategic Reset but Turnaround Will Take Time

We raise our fair value estimate for no-moat Dollar Tree DLTR 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.

While the Dollar Tree banner continues to post solid results, the firm’s 2015 acquisition of Family Dollar has proven burdensome. Family Dollar’s lackluster scale and undifferentiated product assortment have been acutely apparent over the past eight years, with issues being compounded by underinvestment in supply-chain processes and stores. As such, the banner boasts a precarious value proposition.

Positively, Dollar Tree’s recently revamped management team boasts an impressive track record as several key executives contributed to Dollar General’s strategic turnaround and meteoric rise in the 2010s. Aspiring to revive the ailing Family Dollar banner, management laid out an aggressive investment plan to rectify laborious supply-chain processes, update store formats, and alter its merchandising strategy. While we expect operational improvements to yield ameliorated margin performance, we believe the banner will remain disadvantaged and deliver lackluster growth as it contends with competitive angst.

Meanwhile, the Dollar Tree banner’s $1.25 price points and treasure hunt experience have seemingly resonated with consumers with same-store sales growth averaging 3.3% over the past decade. We do not foresee impediments to the banner’s low-single-digit growth trajectory, though we surmise the expansion of its multiprice product assortment may prompt more competitive pressure, weighing on margins. Furthermore, we expect management to prioritize the expansion of Dollar Tree’s footprint over its ailing counterpart, particularly in the latter part of the decade. We forecast Dollar Tree to operate around 11,000 namesake stores by the end of our 10-year forecast, up from 8,177 today.