Dollar Tree’s Controversial New $1.25 Price Point Is Actually Working

One year after Dollar Tree announced a controversial move to increase prices to $1.25, the variety store chain appears to be succeeding despite a challenging macroeconomic environment.

The company’s first price hike in nearly four decades came amid elevated inflation and permitted Dollar Tree, which also owns discount store chain Family Dollar, to expand merchandise offerings, even though share prices fell 11% upon the initial announcement of the pivot. According to the company’s earnings report for the third fiscal quarter, diluted earnings per share increased by 25% since the same period last year.

“Our third quarter sales performance reflects the timely execution of merchandising initiatives to drive our consumables business in this uncertain and inflationary environment,” Dollar Tree CEO Mike Witynski remarked. “Same-store sales for both segments improved from the prior quarter and delivered a sequential monthly improvement throughout the quarter. Shoppers are responding to our new value proposition at Family Dollar and Dollar Tree as we focus on driving both traffic and store productivity.”

Shares for Dollar Tree have risen more than 7% since the beginning of the year, while the Dow Jones Industrial Average and the S&P 500 have respectively declined 6% and 16% over the same period. Dollar Tree plans to increase sales outlooks for the year.

“The efforts to evolve the assortment to drive consumables performance at Dollar Tree, combined with initiatives designed to improve the value proposition at Family Dollar, are working,” Witynski continued. “We believe we will continue to be part of the solution to millions of households seeking value at a time when they need us most.”

Consumers who solicit discount stores generally come from lower income households. Inflation has a greater impact on such households, which generally allocate a greater portion of their monthly income to basic living expenses in comparison to wealthier families.

Price levels rose 7.7% year-over-year as of last month, according to a report from the Bureau of Labor Statistics. Elevated inflation will have a salient impact on the holiday season; retail sales during the critical period for American retailers are expected to grow between 6% and 8% since last year to possibly surpass $960 billion, according to data from the National Retail Federation, meaning that the nominally higher sales will be largely eclipsed by rising price levels.

Americans are nevertheless among the only citizens of developed nations planning to increase spending on Black Friday, according to a recent analysis from Boston Consulting Group. While Americans are predicted to spend 6% more, German and French shoppers will spend 15% less, while their counterparts in Australia and the United Kingdom will spend 18% less.

Evidence suggests that many American households have been spending beyond their means amid inflationary headwinds. The total level of consumer loans increased from $1.5 trillion at the beginning of last year to $1.8 trillion as of two months ago, according to data from the Federal Reserve. Meanwhile, the personal savings rate has dropped from 20% to slightly more than 3% over the same period, according to data from the Bureau of Economic Analysis, marking a significant decline from typical rates witnessed before the lockdown-induced recession.

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