There was big news in retail this week. It has nothing to do with Black Friday, and in reality, probably was not viewed as that big of a deal, but in the current environment, it may be a harbinger of things to come.
Dollar Tree (DLTR) , which had begun pricing items at $1.25 instead of just a dollar at some stores in September, will adopt that new pricing scheme everywhere by the end of the first quarter.
If that isn't an admission or fear that the current bout of inflation is here to stay a while, I don't know what is.
It's actually a brilliant move for Dollar Tree, which obviously does a lot of volume. Indeed, you need to do that kind of volume when everything costs a buck. Yet I can't imagine this pricing strategy will have a negative effect on its volume.
Most of us who go to Dollar Tree -- and I go several times a year --likely purchase a handful of items; the seven things I bought last Tuesday cost me $7.42 with tax and would cost me $9.28 under the new pricing scheme. From a behavioral finance standpoint, a 25% increase in items that used to cost a buck may be much more palatable than the new car that jumps in price from $30,000 to $37,500, even though the math works out the same.
Dollar Tree's plans mark the end of a 35-year run of $1 pricing at the retailer. Interestingly, an independent survey of Dollar Tree shoppers found that 91% would continue to shop at company stores with "the same or increased frequency" according to its third-quarter earnings call. That's evidence, if accurate, that Dollar Tree has pricing power.
The reason for the move, as stated by the company, is to "mitigate higher freight and other inflationary costs in order to return to our historical gross margin of 35% to 36 % in fiscal 2022." Gross margin for the third quarter was 29.1%, down from 30.1% for the like period last year.
It has been a wild ride for Dollar Tree in 2021. Its shares are up 36% year to date, but fell from about $120 to $85 between April and late September. Since then, however, they have been on fire and closed Wednesday at $146.61, an all-time high. The company's price increase plan was warmly received by the markets, which pushed shares 9.2% higher in Tuesday's trading. DLTR shares currently trade at about 20x next year's consensus earnings estimates of $7.37 a share.
The old joke of asking a Dollar Tree store employee "how much is this" when everything in the store cost a buck will no longer resonate. In addition to the $1.25 pricing, the company has been selling other items in the $3 to $5 range at 600 select stores and plans to implement the same at 1,500 more stores in 2022.
I somewhat tongue-in-cheek wonder whether a name change will follow: "Dollar and a Quarter Tree," "Five Quarters Tree," "Buck and a Quarter to Five Bucks Tree" are a few of my favorites. "Five Dollar and Below Tree" won't work for obvious reasons; it sounds too much like Five Below (FIVE) .
In any event, get used to price increases. The $18 we spent on two McDonald's (MCD) meals in central Pennsylvania last week was yet another eye opener.
At the time of publication, Heller had no positions in the stocks mentioned.
