Dollar Tree (NASDAQ: DLTR) just basked in the sun for the first time in a long time. On Mar. 27, shares of Dollar Tree rose by over 11%. This marks the first day since late May 2022 that the stock was up by over 10%.
This big day comes after the retail company agreed to sell its deeply struggling Family Dollar segment for $1 billion. The company is losing billions on this sale after originally buying Family Dollar for $9 billion.
So why are markets responding positively despite the company taking a loss on the sale? How is Dollar Tree positioned for the future—and could this present a buying opportunity?
Family Dollar: Dollar Tree’s 10-Year Ordeal
To understand why things could improve for Dollar Tree going forward, it is important to understand what went wrong with the Family Dollar investment. Dollar Tree acquired Family Dollar, another dollar store chain, on Jul. 6, 2015, for $9 billion.
Dollar Tree originally thought that the acquisition of Family Dollar would allow for several benefits. The company sought to unlock millions in cost synergies through the company’s now larger scale. It would also help the company attract more low-income customers and diversify its customer base geographically.
Ultimately, the deal aimed to speed up growth, increase operating margin, and improve free cash flow. In fiscal 2014, the year prior to the acquisition, Dollar Tree’s adjusted operating margin was over 12%. Since acquiring Family Dollar, the annual adjusted operating margin has never even come close to that level. In 2024, the figure hit the lowest level in that period of just over 5%.
Family Dollar's sales growth has actually slightly outpaced Dollar Tree's sales growth over the period, but its profitability has been drastically lower. In Q3 2024, Dollar Tree had an adjusted operating margin of nearly 11%. The figure was essentially zero for Family Dollar. The return of Dollar Tree stock from the acquisition date to the Mar. 26 close shows how poorly the investment paid off. In that just under 10-year period, Dollar Tree stock provided an abysmal total return of -14%.
Why Markets Reacted Positively to the Bargain-Bin Sale of Family Dollar
Financially, it’s easy to see how Family Dollar has massively brought down the potential of the overall business. The company is now selling Family Dollar to Brigade Capital Management and Macellum Capital Management for $1 billion. Despite this big loss versus the original investment, sometimes it’s simply better to accept defeat.
Shares are up big after the deal because Dollar Tree now has the opportunity to unlock value that Family Dollar’s struggles kept buried. In Dollar Tree’s case, it makes more sense to move on rather than try to salvage an investment that seems broken beyond repair.
Markets are now reacting positively as the company is finally turning the page to focus on maximizing the success of its core Dollar Tree business. Dollar Tree is a much higher-margin business and has grown significantly faster than Family Dollar in recent years. Since fiscal 2021, Dollar Tree's annual net sales are up 27%, versus just 7% for Family Dollar.
Is DLTR a Buy Now?
The decision to get rid of Family Dollar is a good one. Dollar Tree and Family Dollar have different business models, making it hard to run either store to its full potential. Dollar Tree faces increasingly tough competition from retailers like Walmart (NYSE: WMT) and Costco Wholesale (NASDAQ: COST).
[content-module:Forecast|NASDAQ: DLTR]To realistically compete, it needs to narrow its focus. Still, the company is far from out of the woods. Dollar Tree expects the process of untangling from Family Dollar to last into 2026, meaning the company will likely still face distractions.
Additionally, the firm faces significant exposure to tariff risks due to importing many of its goods. The company says it has mitigated around 90% of the cost from Trump's first round of tariffs. The next wave could add additional costs of $20 million per month before mitigation efforts. However, this would still represent less than 1% of the company’s expected revenue in fiscal 2025.
Overall, Dollar Tree looks to have a moderate amount of upside potential in 2025. However, this potential could increase if management proves it can make the right decisions to optimize Dollar Tree. MarketBeat tracked three analyst price target updates after the Family Dollar announcement. Their average implies an upside in shares of 6% versus the Mar. 27 closing price.
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