Dollar Tree (DLTR)

Discount treasure-hunt retailer Dollar Tree (NASDAQ:DLTR) missed Wall Street’s revenue expectations in Q4 CY2024, with sales falling 42.1% year on year to $5 billion. Next quarter’s revenue guidance of $4.55 billion underwhelmed, coming in 42.1% below analysts’ estimates. Its non-GAAP profit of $2.29 per share was 4.3% 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.

Founded in 1986 and initially selling items priced at $1 or less, the company has since expanded its selection and price points. However, most items are still under $5 with an extensive selection under $2.

While low prices are an obvious benefit to the consumer, the tradeoff is consistency of selection. One day, a shopper may find bottles of name-brand dish soap for $1 that would sell for much more elsewhere. However, that product may not be available weeks later. This is why the Dollar Tree experience is often called a treasure hunt. The company’s sourcing and logistics capabilities are a key reason prices are so low. Shorter-term deals and arbitrage opportunities are prioritized by the merchandising team over long-term supplier agreements.

Dollar Tree is known for party supplies, holiday décor, home goods, toys, and a limited snack selection, but the company also operated the Family Dollar banner until an announcement in March 2025 to sell it. Acquired in 2015, Family Dollar focuses more on food and consistent selection to serve the grocery needs of lower-income households. The concept competes most directly with Dollar General and looks to locate stores in rural or suburban areas not served well by large regional grocery chains or general merchandise behemoths like Walmart.

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 performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years.

With $27.58 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 it’s harder to find incremental growth when you’ve penetrated most of the market. To accelerate sales, Dollar Tree likely needs to optimize its pricing or lean into international expansion.

As you can see below, Dollar Tree’s 3.2% annualized revenue growth over the last five years (we compare to 2019 to normalize for COVID-19 impacts) was sluggish as its store footprint remained unchanged.

This quarter, Dollar Tree missed Wall Street’s estimates and reported a rather uninspiring 42.1% year-on-year revenue decline, generating $5 billion of revenue. Company management is currently guiding for a 40.4% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 15.9% over the next 12 months, an acceleration versus the last five years. This projection is eye-popping for a company of its scale and indicates its newer products will catalyze better top-line performance.

Number of Stores

A retailer’s store count influences how much it can sell and how quickly revenue can grow.

Dollar Tree listed 16,503 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% 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 2% year on year. This growth was a deceleration from its historical levels, showing the business is still performing well but losing a bit of steam.

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 31.3% 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.

Dollar Tree’s gross profit margin came in at 37.7% this quarter, up 4.5 percentage points year on year and easily exceeding analysts’ estimates. Dollar Tree’s full-year margin has also been trending up over the past 12 months, increasing by 1.1 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).

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Dollar Tree was profitable over the last two years but held back by its large cost base. Its average operating margin of 5.6% was weak for a consumer retail business. This result isn’t too surprising given its low gross margin as a starting point.

Looking at 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 Q4, Dollar Tree generated an operating profit margin of 10.7%, up 1.9 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.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Dollar Tree’s unimpressive 2.9% annual EPS growth over the last five years aligns with its revenue performance. On the bright side, this tells us its incremental sales were profitable.

In Q4, Dollar Tree reported EPS at $2.29, down from $2.55 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 4.3%. Over the next 12 months, Wall Street expects Dollar Tree’s full-year EPS of $5.51 to grow 7.1%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and 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 2.5% 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 1.3 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 $503.9 million in Q4, equivalent to a 10.1% margin. This result was good as its margin was 4.6 percentage points higher than in the same quarter last year, building on its favorable historical trend.

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 9.7%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+.

Dollar Tree reported $1.26 billion of cash and $7.83 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 $1.96 billion of EBITDA over the last 12 months, we view Dollar Tree’s 3.3× net-debt-to-EBITDA ratio as safe. We also see its $58.2 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.

The result this quarter don't matter as much as the company's announcement to sell its Family Dollar unit, which it acquired in 2015. The stock traded up 3.8% to $69.73 immediately after reporting.

Updated: May 21, 2025 at 10:36 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Dollar Tree isn’t a terrible business, but it doesn’t pass our bar. First off, its revenue growth was uninspiring over the last five years. 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 make it more difficult to reach positive operating profits compared to other consumer retail businesses.

Dollar Tree’s P/E ratio based on the next 12 months is 15.1x. While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $85.87 on the company (compared to the current share price of $89).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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