Dollar Tree trades at $101.45 per share and has stayed right on track with the overall market, gaining 7.9% over the last six months. At the same time, the S&P 500 has returned 5.1%.
Is now the time to buy Dollar Tree, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Dollar Tree Not Exciting?
We don't have much confidence in Dollar Tree. Here are three reasons why DLTR doesn't excite us and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last three years, Dollar Tree’s demand was weak and its revenue declined by 11.8% per year. This wasn’t a great result and is a sign of lacking business quality.
2. Lack of New Stores, a Headwind for Revenue
A retailer’s store count influences how much it can sell and how quickly revenue can grow.
Over the last two years, Dollar Tree has kept its store count flat while other consumer retail businesses have opted for growth.
When a retailer keeps its store footprint steady, it usually means demand is stable and it’s focusing on operational efficiency to increase profitability.
Note that Dollar Tree reports its store count intermittently, so some data points are missing in the chart below.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Dollar Tree historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+.
Final Judgment
Dollar Tree’s business quality ultimately falls short of our standards. That said, the stock currently trades at 15× forward P/E (or $101.45 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now. We’d recommend looking at one of our top software and edge computing picks.
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