Discount store chain Dollar Tree is raising the maximum price limit of items sold at its shops to $7 as outlets saw an increase in traffic from relatively wealthy shoppers amid elevated inflation.
In 2023, Dollar Tree saw “strong gains in traffic and market share,” CEO Rick Dreiling said during an earnings call on March 13. He credited this to the company’s “ability to attract new and higher-income customers.” Dollar Tree added 3.4 million new customers last year, “mostly from households earning over $125,000 a year.”
The “exceptional performance” was attributed to a range of initiatives implemented at Dollar Tree, including “multi-price-point strategy, which we’re calling more choices. The underlying premise here is that we can present a more relevant assortment to our customers if we are free to offer items at a variety of price points.”
“By the end of 2023, we introduced $3 and $5 center store merchandise to approximately 5,000 Dollar Tree stores and expect to add another 2,000 stores this year,” he said. “This year, across 3,000 stores, we expect to expand our multi-price assortment by over 300 items at price points ranging from $1.50 to $7.” Back in June 2023, the price cap was raised to $5.
The new offerings will be provided across a variety of categories, including food and snacks, beverages, pet care, personal care, and more. Even as the company expands on new price offerings, the “vast majority of the items sold in Dollar Tree stores will remain at our entry-level fixed price point,” Mr. Dreiling stressed.
The Dollar Tree CEO also highlighted the negative impact of inflation. “Persistent inflation and reduced government benefits continue to pressure the lower-income consumers that comprise a sizable portion of Family Dollar’s customer base.”
“Categories like apparel, home decor, electronics, and general merchandise remained weak as lower-income consumers continued to be very deliberate about their spending,” he said.
Last year, InMarket, which tracks foot traffic at retail outlets, estimated that the share of people earning over $100,000 a year visiting generic dollar stores grew by 4 percent in the second half of 2022, according to The Wall Street Journal.
A September report from Consumer Edge found that “the rate of growth in affluent shopper exposure is growing.” The percentage of new customers from the $100,000 income group was found to have gone up among major discount stores, including Dollar Tree.
While speaking to The Wall Street Journal in June, Michael Liersch, the head of advice and planning at Wells Fargo, pointed out that wealthy Americans used to see discount stores as “not for them.” However, elevated prices are making this demographic rethink their views.
Outlook for 2024
Mr. Dreiling’s comments came as the company reported a net loss of $1.71 billion in the quarter ended Feb. 3. He also announced that Dollar Tree intends to shut down 1,000 stores.The company plans on closing 600 stores under its Family Dollar subsidiary chain in the first half of fiscal 2024. In addition, around 370 more Family Dollar and 30 Dollar Tree stores will shut shop when the current lease term ends.
“We believe rationalizing these unprofitable locations will help to unlock meaningful value at the enterprise level. Collectively, we estimate that net sales loss from the stores we intend to close this year is approximately 730 million on an annual run-rate basis,” he said.
Chief Financial Officer Jeff Davis predicted a positive performance for Dollar Tree this fiscal.
“While we expect current shrink and mix levels to be a headwind in the first half of the year, we are expecting to benefit from favorable freight rates and moderating headwinds from reduced SNAP benefits throughout the year.”
The Supplemental Nutrition Assistance Program (SNAP) is the largest federal nutrition assistance program in the United States that is made available to low-income groups.
“We are making solid progress on our key growth initiatives and are encouraged by the early results of our business transformation efforts,” Mr. Davis said.
Dollar Tree shares have declined by over 8 percent year to date and were currently trading at around $130 as of 12:35 p.m. EST on Wednesday. According to a NASDAQ analysis of 25 analyst firms, Dollar Tree has a “Strong Buy” recommendation.
“Based on analysts offering 12-month price targets for DLTR in the last three months. The average price target is $152.38 with a high estimate of $180 and a low estimate of $109.”
Dollar Tree had earlier announced a target of $10 in yearly earnings per share by 2026. However, Mr. Dreiling toned down the expectations during the earnings call.
The company believes in the $10 target and is “continuing to march toward that goal.” But “the macro-environment has gotten in our way, and we are dealing with high, high shrink numbers. We’re dealing with big mix shifts.”
“So, it’s a little difficult for us to pinpoint that $10 target going forward. We still believe in the target, but we believe the path is to get to $7 in 2024, and we’re intently focused on that. But again, we want a positive 2024. And then as we move through 2024 and 2025, we'll give you more of a handle on the $10.”
