Dollar Tree Stock Is Soaring. Is This the Time to Buy?

Shares of Dollar Tree (NASDAQ: DLTR) are up more than 60% since mid-March and are fast approaching a 52-week high. As the company prepares to divest itself from its Family Dollar brand and embraces a new pricing model, Dollar Tree appears capable of thriving even as many retailers struggle with tariffs and economic uncertainty.

There's a lot happening with Dollar Tree -- management changes, the Family Dollar mess, and its 3.0 pricing model. But all of it makes Dollar Tree a compelling stock that appears capable of producing oversized gains for investors.

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How is Dollar Tree threading the needle? And more importantly, is there still time for investors to join the rally?

Image source: Getty Images.

Family Dollar didn't work out

Dollar Tree excels by providing low-cost household goods, food, cleaning supplies, and beauty products. Most items are priced at $1.25 (it used to be just a dollar, but the company began raising prices in late 2021 to offer a wider selection).

Shares of Dollar Tree stock topped the $170 mark as recently as 2022, but began a long fall in 2024, stretching into the first quarter of 2025. Dollar Tree CEO Rick Dreiling stepped down, citing his health, and was replaced by Michael Creedon, who was formerly chief operating officer. Meanwhile, Family Dollar, which it purchased for $8.5 billion in 2015, continued to drag on the business.

Dollar Tree finally shuttered several hundred Family Dollar stores in recent years, and then in 2024 announced it was exploring divesting itself of the brand. This March, Dollar Tree announced it had a buyer -- a partnership of hedge fund Brigade Capital Management and investment firm Macellum Capital Management, which are buying the stores for just over $1 billion. The deal is expected to close in this quarter.

Not surprisingly, Dollar Tree stock started to recover soon after the announcement. Shares are up 61% since mid-March and 33% on a year-to-date basis. Dollar Tree stock has a long way to go from its 2022 ceiling, but it's only about 10% off its 52-week-high.

Writing a new chapter

The most interesting thing about Dollar Tree is its willingness to walk away from what made it famous. The company is embracing its 3.0 multi-price store format that includes wider store aisles, better signage, and a tiered price structure, where products range up to $7. Dollar Tree began switching stores over in 2024 and now has about 3,400 in the new format. Management hopes to have half of the company's stores working in the 3.0 format by the end of 2025.

The format means that Dollar Tree can expand its offerings and draw in additional customers at higher price points. Same-store sales in the first quarter of fiscal 2025 (ending May 3) showed a 5.4% gain, which management attributed to higher prices and greater traffic.

Gross profit increased to $1.6 billion, thanks to lower freight and occupancy costs. Adjusted earnings per share came in at $1.26. Dollar Tree opened 148 stores during the quarter and now has more than 9,000 locations, with plans to open a total of 400 stores this year.

Management reiterated its full-year revenue guidance of $18.5 billion to $19.1 billion, while raising its guidance for earnings. The company is now expecting full-year EPS of $5.15 to $5.65, up from a range of $5 to $5.50.

What's ahead for Dollar Tree?

Even with higher-priced items, Dollar Tree is a discount retailer, and when people feel like their pocketbooks are getting squeezed, they are much more likely to look for consumer staples in a store that specializes in low prices rather than luxury items. So that helps Dollar Tree's outlook.

But there's also the continued threat of tariffs, although President Donald Trump is developing the practice of announcing huge punitive tariffs as a negotiating ploy and then immediately rolling them back. Tariffs are a threat to any discount retailer, but perhaps even more to a store that sells many of its products for $1.25. If the tariffs come roaring back, Dollar Tree will need to make some changes either in pricing, the types of goods it offers, or will have to work some price relief with its suppliers.

So is Dollar Tree a buy?

Dollar Tree today is a pretty cheap stock -- the price-to-earnings ratio of 19.7 and the forward P/E of 18.3 are both attractive, as is its low price-to-sales ratio of 1.2 times.

Now that the company is ridding itself of the Family Dollar fiasco and appealing to more consumers with its 3.0 multi-price format, Dollar Tree stock appears capable of setting a new 52-week high this summer. It's too early to say if it gets back to its 2022 heyday, but Dollar Tree is certainly on the right track.

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Patrick Sanders has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.