We came across a bullish thesis on Dollar Tree, Inc. (DLTR) on Substack by Acid Investments. In this article, we will summarize the bulls’ thesis on DLTR. Dollar Tree, Inc. (DLTR)’s share was trading at $69.21 as of March 26th. DLTR’s trailing and forward P/E were 14.33 and 11.85 respectively according to Yahoo Finance.
A busy shopping aisle filled with discounted items in a retail store.
Dollar Tree (DLTR) has long been a story of unrealized potential, weighed down by its ill-fated $9 billion acquisition of Family Dollar (FD) a decade ago. The integration was fraught with challenges, as FD and DLTR operated with distinct business models—FD’s sales mix is 80% consumables, akin to Dollar General (DG), while DLTR maintains a more balanced mix between consumables and discretionary items. Despite efforts to optimize operations, FD remained a drag on DLTR’s financial performance, prompting management to finally cut its losses and put FD up for sale. The long-awaited divestiture was officially announced alongside DLTR’s Q4 2024 results, but the sale price—just $1 billion gross, or $800 million net—was shockingly low, representing a mere fraction of FD’s $13-14 billion in sales and an abysmally low 0.07x EV/Revenue multiple. Analysts had expected a significantly higher valuation, making the sale a major surprise.
The market’s immediate reaction was muted, but peeling back the layers reveals an attractive opportunity. DLTR’s true earnings power had been masked by FD’s struggles. Now, with the distraction removed, DLTR’s core business is exposed as fundamentally superior to DG’s in several key metrics. At $69 per share, DLTR trades at ~7.3x FY25 EBITDA and ~13x FY25 P/E, compared to DG’s 8.1x EBITDA and 15.4x P/E at $85. This spread was even more compelling when DLTR was trading at $65 at market open. Simply closing this valuation gap suggests DLTR should be at least $80, with further upside if dollar stores return to favor.
DLTR’s recent performance reinforces its case for a valuation premium over DG. Over the past two fiscal years, DLTR has consistently gained market share in its consumables segment, while FD stagnated. More notably, DLTR has demonstrated superior EBIT margins relative to DG, even though both companies saw margin erosion between FY23 and FY24. Given DLTR’s historically higher margins and peak EBIT levels of ~15% in FY22, it has a clear margin expansion potential that DG lacks.
Despite having a more discretionary-heavy mix, DLTR has outperformed DG in same-store sales growth (SSSG), even when lapping tough FY23 comparisons. Traffic trends have improved since FY23, benefiting from inflationary pressures driving consumers toward discount retailers. DG holds the advantage in store productivity, with higher sales per square foot ($260 vs. DLTR’s mid-$230s), but when factoring in profitability per square foot, DLTR is far superior, generating ~$18 EBIT/sqft versus DG’s ~$10.
Looking ahead, DLTR’s growth trajectory is promising. It is expanding its store base at a faster clip than DG, with 400 new stores planned for FY25 (~4.5% growth), doubling DG’s 2% expansion. DLTR is also guiding for 3-5% SSSG, almost twice DG’s 2-3% projection. Additionally, DLTR’s operating margins are expected to rebound, while DG’s guidance suggests it may take years to recover to pre-pandemic levels.
Management can now focus entirely on optimizing DLTR’s business. The company’s experiment with multi-price points has reportedly driven sales uplifts, with more stores shifting to this model. Historically, DLTR traded in line with or at a premium to DG before the FD acquisition (2010-2015). With FD now out of the picture, there’s little reason why this valuation gap shouldn’t correct.
Dollar Tree, Inc. (DLTR) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 64 hedge fund portfolios held DLTR at the end of the fourth quarter which was 40 in the previous quarter. While we acknowledge the risk and potential of DLTR as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DLTR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article was originally published at Insider Monkey.