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Dollar Tree (DLTR +9%) is trading sharply higher following its Q4 (Jan) earnings report this morning. However, the bigger news is that DLTR reached a deal to sell its Family Dollar segment to Brigade Capital and Macellum Capital for just north of $1 bln. DLTR previously announced a review of strategic alternatives for its FD segment. The transaction is expected to close later in Q2.

• As we said in our preview, we might get news about a sale and that turned out to be true. We suspect management saw the ending of the fiscal year as a good time to announce a deal, so it heads into the new year with this issue resolved and behind it. Its FD segment has been struggling and this deal now allows DLTR's new CEO to focus on turning around the Dollar Tree segment.
• Specifically, Dollar Tree wants to return to its roots while still competing and innovating. It says its merchants consistently provide shoppers with an ever-changing assortment and that no other retailer can reproduce the immediacy and thrill of that signature Dollar Tree treasure hunt. It also wants to run stores that are clean, bright and inviting.
• In terms of the rationale, the company said that Dollar Tree and Family Dollar are two different businesses with limited synergies, and each is at a very different stage of its journey. Separating them will enable each banner to focus exclusively on what each banner needs. Also, separating them allows investors to assign proper multiples for each business. We suspect that DLTR may get rewarded with a higher multiple when not dragged down by Family Dollar.
• Turning to the Q4 results, they are a bit difficult to analyze because Family Dollar is now considered discontinued operations. As such, DLTR's results are not comparable to consensus estimates. With that said, Q4 revenue increased 0.7% to $5.0 bln. Same-store comps increased +2.0%, in-line with prior guidance of low-single-digit comp growth for the Dollar Tree segment. Looking ahead to Q1 (Apr), the company expects sales from continuing operations to be $4.5-4.6 bln, based on comp growth of +3-5%, which is a nice acceleration from Q4 comps.

Overall, we think it is a good thing for the stock to have the Family Dollar sale finalized, so investors can now focus exclusively on Dollar Tree going forward. We think DLTR will eventually be rewarded with a higher multiple. Also, the sale provides a clean slate for new CEO Michael Creedon, Jr., who took the helm in December 2024. The Dollar Tree segment has been the better performing segment, but it still needs improvement. The Q1 comp guidance of +3-5% was quite promising. However, even after the FD sale, DLTR is still navigating a tough macro environment, especially for its lower income core customer. Plus, DLTR sources a lot of merchandise from overseas, so dealing with tariffs will be tricky.