Text size
Customers shop at a Dollar Tree store on March 04, 2021 in Chicago, Illinois.
Scott Olson/Getty Images
How do you fix a dollar store? By raising prices, of course. And that’s exactly what Dollar Tree plans to do, helping its stock to jump in premarket trading.
Dollar Tree
has been pretty steadfast in its desire to live up to its name, charging a buck for everything in its stores. But with logistic costs rising, and surpluses become shortages, the company, on Tuesday night, announced that it was going to begin selling products that cost more than $1 in its Dollar Tree Plus stores and testing them in their traditional stores.
The benefits are potentially enormous. “[Comps] can further improve, store productivity can be enhanced, merchants can source new products to better the customer experience, and supply chain flexibility can increase,” writes Jefferies analyst Corey Tarlowe. “We believe the possible added supply chain flexibility is particularly important, given the continued cost headwinds DLTR is facing near term.”
Supply chain issues have been hurting dollar stores in recent quarters. Shares of Dollar Tree fell 12% on Aug. 26 when the company announced its earnings. While its profits beat expectations, sales fell short, and margins were under pressure due to rising freight costs. As a result, Dollar Tree cuts its full-year earnings outlook.
The changes don’t mean Dollar Tree is changing its philosophy, however. “Importantly, mgmt’s overarching #1 priority will remain “value”, which ultimately will determine out-the-door price point per SKU (i.e. $1 vs. $1.25 vs. $1.50 vs. $3) citing opportunity to grow the customer base, improve sales productivity, better leverage fixed costs, and accelerate bottom-line operating profit dollars,” writes JPMorgan analyst Matthew Boss.
There are risks, of course, though they are almost certainly worth the reward. “Some might argue that DLTR’s special sauce is the $1 price point,” writes UBS analyst Michael Lasser. “We argue that the consumer wants 1) overwhelming perceived value; and 2) a straight-forward pricing structure. Adding an array of price points above $1 shouldn’t change the attributes that make DLTR unique. Though, it will be critical to manage this carefully as not to alienate its customer base.”
Dollar Tree also said it would increase its share buybacks to $2.5 billion from $1.45 billion, a $1.05 billion increase.
Dollar Tree shares are up 16% at $100.01 in Wednesday trading, on pace for its biggest gain since Oct. 2000. It’s also well above the 0.4% and 0.5% advances in the
Dow Jones Industrial Average
and the
S&P 500.
Still, even with the gain, Dollar Tree is 7.4% in 2021.
Write to Ben Levisohn at ben.levisohn@barrons.com
Read More:Dollar Tree Stock Soars Because It’s Not Just a Dollar Store Anymore
2021-09-29 15:23:00