Dollar-store shopping has always been a tightrope act for me, requiring weighing my desire for a bargain against my limited patience for stores with spotty inventory and lines that snake down the aisles. Then something happened to make the balancing act even more challenging.
However, the $1 price might be a thing of the past as inflation rapidly rises under Biden’s administration. In fact, one of America’s last remaining true dollar stores said it will raise prices from $1 to $1.25 on the majority of its products. The change is a sign of the pressures low-cost retailers face holding down prices during a period of rising inflation.
As Dollar Tree is expected to remain a buying destination for many Americans as inflation rears its ugly head elsewhere within the economy, the company itself is set to face a tougher environment as the cost of its goods which it sells for $1 cost more. There’s also wage inflation which they have to deal with, although it is a great thing for the overall economy and the people earning more, it remains a harmful item for their earnings-generating ability.
“For decades, our customers have enjoyed the “thrill-of-the-hunt” for value at one dollar – and we remain committed to that core proposition – but many are telling us that they also want a broader product assortment when they come to shop,” said CEO Michael Witynski in a prepared statement.
Dollar Tree’s stock prices dropped from $106.32 to a low of $87.64 per share since the announcement but have been on their way up ever since and currently sit at about $95 per share today. Because of this, it is clear that customers are not thrilled with Dollar Tree’s decision to start selling items over a dollar, but the change probably wouldn’t have taken place if it weren’t for inflation and the economic crunch created by the pandemic.
As a result, I don’t believe that their current profit projections, which are set to grow at a faster pace than overall sales – indicating margin expansion – are realistic and that the company is almost certainly going to underperform these expectations. With that being said, even their current multiple of around 10x forward earnings is overvaluing their potential and I wonder whether the company is ripe for a 6-12 month short position as inflation woes materialize.
“We will continue to be fiercely protective of that promise, regardless of the price point, whether it is $1.00, $1.25, $1.50,” Witynski assured its patrons.
Source: AWM
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