The biggest point of resistance we’re met with as it relates to our Dollar Tree Long call is our contention that DLTR needs to break out of the single dollar price point. People simply come back and say “it’s not broken, and they’re great at it. So what’s there to fix?” I’ll tell you what there is to fix…capturing an additional $3-$5ps in earnings power simply by taking advantage of one of the biggest white space opportunities in retail. Just because settling for a 2-4% comp story at peak margins while sitting at a buck is ‘acceptable’ doesn’t mean that shareholders couldn’t and shouldn’t deserve more – especially when the implementation risk is so low with a likely success rate so high?
While you’re hard pressed to find any retailer with the word ‘dollar’ in its name that has not actually given in and realized that inflation is actually a real thing and subsequently broken into price zones above a buck – the best example is Dollarama. By raising the maximum allowed price point in a staged and pragmatic way, the retailer has been able to break into new categories like electronics, beauty and baby – something that Dollar Tree cannot do today. This distinction is critical – I’m not talking about raising prices on like-for-like items, but rather giving the opportunity for consumers to experience the same kind of value proposition that a world class buying organization can bring to new categories. After a decade, Dollarama is flirting with a $5 price point, by way of new category offerings – though roughly 40% of its store is still at a US $1 price point equivalent.
If you ask Dollarama management about the 10-year strategy, they’d say if anything that they should have moved faster. As evidenced by the traffic numbers, it drove NEW customers to the store and did not alienate what was then the core customer. It turned Dollarama into one of the most consistent compers and share gainers. Based on the superiority of the Dollar Tree buying/sourcing organization – which is admittedly the best in the business – it’s my bet that it could put Dollarama to shame as it relates to succeeding in this arena.
And it’s not just about comp. The least discussed benefit from breaking the buck is the margin boost. Dollarama introduced three higher price points when it broke the buck. Since the different price points were relatively far apart (25% and 50% for example) the buyers rounded up to the nearest price point. So rather than pricing an object that had the desired merchandise margin at $1.12 for example the retail price was rounded up to $1.25. This led to better merchandise margins than the company and investors expected from breaking the buck. It was one of the contributing factors along with expense leverage that led to 500bps of gross margin expansion over eight years.
The punchline is that a well-thought-through steady rollout of new categories and $1+ price point introductions would lift the existing comp trajectory by 5-6% per year over a 5-year time frame. That’s ON TOP of the existing traffic growth we’re seeing out of the core business. On top of that, we get an extra 50bp in merchandise margin lift, plus roughly another half a point from leveraging occupancy. In the end, we’re getting to incremental EPS of $1 PER YEAR over the 5-year window. Importantly, this would open up greater square footage growth opportunities, which is good for another 20-30% multiple premium vs what is the slowing growth concept that we see today.
