The pandemic took the shift consumers were already making from brick-and-mortar to e-commerce into hyperdrive, accelerating the retail apocalypse and sinking many retailers in the process. But Dollar Tree (NASDAQ: DLTR) became a surprise darling of the pandemic, rising to the top in an environment it was almost perfectly designed for.
Many consumers came out only for essentials, which Dollar Tree offered, and then took advantage of the opportunity to also shop for nonessentials while they were there. And of course, Dollar Tree's essential-retailer status kept them open during lockdowns while other retailers were forced to close.
But now, from the rising costs of materials and transportation to increasing labor costs, inflation is hitting everyone hard. And unlike during the pandemic, when Dollar Tree was uniquely positioned to come out on top, this retailer is perhaps the most vulnerable of all. Let's take a look at where inflation is taking Dollar Tree now and explore whether its plans for the future could help it change course.
Why Dollar Tree?
While most retailers do at least have the freedom to gradually (and sometimes not so gradually) raise prices in response to the rising costs they face, it's not so easy when your store motto is "Everything's $1!"
"Everything's $1.05!" just doesn't have quite the same ring to it, and even less so when you may have to keep raising prices from there. Dollar Tree's entire business model is built around a very specific price point, and that's quickly becoming a serious liability.
Dollar Tree's stock has fallen 8% over the past six months, and last week, Deutsche Bank analyst Krisztina Katai downgraded it from buy to hold and slashed the price target from $129 to $102. What's more, she believes the worst could still be ahead. Katai was quoted in a Yahoo Finance piece as saying: "With the sequential worsening in ocean freight rates since the 1Q release, we are no longer confident that negative earnings revisions are behind us."
Sprouting new growth
Dollar Tree bought Family Dollar back in 2015, laying the groundwork for what could be the company's saving grace. In a March 3, 2021, video on Dollar Tree's YouTube channel, president and CEO Michael Witynski announced the company's plans, initially tested in 30 markets, to combine Dollar Tree and Family Dollar.
"We're combining Family Dollar's trusted brands and great value with the thrill of the hunt and incredible seasonal finds at Dollar Tree, creating a powerful new shopping experience," Witynski said.
Dollar Tree has opened nearly 50 of these joint-concept stores already and has identified over 3,000 markets where they intend to do so. This move will greatly expand the offerings available at a single store location. But perhaps more importantly right now, it will give the company the power to let Family Dollar do the heavy lifting of keeping up with inflation while allowing Dollar Tree more discretion in which items it will continue to sell at the $1 price point -- while still drawing in customers looking for those deals.
The Millionacres bottom line
If the pandemic has taught us anything about retail, it's just how quickly you can go from hot to not. The upside is that Dollar Tree doesn't have to put together a plan from scratch. The new joint-concept stores it began experimenting with in late 2019 have the potential to help it shake off the heavy weight its fixed price point has become.
But rolling out those changes nationwide will likely be a slow process, and some Dollar Tree stores could close in the meantime. Until the company's store expansion plans can be fully realized, commercial investors should not expect stand-alone Dollar Tree stores to continue to be the virtually unsinkable anchor stores they became for shopping centers during the pandemic.