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Is Dollar Tree Stock a Buy?

Dollar Tree (NASDAQ: DLTR) has had its share of issues over the last several years. However, investors have clearly warmed up to the company, and the stock has gained 52% over the past year, besting the S&P 500's 48% increase.

The key question is whether the company has truly turned the corner, leaving a lot of upside potential for long-term stock investors, or if Dollar Tree benefited from extenuating circumstances. That's why it's important to look closer at its business.

Image source: Getty Images.

Turning it around

Dollar Tree has two chains: its namesake stores and Family Dollar. The Dollar Tree brand sells most items for $1 or less. Meanwhile, Family Dollar, which the company acquired in 2015, has price points ranging from $1 to $10.

Management is experimenting with higher prices at the Dollar Tree chain, though. Last year, it tested offerings at $3 and $5 under its Dollar Tree Plus concept. Based on what the company learned, it expanded the testing to 500 stores (out of about 7,800 total) this year and started offering combination stores.

Last year, adjusted same-store sales (also called comps) increased by 6%. While Dollar Tree's comps rose by 2.2%, its struggling Family Dollar franchise turned things around with a 10.5% increase.

People spending more money drove the comps increase, even as fewer people frequented the stores. Of course, with the pandemic restricting people's activity, 2020 was anything but a typical year.

Can it last?

Management implemented several initiatives designed to improve Family Dollar's sales, including changing the offerings and devoting more space to frozen goods.

On the bright side, management notes that renovated stores have produced 10% higher sales. Still, it also stated that COVID-19 helped boost sales at the chain, making it difficult to judge the success of its plan right now.

A competitive marketplace

Aside from other exclusive discount stores, like Dollar General, Dollar Tree competes with a bevy of major retailers. This includes Walmart, which has perfected its low-price offerings, and other retailers that have a section devoted to $1 merchandise.

Last year, the Family Dollar unit entered into an arrangement with delivery service Instacart that allows online shopping. A couple of months ago, management expanded this to over 6,000 stores out of the nearly 7,900 total. An increased omnichannel presence is important to remain competitive with the likes of Walmart, but these large chains have broad offerings, making it a tough battle.

So, with all credit due to management for launching initiatives to improve the chain's standing, this is still a very competitive marketplace. Before committing your hard-earned money, it is better to wait and see how the initiatives pan out as people keep receiving vaccinations and the retail landscape begins to return to some semblance of normalcy.

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