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Why Dollar Tree Shares Rallied More Than 14% This Week

By James Brumley – Oct 1, 2021 at 1:57PM

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The value-oriented retailer is making a major change to its pricing approach, and the market loves it.

What happened

Shares of discount retailer Dollar Tree (DLTR -0.07%) were up 14.5% for the week heading to Friday's closing bell, as investors celebrated a major strategic change to the company's merchandising strategy. Dollar Tree shoppers will see more goods priced above the retailer's ubiquitous $1 price point. The company also expanded its existing stock-buyback program.

So what

A handful of Dollar Tree regulars might have already seen higher in-store prices, either at a concept store called Dollar Tree Plus, or at one of its locales referred to as a combo store. The former focuses on $1, $3, and $5 price points, while the latter melds the original premise of Dollar Tree with its Family Dollar division's stores to offer a wider range of goods and price points.

Now, based on customer receptiveness to higher-priced items, Dollar Tree intends to expand its Dollar Tree Plus footprint from 500 stores to more than 5,000 by the end of fiscal 2024, and at the same time plans to add 400 combo stores in fiscal 2022. Although the company didn't offer any details as to how ordinary Dollar Tree stores would be overhauled, CEO Michael Witynski might have offered a glimpse of what to expect by saying, "We will continue to be fiercely protective of that promise [of great value], regardless of the price point, whether it is $1, $1.25, $1.50."

Higher prices will help relieve much of the profit margin pressure the company has been feeling of late in the face of supply chain impasses as well as soaring transportation costs.

Rising bar chart plotted on a chalkboard.

Image source: Getty Images

Separately, the discount retailer also announced this week that its existing $1.45 billion stock buyback program has been recently expanded to $2.5 billion by the board of directors.

Now what

Rethinking the company's pricing strategy is not only the right thing to do, but also an overdue measure.

Profit margins in retail are already thin, and limiting the pricing power of a huge chunk of your inventory to $1 is proving to be unsustainable. Consumers are generally OK with slightly higher pricing in Dollar Tree stores, while Family Dollar continues to leverage private-label and custom-designed goods with its particular shoppers in mind. Meanwhile, the bigger stock buyback speaks for itself: That's bullish, too. Both factors combined certainly bolster Dollar Tree's bullish thesis.

The only concern with new positions in the stock stem from the sheer scope of this week's gain. Even then, though, the stock is still below August's peak, and 20% below April's high. There's seemingly still lots of room for more immediate upside even after this surge.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

Dollar Tree Inc Stock Quote
Dollar Tree Inc
DLTR
$144.99 (-0.07%) $0.10

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