Dollar Tree (DLTR)

Discount treasure-hunt retailer Dollar Tree (NASDAQ:DLTR) reported revenue ahead of Wall Street’s expectations in Q2 CY2025, but sales fell by 38.1% year on year to $4.57 billion. The company’s full-year revenue guidance of $19.4 billion at the midpoint came in 1.3% above analysts’ estimates. Its non-GAAP profit of $0.77 per share was 87.6% 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 performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.

With $21.78 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 demand was weak over the last six years (we compare to 2019 to normalize for COVID-19 impacts). Its sales fell by 1.1% annually as it didn’t open many new stores.

This quarter, Dollar Tree’s revenue fell by 38.1% year on year to $4.57 billion but beat Wall Street’s estimates by 2%.

Looking ahead, sell-side analysts expect revenue to decline by 9.6% over the next 12 months, a deceleration versus the last six years. This projection doesn't excite us and suggests its products will see some demand headwinds.

Number of Stores

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

Dollar Tree 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.

Note that Dollar Tree reports its store count intermittently, so some data points are missing in the chart below.

Same-Store Sales

A company's store base only paints one part of the picture. When demand is high, it makes sense to open more. But when demand is low, it’s prudent to close some locations and use the money in other ways. Same-store sales is an industry measure of whether revenue is growing at those existing stores and is driven by customer visits (often called traffic) and the average spending per customer (ticket).

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 6.5% year on year. This growth was an acceleration from its historical levels, which is always an encouraging sign.

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 32.9% 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 34.4% this quarter, up 4.3 percentage points year on year and exceeding analysts’ estimates by 3.6%. Dollar Tree’s full-year margin has also been trending up over the past 12 months, increasing by 2.4 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 a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Dollar Tree was profitable over the last two years but held back by its large cost base. Its average operating margin of 6.5% was weak for a consumer retail business. This result isn’t too surprising given its low gross margin as a starting point.

On the plus side, Dollar Tree’s operating margin rose by 1.1 percentage points over the last year.

This quarter, Dollar Tree generated an operating margin profit margin of 5.1%, up 2.3 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 EPS grew at an unimpressive 1.1% compounded annual growth rate over the last six years. This performance was better than its 1.1% annualized revenue declines but doesn’t tell us much about its business quality because its operating margin didn’t improve.

In Q2, Dollar Tree reported adjusted EPS of $0.77, up from $0.67 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Dollar Tree’s full-year EPS of $5.44 to grow 12.1%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

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 3.3% 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 2.4 percentage points over the last year. This shows the company is heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability.

Dollar Tree burned through $88.8 million of cash in Q2, equivalent to a negative 1.9% margin. The company’s cash burn slowed from $195.9 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

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 $666.3 million of cash and $7.34 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 $2.15 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 $50 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.

This was a beat and raise quarter. Specifically, it was good to see Dollar Tree beat analysts’ revenue and EPS expectations this quarter. We were also excited that the company raised full-year guidance for revenue and EPS. Zooming out, we think this was a good print with some key areas of upside. The stock remained flat at $111.26 immediately after reporting.

Updated: November 12, 2025 at 9:30 PM EST

When considering an investment in Dollar Tree, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Dollar Tree isn’t a terrible business, but it doesn’t pass our bar. For starters, its revenue has declined 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 mediocre EPS growth over the last six years shows it’s failed to produce meaningful profits for shareholders.

Dollar Tree’s P/E ratio based on the next 12 months is 17.7x. While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $108.43 on the company (compared to the current share price of $106.19).