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Why items at Dollar Tree will soon cost you way more than $1

Brian Sozzi
Editor-at-Large

To shut up angry investors and line their pockets with more cold hard cash, Dollar Tree (DLTR) executives are finally budging on the notion of selling stuff for greater than $1.

Unfortunately, for the store’s lower income shoppers, that means their dollars will probably go less further than before. But hey, all in the name of a higher stock price, right?

Introducing Dollar Tree Plus!

Dollar Tree’s test of price points above $1 kicked off earlier this year. The company aimed to see at these test stores how its economically sensitive customers responded to the higher price point items. Apparently satisfied with the results, the company is moving from test phase to a wider rollout at 100 stores.

Dubbed “Dollar Tree Plus!”, the initiative will feature products across many categories that are priced above $1. Dollar Tree management was quick to point out in its Thursday earnings release it was not raising prices on its assortment. Instead, “Dollar Tree Plus!” would be additive to the sales floor.

“With its ‘Everything’s a Dollar’ model, Dollar Tree has remained one of the most unique, differentiated and defensible brand concepts in all of value retail. However, we have always been a ‘test-and-learn’ organization that is committed to evaluating all opportunities to deliver great value for our customers while driving long-term value creation. During this test, we look forward to measuring and assessing the initial results and understanding if the introduction of multiple price points across a broader set of stores is in the best interests of our customers, Company and shareholders,” Dollar Tree CEO Gary Philbin said in a statement.

The decision comes after activist investor Jeff Smith at Starboard Value launched a boardroom attack on the company in January. Shocker.

Why is Dollar Tree doing this?

PepsiCo Inc. Gatorade brand sports drinks sit on display for sale at a Dollar Tree Inc. store in Louisville, Kentucky, U.S. Photographer: Luke Sharrett/Bloomberg via Getty Images

Obviously to make more money and plump up a bottom line that has been hampered by rising transportation costs and investments in the bumbled acquisition that is Family Dollar.

The profit potential for Dollar Tree from this shift in strategy could be huge.

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 (assuming all goes well with the rollout), Jefferies analyst Christopher Mandeville estimates the company’s same-store sales would balloon to an 11.7% increase by 2024. That’s significantly higher than the low-single digit percentage gains the Dollar Tree banner has seen in recent years.

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.

Besides the pure profit motive of management, the move is also likely being done to prevent another activist investor from swooping in. The aforementioned Smith’s Starboard Value took a 1.7% stake in Dollar Tree in January, pushing for a board shake-up, the sale of Family Dollar and the rollout of a multi-price point strategy.

In April, Starboard dropped its push for a complete board overhaul. Smith said he was pleased Dollar Tree had begun to test multiple price points. He is probably even more pleased with the news out today.

Dollar Tree shoppers may leave its stores with one less item in the basket as they are tempted to buy higher priced, likely higher quality products. But the profit potential from the strategy could be massive considering Dollar Tree has reluctantly stayed with its $1 model for years.

That’s no longer a tenable position to be in given rising transportation costs and hourly wages. And of course, the specter of an activist investor returning at the drop of a dime.

Brian Sozzi is an editor-at-large and co-host of ‘The First Trade’ at Yahoo Finance. Follow Brian Sozzi him on Twitter @BrianSozzi

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