Margins: Dollar Tree’s Post-Integration Game Changer

Strong margins

As Dollar Tree (DLTR) (XRT) (XLY) operates in a low-margin industry, the optimization of margins is of utmost importance. Dollar Tree (DLTR) has been successful in achieving good margin performance over the years, with an average EBITDA (earnings before interest, tax, depreciation, and amortization) margin of 14% between fiscal 2010 and 2014. Peers Dollar General (DG) and Walmart (WMT) had average EBITDA margins of 11.5% and 7.7%, respectively, for the same period.

Margins: Dollar Tree’s Post-Integration Game Changer

Cost synergies from Family Dollar integration

Apart from aiming to increase their footprint in the market, Dollar Tree (DLTR) and Dollar General (DG) were competing to acquire Family Dollar because of the cost synergies available in terms of sourcing and procurement, overhead costs, distribution and logistics, and the optimization of stores. The company’s management has indicated that three years following the acquisition, it may achieve $300 million in annual run-rate synergies. This could mean an improvement of 60 to 80 basis points in its operating margins.

Margin outlook for 4Q15

Wall Street consensus is that the EBITDA margin for 4Q15 should be around 12.2% and the gross margin should be around 31.0%. In the next article, we’ll have a look at the stock performance of Dollar Tree.