Dollar Tree's Q1 Results: A Temporary Setback or a Strategic Turning Point?

Dollar Tree (DLTR) delivered mixed Q1 2025 results, with revenue growth outpacing expectations but falling short of estimates and a notable EPS miss. While the immediate headlines highlight a decline in profitability, the story is deeper: a transitional period driven by the Family Dollar sale, strategic store expansions, and margin pressures that could resolve in the coming quarters. For investors, the question is whether DLTR's fundamentals remain robust enough to justify a long-term play at current valuations.

Store Expansion: A Steady Anchor in Turbulent Waters

Dollar Tree's Q1 store count held steady at 8,881 locations, reflecting a strategic balance between openings (33 new stores) and closures (24). The company's multi-price format stores (Dollar Tree 3.0) now total 2,900 units, a key driver of higher sales per square foot and foot traffic. Selling square footage grew 7.3% year-over-year, signaling continued investment in its core business.

However, the Family Dollar segment—now classified as discontinued operations—saw its store count decline by 100 in Q1, aligning with plans to divest the underperforming business. This pivot underscores Dollar Tree's focus on its profitable Dollar Tree brand, which now accounts for nearly 50% of its total store footprint.

Margin Pressures: A Transitional Cost Drag

The EPS miss of $0.12 in Q1 was largely due to elevated SG&A expenses, which rose to 27% of revenue in Q4 2024. This reflects the full burden of shared service costs supporting Family Dollar, which will persist through 2025. Analysts estimate this drag will reduce full-year EPS by $0.30–0.35, concentrated in the first half. Once the Family Dollar sale closes in June, reimbursements under the Transition Services Agreement (TSA) will offset these costs, potentially unlocking margin expansion in H2 2025.

The company's adjusted SG&A rate (excluding one-time costs) rose to 25.1% of revenue, suggesting underlying operational efficiency challenges. Yet, the $1.3 billion cash balance and $952 million remaining in its buyback authorization provide liquidity to weather this transition.

Valuation: A Discounted Opportunity or Overpriced Risk?

DLTR trades at a forward P/E of 16.47x, below its five-year average and the retail-discount sector median. Analysts project a 17.6% EPS growth to $8.14 in fiscal 2025, assuming a post-sale rebound. However, skeptics argue that sales per square foot for Dollar Tree dipped to $232 from $234 in 2024, raising concerns about pricing power and consumer demand.

The Bull Case: Why Now Could Be the Bottom

1. Post-Sale Turnaround: The Family Dollar sale, expected to close by mid-2025, will eliminate shared service costs and unlock $804 million in net proceeds. This capital could be deployed to reduce debt, boost buybacks, or accelerate Dollar Tree 3.0 expansions.
2. Operational Leverage: The TSA reimbursements in H2 2025 could drop SG&A to ~24% of revenue, aligning with pre-Family Dollar levels. Combined with 3%–5% same-store sales growth, this could catalyze EPS recovery.
3. Valuation Safety Net: At current levels, DLTR offers a margin of safety. Even if EPS growth slows to 10%, the stock remains attractively priced compared to its growth trajectory and cash flow generation.

Bear Risks: Margin Pressures and Consumer Sentiment

• Inflation/Supply Chain: Rising freight costs and tariffs remain a wildcard, as seen in Q4's $25 million duty accrual.
• Consumer Spending: A slowdown in discretionary purchases could further pressure sales per square foot.
• Execution: The success of Dollar Tree's multi-price format depends on converting Family Dollar stores effectively and maintaining traffic.

Conclusion: A Buy for the Long Game

Dollar Tree's Q1 results are a snapshot of transition, not failure. The company is strategically shedding underperforming assets, focusing on its profitable core, and positioning for post-sale efficiency gains. While near-term EPS will remain pressured, the $0.30–0.35 drag is temporary, and a rebound in H2 2025 is plausible. At a P/E of 16x and with $2.5 billion buyback capacity, DLTR offers a compelling risk-reward.

Action Item: Consider a gradual position in DLTR ahead of the Family Dollar sale closure. Monitor Q2 results for signs of margin stabilization and track TSA reimbursements as key catalysts.

The path forward is clear: Dollar Tree's store expansion and valuation discounts make it a compelling play—if investors can stomach the near-term pain.