By Tonya Garcia
Dollar Tree Inc. is raising prices for good, the company announced on Tuesday, moving its price point higher by a quarter from the eponymous dollar.
The company notes that it has managed to hold prices at $1 for 35 years, including during inflationary periods. This decision comes after a testing process that began this past summer, and was introduced in September as part of a company transformation plan.
Dollar Tree /zigman2/quotes/203712248/composite DLTR -4.53% says the customer response to the higher prices has been positive. And when Dollar Tree talked about the higher prices during its last earnings announcement in September, investors responded happily as well.
“[Customers] have also indicated they are seeing price increases across the market and that Dollar Tree is still providing the products they need at an undeniable value,” Dollar Tree said in a statement.
The company said the higher price point is a permanent move, and not the result of “short-term or transitory market conditions.” Moreover, the $1.25 price point allows the company to offer a wider range of merchandise, including items that had been discontinued at the $1 level.
Gross margins will also benefit, with the higher price point offsetting freight, operating and other costs that have gone up.
“Accordingly, we have begun rolling out the $1.25 price point at all Dollar Tree stores nationwide,” said Chief Executive Michael Witynski in a statement.
The higher prices will be in 2,000 Dollar Tree stores in December, with the rollout complete in the first fiscal quarter of 2022.
“Lifting the one-dollar constraint represents a monumental step for our organization and we are enthusiastic about the opportunity to meaningfully improve our shoppers’ experience and unlock value for our stakeholders,” Witynski said.
Dollar Tree reported that third-quarter net income totaled $216.8 million, or 96 cents per share, down from $330 million, or $1.39 per share, a year earlier and in line with the FactSet consensus.
Sales totaled $6.415 billion, up from $6.177 billion in 2020. The FactSet consensus called for sales of $6.411 billion. Enterprise same-store sales rose 1.6%, with the Dollar Tree chain up 0.6% and the Family Dollar chain rising 2.7%. The FactSet consensus was for enterprise same-store sales growth of 1.5%.
For the fourth quarter, Dollar Tree is guiding for sales in the range of $7.02 billion to $7.18 billion and low single-digit same-store sales increase. Earnings per shares are expected to be to be in the range of $1.69 to $1.79.
The FactSet consensus estimate calls for sales of $7.025 billion, same-store-sales growth of 1.3% and per-share earnings of $1.74.
The benefit of higher prices is expected to be offset by higher costs as well as store conversions, with the company expanding its Dollar Tree Plus locations, adding combo stores that house both Dollar Tree and Family Dollar merchandise, and more. Supply-chain disruptions are expected to be a challenge in the near term.
For the full year, the discount retailer’s outlook anticipates sales in a range from $26.25 billion to $26.41 billion, a low-single-digit percentage increase in same-store sales and earnings per share in the range of $5.48 to $5.58.
The FactSet consensus calls for sales of $26.258 billion, same-store-sales growth of 0.6% and earnings per share of $5.53.
Witynski thinks the company’s gross margin will return to the range of 35% to 36% in fiscal 2022, he said. In the third quarter, its gross margin had dropped to 27.5% from 31.2% a year before.
“The additional price point at Dollar Tree affords us greater flexibility to manage the overall business, especially in a volatile, inflationary environment, while driving customer loyalty and store productivity,” Witynski said.
“In this environment, we believe small-box, value retail is more important than any other retail sector to millions of households.”
Dollar Tree’s stock has gained 34% to date in 2021. The S&P 500 index /zigman2/quotes/210599714/realtime SPX -1.04% has gained nearly 25% on the year.