Time to dig up that sizable pile of money buried out in the backyard, Dollar Tree (DLTR).
The cash isn’t actually that hard to find. All Dollar Tree management has to do is stop thinking it doesn’t have to raise prices beyond $1.00 in a world of inflation and embrace an important suggestion from activist investor Jeff Smith at Starboard.
The fact Dollar Tree remains reluctant to go beyond $1.00 price points makes little financial sense when running the numbers, as investment bank Jefferies so generously has done.
By starting to test $1.25 average price points at Dollar Tree this year — and reaching a $2.25 average five years into the future, Jefferies analyst Christopher Mandeville estimates the company’s same-store sales would balloon to an 11.7% increase by 2024. Jefferies estimates Dollar Tree’s same-store sales this year will be a meager 2.6% increase.
By reaching the $2.25 average price point in 2024, Jefferies thinks Dollar Tree’s operating profits would skyrocket to $3.5 billion versus $1.6 billion in 2019.
In Wall Street lingo, that’s a material amount of untapped margin. And it could be done by leaving 80% of Dollar Tree’s products priced at $1.00, according to Jefferies.
Jefferies believes Dollar Tree’s price increases should be focused on the seasonal, party supplies, kitchen/dining and office/school supplies categories. The bank also found in a survey of 1,000 Dollar Tree shoppers, 76% of customers would be willing to pay a little more at the store provided the products offered are higher quality.
So believe it or not, Dollar Tree may have some pricing power.
If Dollar Tree were to implement multiple price points as Jefferies has laid out, the stock could be worth about $155 a share. Dollar Tree shares currently trade at $105 a share.
‘Time seems ripe’
Now Dollar Tree management just has to buy into the idea, which may not be so easily assumed. Thus far, Dollar Tree has only paid lip service to investors by saying it would test multiple price points. No timeline for the tests was offered on Dollar Tree’s fourth quarter earnings call in March, nor were a cluster of stores identified.
“The time seems ripe now for a multi-price-point (MPP) strategy as the Dollar Tree format is better positioned to test the concept given its on-going investments in co-bannered DCs (four out of a total of 25), better global sourcing capabilities and existing relationships with Family Dollar (FDO) suppliers,” says Mandeville. “Based on our proprietary survey results and extensive discussions with discount retail industry contacts, we're proponents of Dollar Tree shifting to a MPP strategy; however, based on these same conversations and management's comments, we're skeptical of a whole-hearted adoption.”
A test of multi-price points at Dollar Tree was one among many suggestions activist Smith suggested back in a letter to CEO Gary Philbin in January. Dollar Tree’s model has long been rooted in selling items for $1.00. But that is a tough model to maintain — and profit from — especially nowadays with minimum wage hikes, transportation inflation and tariffs on Chinese goods (where Dollar Tree gets the bulk of its general merchandise).
Smith thinks Dollar Tree could be worth $150 a share. But key to that: pricing items above $1.00 (and getting rid of the lagging Family Dollar brand).
Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi