Cabot Turnaround Letter Issue: April 30, 2025

Dollar Tree (DLTR): A Turnaround with Multiple Tailwinds

“What’s that got to do with the price of eggs?” is an adage that was once commonly used to question the relevance of a particular subject introduced to a conversation. But in light of current economic conditions—and as it pertains to this month’s stock recommendation—that question is entirely relevant.

Indeed, the price of eggs is just one of many concerns for millions of Americans today as inflation remains a thorn for the economy and for policymakers. Record-high egg prices have become emblematic of the larger question of inflation’s persistence, particularly for retail food costs.

On that front, while economists continue to assure us that inflation’s momentum is slowing, the prices customers pay at grocery stores remain elevated at, or near, historic levels. According to a recent report from the marketing research firm NIQ, prices paid by retail shoppers for several staple food items are still at worrying levels. Among those items experiencing rising costs in the latest month for which data is available are: eggs (up $2.69 a dozen from a year ago), ground beef (up 51 cents a pound) and orange juice (up 32 cents per 32 ounces).

And while the constant refrain from economists is that the rate of inflation is decelerating for wholesale prices, it remains very much on the ascent on the retail level. As the following chart shows, the year-on-year change in retail food prices across several major U.S. cities continues to accelerate with no relief in sight.

Against this backdrop, a growing number of shoppers across all socioeconomic strata are looking for ways to stretch their budgets. For many of them, that means spending less on premium food items (including organics) and turning to cheaper groceries and household goods at discount stores. That’s where this month’s purchase recommendation comes into play: Dollar Tree (DLTR) is well known to most Americans as its stores can be found in most towns and cities of any size across all 48 contiguous U.S. states, plus Canada.

The Virginia-based company has a large footprint in the dollar store and low-end retail market space, selling a large variety of commonly used household products at a primary price point of $1.25, with the highest-priced items costing no more than $7. (Alas, inflation has forced Dollar Tree to raise its previously advertised $1 price point to $1.25, but the vast majority of its items for sale cost no more than this.)

For those of you unfamiliar with Dollar Tree, each store provides a variety of products, including national, regional and private-label brands. Among its offerings are food and beverages, health and beauty, party and seasonal décor, housewares, cleaning supplies, candy, toys, gifts, craft supplies, automotive, electronics, pet supplies and books. Needless to say, it offers significant savings across several categories for price-conscious shoppers in the current environment.

Dollar Tree operates approximately 8,710 stores in the U.S. as of March 2025, although the number was over 16,000 prior to its recent divestment of Family Dollar, a retailer it acquired in 2014 (but which proved to be a poor fit). The greatest concentration of its stores is to be found in just two states: Texas (1,620) and Florida (1,110), with California and North Carolina also having a fair share at about 725 apiece.

Aside from benefiting from inflation, Dollar Tree also has a track record of significantly outperforming during recessions. Its stock price increased by around 64% during the 2008 credit crisis, thanks in large part to the increased demand for lower-priced groceries during that historic economic downturn as consumers sought out budget-friendly options. The stock also outperformed during the 2001-2002 bear market and recession and, more recently, during the Covid-era economic downturn. That said, with a growing number of analysts seeing a growing threat of recession at some point in the coming year, Dollar Tree is an ideal defensive position for anyone’s portfolio.

The company’s prospects, however, peaked along with its stock price in early 2022 as the Covid era gave way to a return to a semblance of normalcy. Concomitant with the return to normal, Dollar Tree suddenly faced increased competitive pressures from retailers like Walmart and certain grocery and convenience stores, which began lowering prices for key food and household items in an effort to win back lost customers from ultra-discount retailers like Dollar Tree.

Consequently, the stock fell in the face of the heightened competition, although Dollar Tree never really lost market share (indeed, it experienced growth in its consolidated net sales and gross profit during 2023 despite the stock price erosion that year). Last year, however, is when things really turned sour for the company, as the challenges it faced with Family Dollar came to the fore, while pressures from the aforementioned competitors drastically increased.

But 2024 is also the year when the firm took serious steps to turn the corner, beginning with a shakeup in management. It brought on board a new CEO, Michael Creedon (formerly of Advance Auto Parts, Tyco and ADT Security), who took the helm last December. Meanwhile, a new CFO, Stewart Glendinning (previously of Tyson Foods), commenced duties earlier this year.

Creedon’s turnaround strategy involves refocusing on the core Dollar Tree brand, improving profitability through targeted investments, expanding its multi-price assortment, implementing store upgrades and exploring new store openings, including conversions of former 99 Cents Only locations. (Dollar Tree acquired the 99 Cents Only leases for 170 of those stores last May, with locations in Arizona, California, Nevada and Texas; Dollar Tree plans to reopen these locations under its own brand.)

Another integral part of the company’s transformation is the introduction of what it calls Dollar Tree 3.0 stores. These new outlets are either new or converted from existing formats with the aim of diversifying the product range and enhancing the shopping experience by offering more choices at various price points. The company ended 2024 with approximately 2,900 of the 3.0 format stores with an ambitious plan of having 5,200 by the end of this year, including 2,000 new conversions and 300 new store openings.

Yet another major catalyst for the store’s ongoing turnaround efforts is the recent removal of the proverbial albatross around its neck by shedding the Family Dollar brand, a deal that several analysts have described as a “disastrous marriage.” By selling Family Dollar to Brigade Capital Management and Macellum Capital Management for around $1 billion (in March), Dollar Tree can now focus on its core brand while avoiding the overhang caused by the ill-timed merger.

Also worth mentioning is that earlier this month, CFO Glendinning bought $1.2 million in Dollar Tree shares. According to an SEC filing, Glendinning bought 4,000 shares of the common stock for 72.50 a share, and 13,000 shares for a weighted average price per share of 72.83, for a total of almost 50,000 shares of direct ownership after the transaction. Granted, insider buying isn’t always a guarantee the stock price is headed higher, but it’s nonetheless encouraging to know that upper management is expressing confidence in the company’s future prospects by taking such action.

But a big part of the story here is Dollar Tree’s returning competitive advantage in terms of retail pricing. Although it temporarily lost its edge to Walmart and other retailers during the setback it faced during 2023 to 2024, it has arguably regained the advantage since its prices are largely fixed at $1.25 (with some exceptions here and there).

Walmart, meanwhile, continues to see its prices for groceries and other staple items increase despite its best efforts at holding them down. Below is a chart that I’ve kept on a weekly basis since 2023 that’s based on an average of 15 staple goods listed on Walmart.com. (The items include mainly commonly purchased food and household items like eggs, coffee, cereal, rice, bread, laundry detergent and paper towels).

And on the tariff front, Dollar Tree has been, in the words of a Seeking Alpha news report, “aggressive in preparing for the tariff scenario by negotiating supplier cost concessions, adjusting sourcing, changing product specifications and dropping non-economical items,” all of which management expects will offset 90% of the first round of tariffs.

The stock has subsequently been outperforming virtually all of its industry peers in the last few weeks, based in part on the perceived insulation against the tariffs. And to that end, a Citi analyst recently wrote concerning Dollar Tree: “[The] higher tariff regime gives them further cover to expand price points from $1.25 to $1.50 - $1.75” across numerous key product categories.

All told, the Dollar Tree turnaround story is one that’s positioned to benefit from multiple tailwinds, including persistent inflation, the growing possibility of recession, fresh (but experienced) management with a solid growth strategy, plus what looks like a secular rotation among investors into defensive-oriented companies. As such, I consider the stock a beneficial addition to the portfolio.

Recommendations

Purchase Recommendation: Dollar Tree (DLTR)

500 Volvo Parkway
Chesapeake, VA 23320
Website: https://www.dollartree.com

Symbol: DLTR
Market Cap: $17.3 Billion
Category: Large-Cap
Business: Discount Retail
Revenues (2025e): $19 Billion
Earnings (2025e): $1.1 Billion
4/28/25 Price: 80.60
52-Week Range: 60.50-123.20
Dividend Yield: None
Price target: 120

Background:

DLTR has a 30-year history as a publicly traded company. It was a stable but uninspiring performer during the 1990s and 2000s, but the 2008 credit crisis really brought it into prominence. From that time onward, the stock’s upward trajectory began to accelerate before finally peaking in April 2022 at a share price of about 175.

From there, the stock fell out of favor as increased competition from other retailers began pressuring the company, as mentioned previously. The problems DLTR experienced with its Family Dollar investment also became exacerbated during the critical last three years, which ultimately led the firm to shed those holdings.

After hitting rock bottom at 60 last September, the stock began building out a solid base over the next several months. Last year’s bear market low was tested several times during the ensuing base-building process, most recently during the recent market-wide correction. But in every case, the 60 level held up against the incursions of the sellers and DLTR rebounded strongly each time.

Of paramount importance (from a technical perspective), the stock has just broken out from the upper boundary of its eight-month basing pattern. By closing above 80 last week, the stock has paved the way for the potential inauguration of a new intermediate-term uptrend. Of course, the general market environment remains shaky with no guarantees that volatility won’t rear its ugly head again, but I like what I’m seeing so far in DLTR’s price structure.

Aside from the company’s evident longer-term potential, the intermediate-term window for this potential turnaround is roughly six to 12 months. I’m pegging the upside target for this stock at 120 (up 50% from the current share price, if realized).

Analysis:

We’ve already discussed the favorable macroeconomic background for Dollar Tree, which is prompting consumers to actively seek out lower price points for both staple and discretionary items in their weekly shopping forays. That’s obviously a major selling point for the turnaround story. But several of the firm’s recent financial metrics also point to fundamental improvement, which provides further support for the return to sustained growth.

In its fiscal Q4 report (released in late March), the company disappointed on both the top and bottom lines, with total revenue of $5 billion down 42% year-on-year and earnings of $2.11 missing estimates by nine cents. But there were some green shoots within the quarter, including same-store net sales that increased 2%, driven by higher foot traffic and a 1.3% increase in the average ticket.

During the earnings call, the top brass noted that in the current economic landscape, it’s seeing value-seeking behavior across all customer groups, with customers (particularly middle-income shoppers, who make up about half its customer base) shifting towards alternatives that present greater value. At the same time, it’s seeing stronger demand from higher-income customers “who increasingly see Dollar Tree as a cost-effective source for an expanding range of products.”

Additionally, the company’s valuation still remains attractive despite the recent rally, with a decent forward EV/EBITDA multiple of around 10.5X. Meanwhile, with a forward P/E of around 15.5X, it compares even more favorably with its industry peers, with the added possibility of a higher re-rating on the successful execution of its multiple price point strategy.

The balance sheet, moreover, is “very healthy” (in the company’s own words), with analysts holding a generally positive outlook on it. As of February, the company has $1.3 billion of cash and cash equivalents, has no borrowings under its revolver and no commercial paper outstanding. Indeed, the firm is “sitting on a lot of cash that we will need to do something with,” as the CEO stated last month, which will likely come in the form of future share buybacks. (Dollar Tree currently has almost $1 billion remaining under its $2.5 billion share repurchase authorization.)

All in, I’m recommending that we add DLTR to the portfolio on the strength of its strategic initiatives likely having a successful outcome, plus the bullish macro tailwinds mentioned here. In view of recent positive developments, including high expectations for same-store sales growth this year and positive momentum in the core business, I see a good probability that my share price target will be realized by the stock at some point during the coming year. BUY

The chief analyst of the Cabot Turnaround Letter does not yet personally hold shares of every company on the Current Recommendations List, but that will change over time subject to the following guidelines. The chief analyst may purchase securities discussed in the “Purchase Recommendation” section or sell securities discussed in the “Sell Recommendation” section but not before the fourth day after the recommendation has been emailed to subscribers. However, the chief analyst may currently hold and may purchase or sell securities mentioned in other parts of the Cabot Turnaround Letter at any time.

Performance

The following tables show the performance of all our currently active recommendations, plus recently closed out recommendations.

Notes to ratings:
1. Based on market capitalization on the Recommendation date.

2. Total return includes price changes and dividends, with adjustments as necessary for stock splits and mergers.

* Indicates mid-month change in Recommendation rating. For Sells, price and returns are as-of the Sell date.

** BNT return includes spin-off value in BAM shares.

*** GE total return includes spin-off value of GEHC shares at January 6, 2023 closing price to reflect our sale.

**** Indicates a partial sell.

Most Recent Closed-Out Recommendations

*Includes dividends and prior profits

The next Cabot Turnaround Letter will be published on May 28, 2025.

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