DeepValue Report Exposes Dollar Tree's Valuation Risks Amid Bullish Narrative

What happened

Dollar Tree has divested its Family Dollar banner, streamlining operations and driving revenue growth to an estimated $19.35–$19.45 billion for 2025 with improving gross margins. However, the DeepValue report reveals that operating margins remain constrained near 7% due to persistent SG&A inflation from wages, tariffs, and supply-chain investments, offsetting pricing gains. The stock has rallied 72.8% over the past year to $132.38, embedding market optimism about a 12–15% EPS CAGR through FY26-28, but SEC filings show temporary transition-services income and stranded costs overstate the true earnings base. Despite Seeking Alpha's claim of undervaluation, underlying data indicates traffic turned negative in Q3 FY25, and heavy capex for modernization continues to depress profitability. The current valuation at 16x EV/EBITDA reflects high expectations for smooth execution, which faces significant risks from cost pressures and potential consumer pushback on higher price points.

Implication

The market's bullish narrative overlooks critical flaws: Q3 FY25 saw traffic decline by 0.3% despite ticket growth, signaling sensitivity to multi-price formats that could erode core low-income traffic. Persistent SG&A at 29.2% of sales, up 140 bps YoY, compresses operating margins even with gross margin expansion, undermining the 12–15% EPS CAGR guidance. If comps decelerate below 3% or SG&A fails to leverage, EPS could miss targets, triggering multiple compression from the current 16x EV/EBITDA and driving the stock toward the bear case value of $105. Management's high-teens EPS growth forecast for FY26 is ambitious given ongoing tariff mitigation costs and capital investments that may not yield near-term benefits. Therefore, aligning with the DeepValue report's 'POTENTIAL SELL' rating, investors should avoid new positions at current levels and seek clearer evidence of operational improvement or a lower entry price near $110.

Thesis delta

The Seeking Alpha article argues Dollar Tree is undervalued post-Family Dollar, but the DeepValue analysis reinforces that the stock already discounts management's aggressive growth plan despite evidence of stubborn cost inflation and overstatement of earnings. Our thesis remains unchanged: at $132, the risk-reward is unfavorable with high execution risk, and no shift in the 'POTENTIAL SELL' call is justified based on this new information.