Inflation at the Dollar Store

Shares of Dollar Tree just had their best day in 21 years. All the company had to do was blow up its business model. While rivals have long offered items above the dollar threshold, Dollar Tree has stuck to its $1 price point. It has been a win for consumers -- and investors. The company's stock has returned an annualized 15% over the last 20 years, double the S&P 500.

But last night, in a press release headlined "Dollar Tree Poised to Take Next Steps in its Multi-Price Evolution," the company announced a major change: "The company plans to begin adding new price points above $1 across all Dollar Tree Plus stores and will begin testing additional price points above $1 in selected legacy Dollar Tree stores."

Shares jumped 16% on the news.

It's been a long time coming. Wall Street analysts have often asked Dollar Tree executives about the threat of inflation, given the lack of flexibility in the company's pricing. Here's one 2004 exchange between an analyst and then Dollar Tree CEO Robert Sasser: 

Analyst: "...any impact from inflation that you've seen or expect to see?"

Sasser: "Well, the inflation is out there...We've got the ability to react to higher price pressures by changing the product. We have always said that. And we've got flexibility in terms of what we carry. We can change the pack size. We can change the items themselves. We have a philosophy that we don't have to have anything and what we're about is creating value at the $1 price point. It's not just stuff for a dollar; it's got to be worth more than a dollar."

I always found it fascinating that Dollar Tree's pricing strategy was kind of upside-down. Rather than sourcing paper plates and setting a price point, the company set a price point and then sourced the paper plates to match. 

But times change -- and inflation hawks now have another talking point: Even Dollar Tree is giving up on the old-school dollar store. 

Dollar Tree's lagging stock of late surely helped compel the move. My colleague Ben Levisohn writes today: 

Supply chain issues have been hurting dollar stores in recent quarters. Shares of Dollar Tree fell 12% on Aug. 26 when the company announced its earnings. While its profits beat expectations, sales fell short, and margins were under pressure due to rising freight costs. As a result, Dollar Tree cuts its full-year earnings outlook.

After years of worrying about inflation and Dollar Tree, Wall Street analysts were finally able to celebrate. You can read more about their reaction in Ben's story here.