Breaking The Buck

I’ve never owned Dollar Tree, but it’s a company that I’ve watched closely for years (here’s the link to my June deep dive, “One Buck At A Time”). The main reason is because I believe its namesake banner is one of the most unique and sustainable concepts in all of U.S. retail; on the other hand, they created a real mess with the 2015 Family Dollar acquisition, which is a cloud that lingers over the company to this day (whether the short-term COVID bump will lead to a sustained turnaround at Family Dollar is still to be seen).

The stock reacted very favorably to a recently announced strategic shift at Dollar Tree, which is the focus of today’s post. But despite the recent stock price gains, I think this is a situation that long-term investors should still follow closely; if the Dollarama example, discussed below, is any indication, Dollar Tree may have a bright future ahead (for years to come).

On to today’s update.

For 35 years, Dollar Tree has operated with a straightforward “everything-for-$1” customer value proposition. But beginning in mid-2019, the company started to loosen that constraint, with multi-price point merchandise offerings at its Dollar Tree Plus (DT+) stores. Last Tuesday, on November 23rd (when they released Q3 FY21 results), management announced that they were walking away from the “everything-for-$1” business model for good:

“The Company believes this is the appropriate time to shift away from the constraints of the $1.00 price point... This decision is permanent and is not a reaction to short-term or transitory market conditions. The $1.25 price point, which will apply to a majority of Dollar Tree’s assortment, will enhance the Company’s ability to materially expand its offerings, introduce new products and sizes, and provide families with more of their daily essentials… Additionally, this new pricing strategy enables the Company to reintroduce many customer favorites and key traffic-driving products that were previously discontinued due to the constraints of the $1.00 price point.”

The original multi-price strategy, called Dollar Tree Plus (DT+), introduced $3 and $5 SKU’s to the store. The plan was to expand to ~500 DT+ locations by the end of FY21, ~2,000 DT+ locations by the end of FY22, and ~5,000 DT+ locations by the end of FY24 (with the DT+ assortment accounting for ~10% of the selling space in a given store). This new pricing strategy, which is in addition to the DT+ initiative, will be rolled out to all ~8,000 Dollar Tree stores by the end of Q1 FY22 (in the next six months). In summary, this strategy is much wider in its scope than DT+, along with an accelerated timeline.

So, this is a meaningful change for Dollar Tree’s business.

Is it also a meaningful opportunity for DTLR investors?