Dollar Tree (DLTR)

By both methods, the value today (DCF $189 · Multiples $173) exceeds the market price ($118).

Today — fairly valued: at $118 trades ~31.8% below its value discounted to today (~$173); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — Infravalorado: the target price ($215) plus dividends yield above the required average return (10%) — the business compounds.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$107.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($118) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-4.7%/year) than we project (5.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$1.1 bn of owner earnings in year 5 (vs ~$1.7 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on Resultado operativo normalizado (EV/EBIT). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Year 0 is the TTM as of August 1, 2026 ($20.049bn of net sales from continuing operations) with margins normalized for the tariff refunds paid under the International Emergency Economic Powers Act. The company quantifies it from both sides: it expanded the second quarter's operating margin by 650 basis points — about $318M on the quarter's sales — and contributed $1.31 to diluted EPS of $2.70, or about $250M after tax. With that, the year-0 operating margin goes from 11.0% reported to 9.39%, net margin from 8.05% to 6.80%, and operating cash margin from 15.55% to 13.96%. Year 1 is anchored on fiscal 2026 guidance read by its two anchors and always without refunds. Revenue: $20.5 to $20.7 billion of continuing operations over the prior year's $19.396 billion, with the first half already realized at +7.1%, imply a second half of +5.4%; the rolling window ending August 2027 gives +5.5%. Earnings: the adjusted range of $7.70 to $8.05 includes approximately $0.60 of net benefit from refunds, or ~$7.28 without it, and the model puts year 1 at ~$7.27. The net margin path dips slightly in year 1 before recovering, and that is not conservatism but a guided fact: the company itself expects third-quarter EPS of $0.80 to $0.95 that includes a negative $0.50 impact from reinvestments tied to those same refunds. That reinvestment falls within the year-1 window and out of year 2's. The quality of the growth is the point to watch: second-quarter comparable sales grew 3.7% over a +6.5% prior-year gain, but average ticket contributed 3.3 of those points and traffic just 0.4. The conversion to the multi-price format — about 710 more stores in the quarter, ~6,600 in total — keeps lifting the ticket, and the margin expansion toward 10.3% by year 5 depends on it continuing to do so without a traffic cost. The share count path is a single one for all three scenarios and runs deliberately below what has been revealed: the diluted count fell from 207.8M to 190.9M in one year (−8.1%), supported by proceeds from the Family Dollar sale, and the model projects −3.5% annually because that source does not repeat. The company bought back 11.1 million shares for $1.2 billion year-to-date, $605M in the second quarter alone, and does not pay a dividend. The base case's exit multiple is 13.8 times normalized operating income, at the enterprise level (cash and debt in the bridge) and within the 12-17× specialty retail band, with a return on invested capital of ~26.7% normalized, well above the 10% bar. The adverse case stresses year 1 below the floor of guidance and gives back the recent margin improvement; the favorable case assumes the format conversion lifts both ticket and traffic at once.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $215 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $118, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $215 in 5 years and a required return of 4.5% annually, the maximum to pay today is $173. Against the current market price ($118), the margin of safety is 31.8% (trades below the maximum → there is margin) and the total return at that price would be 12.8% annually.

• Valuation metric. Valued at the enterprise level on EV/EBIT over normalized operating income, with cash and debt in the bridge, consistent with a business without segments of a different nature.
• Entry multiple. The record trades today at 13× on TTM earnings.
• Exit multiple. The base-case exit multiple (13.8×) falls within the specialty retail band (12×-17×), without punitive compression or expansion.
• Expected return. The base case projects +13% annually over 5 years, driven by earnings growth and share count compression from buybacks.
• Margin of safety. It trades at a real discount to value, though short of the required margin of safety.
• Share buybacks. The recent pace of buybacks (~US$1.6-2bn/year) materially reduces the share count, adding to the per-share return.
• Sensitivity to the multiple. With a moderate-growth business, much of the return depends on the market sustaining the current multiple, not on further expansion.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (116%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Return on capital. Return on invested capital runs around 26.7%, comfortably above the 10% bar.
• Cash conversion. TTM operating cash flow (~US$2,456M) comfortably exceeds TTM net income (~US$1,286M).
• Capex vs. depreciation. TTM capex (~US$1,138M) exceeds depreciation (~US$648M), reflecting growth investment, not just maintenance.
• Stock-based compensation. SBC is marginal (0.3% of TTM revenue, 4.8% of FCF), well below the method's materiality threshold.
• Balance sheet. No borrowings under the revolving credit facility or commercial paper outstanding at the end of the first quarter of FY2026.
• Margins. TTM operating margin (~8.8%) has been recovering following the sale of Family Dollar, aided by the transition services agreement.
• Earnings quality. FY2024-FY2025 results were distorted by impairments and the loss on the sale of Family Dollar; continuing earnings post-sale are the clean base.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Dollar Tree's revenue breaks down as store count × sales per store, and in turn sales per store = traffic × average ticket. Traffic has been weak (negative in the first quarter of FY2026) while average ticket has held up strong, driven by conversion to the multi-price format (~5,900 stores), which broadens the assortment beyond the historical fixed price point of US$1.25. Net store openings (~400/year) are the other driver, independent of comparable sales.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (01-ago-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Comparable growth. Comparable sales +5.3% in FY2025 (traffic +1.0%, ticket +4.3%), moderating to +3.5% in the first quarter of FY2026.
• New store openings. ~400 net openings planned for FY2026 (113 in the first quarter) against a base of ~9,300 stores.
• Company guidance. FY2026 revenue guidance (US$20.5-20.7bn) and adjusted EPS guidance (US$6.70-7.10) anchor the year 1 projection.
• Traffic vs. ticket. Recent growth relies more on average ticket than on traffic, which was negative in the first quarter of FY2026 (−1.0%).
• Multi-price format. ~5,900 stores already converted to the multi-price format, broadening the assortment beyond the historical fixed price point.
• Comparison against the trajectory. Consolidated historical growth is noisy from the Family Dollar sale; this valuation's base uses current guidance, not the historical average.
• Penetration ceiling. In a sector with no barriers to entry and broad competition, sustained physical store growth has a natural medium-term ceiling.

• Business model. Discount retail with a historically fixed price point (US$1.25), now complemented by a multi-price format; ~9,300 stores in the US and Canada.
• Demand recurrence. Everyday consumables and low-ticket items generate recurring traffic, with a seasonal component (Christmas, Halloween) adding variety.
• Product differentiation. Closeout merchandise and private label create a sense of discovery, but the assortment is largely substitutable by other discount retailers.
• Purchasing and distribution scale. 16 distribution centers in the US supply ~90% of inventory; no supplier exceeds 10% of total purchases.
• Barriers to entry. The company itself acknowledges that the sector has no significant economic barriers to entry; it competes with dollar stores, big-box retailers, and e-commerce.
• Demand cyclicality. A defensive, basic-consumption discount business, with relative benefit in constrained-spending environments, though the mix has shifted toward lower-margin consumables.
• Geographic exposure. Practically the entire business is in the US and Canada (48 states and seven provinces), with no material currency exposure.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net debt / EBITDA 0.7x
• ✓Interest coverage (EBIT / interest)25.6x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 116% of ROIC
• ✓Value creation (ROIC − 10% bar)+17pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 1.6x
• ✓Float / working capitalFrees up cash $0.1 bn (float / negative WC)
• ✓Dilution (SBC % of revenue + shares)SBC 0.3% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Long-term debt of ~US$2,933M against equity of ~US$3,507M; no short-term debt or commercial paper outstanding.
• Liquidity. ~US$1,007M of cash and equivalents at the end of the first quarter of FY2026, plus an undrawn revolving credit facility.
• Cash generation. TTM operating cash flow of ~US$2,456M comfortably covers TTM capex of ~US$1,138M.
• Interest coverage. TTM operating income (~US$1,742M) comfortably covers interest expense on long-term debt.
• Lease commitments. Like any physical store chain, DLTR carries significant operating lease commitments across ~9,300 locations, not reflected in financial debt.
• Event concentration. Recent one-time costs (inventory impairment, loss on the sale of Family Dollar) have already been recognized; the current balance sheet reflects the clean continuing operation.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• CEO. Mike Creedon became CEO following the sale of Family Dollar, leading the plan for assortment, cost management, and store growth.
• Capital allocation. No dividend; cash is returned to shareholders via buybacks (US$1.6bn in FY2025, US$595M in the first quarter of FY2026).
• Insider ownership. Directors and executives as a group hold ~7.1% of shares outstanding; there is no controlling founder shareholder.
• Activist investor. Mantle Ridge LP, with board representation, owns ~7.0% of shares, adding external pressure on execution.
• Organizational turnover. The company itself acknowledges recent turnover in senior positions and the risk of losing institutional knowledge following the Family Dollar divestiture.

• GAAP history distorted by impairments and by the loss on the sale of Family Dollar in FY2024-FY2025, which weighed on multiples even though the continuing business is profitable and cash-generative
• Recent restructuring (divestiture completed in Jul-2025) that leaves investors still adjusting models for a standalone company different from the one that traded before
• Tariff uncertainty (IEEPA tariffs, Supreme Court ruling Feb-2026) that generated short-term noise over a fixed-price-point business, without changing the medium-term economics

It trades at a real discount to value, though short of the required margin of safety. The combination of a noisy accounting history from Family Dollar and a simple, profitable, cash-generative continuing business is the kind of perception-reality gap the method looks for; the real risk (tariffs, traffic) is priced into the adverse scenario, not the base case.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at +4%/year (+20% total): the margin of safety protects the downside. The bull (+21%/year, +164% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Tariffs and the fixed price point. Most products sell at US$1.25 and 85% of the assortment at US$2.00 or less, amid a volatile tariff environment that generated mitigation costs with no certainty of reimbursement.
• Supply chain and imports. ~40% of retail purchase value is directly imported, with China as the majority source; logistical or geopolitical disruptions can affect availability and margins.
• Consumer spending. Recent shift in spending toward lower-margin consumables, attributed to inflation, higher rates, and changes in government assistance programs.
• Inventory shrink. The company notes that inventory shrink has recently reached historically high rates, with higher mitigation cost.
• Post-Family Dollar execution. The strategic plan requires consistent execution across a large network, amid recent turnover in senior positions.
• Intense competition. A sector with no barriers to entry, facing competitors with greater scale and more advanced digital capabilities (big-box retailers, e-commerce).

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A narrow moat and ROIC 27% above the 10% bar, but the margin is limited (+32%) → excellent business at a fair price.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 5% at a multiple/growth of 2.6 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 8% (EBIT/EV) + ROIC 27% → brushes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -5% vs our 5%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor +4%/yr, bull-scenario ceiling +21%/yr over 5y → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A narrow moat, stable; sources: cost advantage, efficient scale, intangibles → partially passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -5%, within what we project (5%) — the story squares with the numbers.