Dollar Tree (DLTR)

Discount treasure-hunt retailer Dollar Tree (NASDAQ:DLTR) reported Q1 CY2025 results exceeding the market’s revenue expectations, but sales fell by 39.2% year on year to $4.64 billion. The company expects next quarter’s revenue to be around $7.67 billion, coming in 74.6% above analysts’ estimates. Its non-GAAP profit of $1.26 per share was 4.5% above analysts’ consensus estimates.

Company Overview

A treasure hunt because there’s no guarantee of consistent product selection, Dollar Tree (NASDAQ:DLTR) is a discount retailer that sells general merchandise and select packaged food at extremely low prices.

Traditional grocery stores are go-tos for many families, but discount grocers serve those who may not have a traditional grocery store nearby or who may have different spending thresholds. Certain rural or lower-income areas simply don’t have a grocery store. Additionally, some lower-income families would prefer to buy in smaller quantities than available at most stores (think one or two paper towel rolls at a time). While online competition threatens all of retail, grocery is one of the least penetrated because of the nature of buying food. Furthermore, those buying small quantities for immediate need are even less likely to leverage e-commerce for these purposes.

Competitors that offer a treasure-hunt experience centered around general merchandise and/or snacks include Five Below (NASDAQ:FIVE), Dollarama (TSX:DOL), and TJX (NYSE:TJX).

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.

With $24.59 billion in revenue over the past 12 months, Dollar Tree is one of the larger companies in the consumer retail industry and benefits from a well-known brand that influences purchasing decisions. However, its scale is a double-edged sword because there are only a finite number of places to build new stores, making it harder to find incremental growth. For Dollar Tree to boost its sales, it likely needs to adjust its prices or lean into foreign markets.

As you can see below, Dollar Tree grew its sales at a sluggish 1.1% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts) as its store footprint remained unchanged.

This quarter, Dollar Tree’s revenue fell by 39.2% year on year to $4.64 billion but beat Wall Street’s estimates by 2.4%. Company management is currently guiding for a 4% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to decline by 21.7% over the next 12 months, a deceleration versus the last six years. This projection is underwhelming and indicates its products will see some demand headwinds.

Number of Stores

A retailer’s store count often determines how much revenue it can generate.

Dollar Tree listed 16,607 locations in the latest quarter and has kept its store count flat over the last two years while other consumer retail businesses have opted for growth.

When a retailer keeps its store footprint steady, it usually means demand is stable and it’s focusing on operational efficiency to increase profitability.

Same-Store Sales

The change in a company's store base only tells one side of the story. The other is the performance of its existing locations and e-commerce sales, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales provides a deeper understanding of this issue because it measures organic growth at brick-and-mortar shops for at least a year.

Dollar Tree’s demand has been healthy for a retailer over the last two years. On average, the company has grown its same-store sales by a robust 3.1% per year. Given its flat store base over the same period, this performance stems from not only increased foot traffic at existing locations but also higher e-commerce sales as demand shifts from in-store to online.

In the latest quarter, Dollar Tree’s same-store sales rose 5.4% year on year. This growth was an acceleration from its historical levels, which is always an encouraging sign.

Gross profit margins are an important measure of a retailer’s pricing power, product differentiation, and negotiating leverage.

Dollar Tree has bad unit economics for a retailer, giving it less room to reinvest and grow its presence. As you can see below, it averaged a 31.8% gross margin over the last two years.

When compared to other non-discretionary retailers, however, it’s a step above. That’s because non-discretionary retailers have structurally lower gross margins; they compete on the lowest price, sell products easily found elsewhere, and have high transportation costs to move goods. We believe the best metrics to assess these companies are free cash flow margin, operating leverage, and profit volatility, which account for their scale advantages and non-cyclical demand.

In Q1, Dollar Tree produced a 35.6% gross profit margin, up 4.8 percentage points year on year and in line with analysts’ estimates. Dollar Tree’s full-year margin has also been trending up over the past 12 months, increasing by 2.1 percentage points. If this move continues, it could suggest the company has less pressure to discount products and is realizing better unit economics due to stable or shrinking input costs (such as labor and freight expenses to transport goods).

Dollar Tree was profitable over the last two years but held back by its large cost base. Its average operating margin of 5.9% was weak for a consumer retail business. This result isn’t too surprising given its low gross margin as a starting point.

Analyzing the trend in its profitability, Dollar Tree’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q1, Dollar Tree generated an operating margin profit margin of 8.3%, up 2.8 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Dollar Tree’s full-year EPS grew at an unimpressive 2.7% compounded annual growth rate over the last five years, worse than the broader consumer retail sector.

In Q1, Dollar Tree reported EPS at $1.26, down from $1.43 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 4.5%. Over the next 12 months, Wall Street expects Dollar Tree’s full-year EPS of $5.34 to grow 1.1%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Dollar Tree has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 2.2% over the last two years, slightly better than the broader consumer retail sector.

Taking a step back, we can see that Dollar Tree’s margin expanded by 1.9 percentage points over the last year. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability was flat.

Dollar Tree’s free cash flow clocked in at $129.7 million in Q1, equivalent to a 2.8% margin. This cash profitability was in line with the comparable period last year and its two-year average.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Dollar Tree historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 9.8%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+.

Dollar Tree reported $1.01 billion of cash and $7.91 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $2.2 billion of EBITDA over the last 12 months, we view Dollar Tree’s 3.1× net-debt-to-EBITDA ratio as safe. We also see its $56.3 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by Dollar Tree’s optimistic revenue guidance for next quarter, which blew past analysts’ expectations. We were also glad its full-year EPS guidance exceeded Wall Street’s estimates. On the other hand, its full-year revenue guidance slightly missed. Overall, we think this was a decent quarter with some key metrics above expectations. Investors were likely hoping for more, and shares traded down 2.8% to $93.94 immediately after reporting.

Updated: June 22, 2025 at 10:46 PM EDT

Before making an investment decision, investors should account for Dollar Tree’s business fundamentals and valuation in addition to what happened in the latest quarter.

Dollar Tree isn’t a terrible business, but it doesn’t pass our quality test. For starters, its revenue growth was uninspiring over the last six years, and analysts expect its demand to deteriorate over the next 12 months. And while its popular brand gives it meaningful influence over consumers’ purchasing decisions, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its gross margins indicate a disadvantaged starting point for the overall profitability of the business.

Dollar Tree’s P/E ratio based on the next 12 months is 18.3x. Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $95.66 on the company (compared to the current share price of $98.73).