Dollar Tree (NASDAQ:DLTR) is one of the few brick-and-mortar retailers that expanded even as the "retail apocalypse" wiped out many other businesses. The over-expansion of retail stores and the rise of online marketplaces sparked that secular decline, which was then exacerbated by the financial crisis and recent pandemic.

Dollar Tree's stock has advanced more than 40% over the past five years. Its annual revenue rose from $15.5 billion in 2015 to $25.5 billion in 2020, while its total number of Dollar Tree, Dollar Tree Canada, and Family Dollar stores increased from 13,851 to 15,685.

Cash growing on a tree.

Image source: Getty Images.

Dollar Tree remained resilient for two reasons. First, its stores were usually located in lower-income neighborhoods, and usually closer to shoppers than superstores like Walmart and Target.

Second, it consistently sold cheaper products than those retailers and Amazon (NASDAQ:AMZN). Dollar Tree still sells most of its products for $1, while Family Dollar (which it acquired in 2015) sells slightly more expensive products. Both banners are resistant to recessions, which often cause more shoppers to flock toward discount retailers.

Dollar Tree has been a stable investment, but it's significantly underperformed the S&P 500 and its rival Dollar General (NYSE:DG) over the past five years. Let's see why that happened, and whether or not Dollar Tree can catch up within the next five years.

What happened over the past five years?

Dollar Tree's biggest challenge over the past few years has been its integration of Family Dollar. Family Dollar was already struggling to keep pace with Walmart, Target, and Amazon at the time of its acquisition, and those challenges continued under Dollar Tree's watch.

However, Dollar Tree gradually turned around Family Dollar by renovating its stores, selling alcoholic beverages, and adding $1 Dollar Tree sections to its stores. It also right-sized the entire chain by closing over 400 weaker locations and rebranding 200 of them as Dollar Tree stores.

That turnaround was slow, but Family Dollar's same-store sales growth accelerated over the past two years. The pandemic, which caused more shoppers to stock up on household essentials, also generated significant tailwinds for Family Dollar's remaining stores last year.

Same-Store Sales Growth

2018

2019

2020

Dollar Tree

3.3%

2.2%

2.2%

Family Dollar

0.1%

1.4%

10.5%

Total Enterprise

1.7%

1.8%

6%

Data source: Dollar Tree.

Dollar General, which operates most of its stores in rural areas, didn't struggle with any acquisition indigestion issues, and faced fewer local competitors than Family Dollar. That's why Dollar General has generated much stronger same-store sales growth than Dollar Tree over the past few years.

What are Dollar Tree's plans for the future?

Dollar Tree recently partnered with Instacart to provide same-day delivery for Family Dollar shoppers, and started testing out sales of fresh and frozen groceries at select Family Dollar locations.

It completed the rollout of its "Crafter's Square" for arts and crafts supplies at all of its Dollar Tree locations in January. It's also rolling out Dollar Tree Plus, which sells products for $3 to $5, at up to 500 of its stores this year to gauge demand for slightly pricier goods at its namesake banner.

Dollar Tree also consolidated the support centers for both banners into one campus to streamline its operations, and it's been testing out Dollar Tree/Family Dollar combination stores to serve small towns. Those combo stores, which have been generating about 20% same-store sales growth, could finally help Dollar Tree challenge Dollar General.

Dollar Tree plans to open 600 new stores (including 400 Dollar Tree and 200 Family Dollar locations) and renovate 1,250 Family Dollar stores in fiscal 2021. The new Family Dollar locations will include its new combo stores and its "H2" stores -- which offer a wider range of merchandise, a Dollar Tree $1 section, and more freezers and coolers than its older stores. 

Dollar Tree didn't provide any detailed guidance for the full year, but analysts expect its revenue and earnings to rise 3% and 9%, respectively. They also expect its growth to accelerate slightly in fiscal 2022 as its revenue and earnings increase 5% and 12%, respectively.

But will Dollar Tree outperform the market?

Based on those estimates, Dollar Tree's stock looks cheap at 16 times forward earnings. The company finally seems to be on the right track after fixing Family Dollar, and it's constantly testing out new ways to refresh its brand and reach more shoppers. However, it still faces unpredictable headwinds like tariffs and Amazon's expansion of its "$10 and under" section.

Therefore, I believe Dollar Tree's stock will head higher over the next five years, but I'm not confident it will beat the market or Dollar General. Many investors might stick with Dollar General as their top dollar store play, and dollar stores still often underperform the broader market during an economic recovery -- which will likely happen after the pandemic finally ends.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.