Is Dollar Tree a Buy, Sell, or Hold in 2025?

Dollar Tree (NASDAQ: DLTR) is making a lot of cents for its investors. The discount retailer is emerging as a compelling comeback story following a disappointing period in 2023 and 2024. Steady demand from bargain-hunting shoppers, alongside ongoing operating efficiency efforts, has driven an improved company outlook.

Not surprisingly, the stock is up an impressive 30% year to date.

The headline numbers are encouraging, but are they enough to sustain the stock price rally? More importantly, what should an investor do at this point? Let's examine whether shares of Dollar Tree are a buy, sell, or hold now.

Image source: Getty Images.

The case to buy or hold Dollar Tree stock

Dollar Tree stands out with a simple, value-driven business model in a crowded retail landscape where consumers have countless options. The company offers a large assortment of products, including household essentials, snacks, and seasonal items, nearly all priced at $1.25.

This focus on low-cost convenience has attracted a loyal customer base, with the company now boasting more than 9,000 stores in the United States and Canada.

However, its Family Dollar brand had been struggling with a broader merchandising approach featuring apparel and higher-priced items, dragging down companywide sales and profitability in recent years. In response, Dollar Tree announced the sale of its Family Dollar chain for $1 billion to a private equity group, with the deal expected to close in the coming months.

The transaction comes at an ideal time amid uncertainties from proposed U.S. trade policy changes, providing the company with a significant cash infusion while streamlining core operations. Dollar Tree estimates that tariffs on imported goods from countries like China and Mexico could add $20 million in monthly costs. Fortunately, solid sales trends are helping mitigate short-term earnings pressure.

In the first quarter (ended March 31), net revenue climbed 11.6% year over year, driven by a 5.4% increase in comparable sales and 148 new store openings. Management highlighted strong performance in discretionary merchandise categories, which saw a 4.6% annual sales increase, supporting operating margins and delivering adjusted earnings per share (EPS) of $1.26, up 2.4% from the prior year.

Dollar Tree expects operating momentum to continue, guiding for full-year comparable sales growth of 3% to 5%. The EPS target of $5.15 to $5.65, at the midpoint, is slightly below 2024's $5.51 due to tariff costs and Family Dollar sale expenses, yet still reflects a sustainable foundation, addressing Wall Street concerns of deeper deterioration. Investors confident that Dollar Tree is just beginning its path toward more consistent, profitable growth have compelling reasons to buy or hold the stock for the long term.

The stock's valuation also looks attractive, trading at a forward price-to-earnings (P/E) ratio of 18 -- well below the average of closer to 25 from 2020 through 2023 under more normalized conditions. By this measure, Dollar Tree stock could still be undervalued, even after its latest price surge.

The case to sell Dollar Tree stock

Selling off the unprofitable Family Dollar brand appears to have been a necessary strategic step for Dollar Tree, but the long-term success of the company's restructured profile remains far from certain.

Dollar Tree faces intense competition in the discount retail space from larger rivals such as Dollar General and Walmart, all vying to capture increasing wallet share from budget-conscious consumers. Without a major digital strategy, Dollar Tree could fall further behind as e-commerce plays an increasingly important role in the convenience segment.

Economic uncertainties also loom large. Should the trade war escalate, or U.S. unemployment rise sharply, Dollar Tree would face major headwinds against sales estimates, forcing a reset of expectations and possibly driving down the stock price.

Investors who believe Dollar Tree will gradually lose market share and struggle to expand earnings may consider selling the stock or avoiding it for now.

My verdict: I'm cautiously bullish

Dollar Tree as an investment isn't perfect, but I'm optimistic the company has planted the roots for a brighter future. The business should benefit from further evidence of comparable-sales growth over the next few quarters, with the bullish case centered on the potential for earnings to exceed expectations.

Don't expect the stock to climb in a straight line higher, but I predict Dollar Tree will reward shareholders willing to stomach near-term volatility.

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Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walmart. The Motley Fool has a disclosure policy.