Entering text into the input field will update the search result below

Dollar Tree: Highly Undervalued Discount Retail Opportunity

GDC Capital profile picture
GDC Capital


  • Despite the ~60% rally since June, Dollar Tree remains an attractive brick & mortar retail play that is largely insulated from online competition.
  • The Dollar Tree banner leads the industry in operating margins, and the Family Dollar turnaround is picking up steam, which will drive higher ROIC for the enterprise.
  • Dollar Tree has grown FCF per share at a 20% CAGR over the last decade and should continue to generate strong FCF, pay down debt, and will initiate share repurchases.
  • Valuation is attractive at 10.6x consensus EBITDA and I see strong upside from here.

Editor's note: Seeking Alpha is proud to welcome GDC Capital as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to the SA PRO archive. Click here to find out more »

Dollar Tree (NASDAQ:DLTR) is one of the leading discount retailers in the U.S. and Canada and the largest by store count, with close to 15,000 stores. In 2015, Dollar Tree completed the transformational acquisition of Family Dollar. While the improvement of Family Dollar has taken longer than many expected, it appears that things are moving in the right direction.

Industry Overview

Participants in the dollar store industry generally compete on price and convenience. Price competition is more important (and more fierce) for banners like Family Dollar and Dollar General (DG), as they sell more consumable products directly comparable to grocery stores or big box stores like Wal-Mart (WMT). Given that their target customer is low income and constantly under financial pressure, pricing on key items can drive traffic. In addition to price, the value proposition of shopping at a dollar store as opposed to a Wal-Mart is based on convenience, as it's much less of a hassle to get in and out of a 7,200 square foot Family Dollar vs. a 177,000 square foot Supercenter. And in many rural locations, the local Family Dollar or Dollar General may be the only close option.

Market ShareSource: Company reports, Author estimates, IBISWorld

According to Dollar General, their stores are priced on average 40% lower than drugstores, 20% lower than grocery, and at parity with mass retailers like Wal-Mart. Previous sell-side pricing surveys have indicated that Family Dollar is priced reasonably close with Dollar General, but competitive pricing often varies by region.

Given the low average

This article was written by

GDC Capital profile picture
Long/short equity analyst with buy-side and sell-side experience. I have a generalist focus, but have spent most of my professional career analyzing consumer companies. CFA Charterholder.

Analyst’s Disclosure: I am/we are long DLTR, DG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (16)

CashFlow13 profile picture
I just don't see DLTR opening that many stores per year over the next decade.
Dollar tree is spending 900 million in cap ex in 2018. 650 total stores. 900 million in cap ex and 1.2 billion in profits on a 20 billion cap.
Started a new position today. Great article!
Looks like it just got more discounted heheh
07 Mar. 2018
Doubling down today. Valuation seems solid here.
Michael Rogus profile picture
Welcome to the jungle. Nice first article. Bit of bad luck, but you laid out the case very well. DLTR will certainly recover - eventually.
Ouch earnings report like WMT. A lot of noise but no momentum for now. Think I will hold off buying until there is some more progress on the transition.
Not today for filthy riches
Very nice, multi-faceted analysis.
I especially liked your survey of past earnings reports to map out the cost concerns.
I have never seen this done befoe - pretty original.
good analysis
I got over 2.2 eps this quarter. Maybe more with the impairment recovery. Don’t know if it will drive the stock price in the short term.
I still don’t know why no one wants to talk about the 35 million recovery charge
Dollar tree will make a lot shareholders filthy rich. And I’ll be one of them
Xenogears23 profile picture
thanks for such a detailed article
Love the Dollar Tree for great values such as their soy milk, allergy meds, frozen fruit, dish detergent, but don't really agree that the stock is "highly undervalued." I don't see that in the financial metrics personally. Good company to own long term, however. There are very few brick and mortar plays worth considering right now, but DLTR; ROST; TJX; DG all likely have lasting power and are decent hedges against an economic downturn.
Those discount retail studs are not hedges. They perform in any climate. Look up their yearly returns lol. DG has never had a negative stock year.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.