Dollar Tree's Q1 Earnings: Navigating Tariffs and Fueling Growth – A Buy at These Levels?

Dollar Tree (DLTR) reported its Q1 2025 earnings this week, revealing a challenging quarter marked by a 40.5% revenue drop to $4.5 billion and a 16.1% decline in EPS to $1.20. While these figures underscore near-term headwinds, the company's strategic moves—tariff mitigation, store expansion, and operational discipline—suggest investors should look beyond the headline numbers. Here's why this discount retailer could be primed for a rebound, making it a compelling buy despite the turbulence.

Revenue Decline, But Strategic Progress

The revenue slump stems largely from transitional costs tied to the sale of its Family Dollar division, which is expected to close in June. Shared service costs are estimated to drag EPS by 30–35 cents in the first half of 2025, but Transition Services Agreement (TSA) reimbursements will offset these starting in the second half. Crucially, Dollar Tree's core Dollar Tree segment grew same-store sales by 2% in Q1, driven by a 1.3% ticket price increase and improved customer traffic. The rollout of its Dollar Tree 3.0 store format—now in 2,900 locations—is also boosting sales and margins, reinforcing its value proposition.

Tariff Mitigation: A Proven Playbook

Dollar Tree's ability to navigate tariffs has been a key focus. The company has renegotiated supplier contracts to offset 90% of tariff impacts, diversified sourcing to Vietnam, Thailand, and Mexico, and cautiously raised prices on select items. Management emphasized that its multi-price format (now including $3 and $5 items) allows flexibility to maintain affordability while absorbing costs. Analysts note that these efforts position Dollar Tree better than peers like Dollar General (DGSE), which faces higher tariff exposure due to its deeper reliance on Chinese imports.

Store Growth and Financial Flexibility

With 9,000 stores in North America (up from 8,520 a year ago), Dollar Tree continues to expand its footprint. The sale of Family Dollar will unlock $804 million in net proceeds and a $350 million tax benefit, freeing capital to invest in high-margin Dollar Tree stores and strategic initiatives. The company's $952 million remaining under its $2.5 billion buyback program signals confidence in its valuation.

Valuation: A Discounted Opportunity

Dollar Tree's forward P/E of 16.47x sits well below its five-year average of 22.6x and the industry average of 19.3x. KeyBanc's upward revision of 2025 EPS to $4.65 reflects optimism in Q1's performance and execution. Meanwhile, the stock's 230% surge over three months—despite broader retail declines—hints at investor optimism in its long-term story.

Technical Catalysts and Risk Factors

• Golden Cross Alert: The stock's 50-day moving average recently crossed above its 200-day line, a technical bullish signal.
• Tariff Uncertainty: Further U.S. tariff hikes could strain margins, though Dollar Tree's contingency plans mitigate risks.
• Execution Risks: The Family Dollar sale's timing and TSA reimbursements must align to avoid prolonged EPS drags.

Investment Thesis

Dollar Tree's valuation discounts its growth trajectory and tariff resilience. A potential earnings beat in Q2 or positive updates on tariff negotiations could catalyze a rebound. With a low P/E, robust store growth, and a war chest from the Family Dollar sale, DLTR offers asymmetric upside.

Recommendation: Buy Dollar Tree on dips below $120. The near-term pain is priced in, and the long-term playbook is working.

In a sector where low-cost retailers battle inflation and tariffs, Dollar Tree's agility in pricing, sourcing, and expansion makes it a standout. Investors who focus on its fundamentals over short-term noise could reap rewards as the company capitalizes on its strategic moves.