Dollar General made a lot of noise today by debuting its plans for a new retail concept called popshelf – which to me looks like a direct assault on Dollar Tree’s plan to break the $1 price point in its core Dollar Tree concept. Popshelf will be focused on selling non-consumables in a ‘treasure hunt’ format at a price point up to $5, to a customer with annual income up to $125k (Dollar General/Family Dollar both target a $40k consumer). In effect, its doing precisely what the ‘Dollar Plus’ test is doing at Dollar Tree. I think the recent change in management at DLTR combined with this move by DG will prompt DLTR to accelerate the Dollar Plus rollout, which I think is one of the most value-enhancing strategic decisions I can point to in today’s retail landscape. Our math suggests that the comp and gross margin lift from selling merchandise up to $5 will yield $3.00-$5.00 in incremental EPS, which is huge for a company that is likely to earn just above $5 this fiscal year. DG plans to have 30 popshelf stores open within the next three months, which compares to ~125 Dollar Plus locations currently being tested. A large-scale rollout by DLTR into its 7,500 locations would in turn be a massive threat to Five Below (FIVE). One thing is for certain…DG management are no dummies. Their own research is validating the white space in the $1-$5 selling price for non-consumables. DLTR better adapt quickly otherwise get beat at its own game like what happened at Family Dollar. I’m betting that management makes the right call and we see the broad-based rollout, which is good for a 2-3-bagger over a TAIL duration, and therefore have DLTR as a Best Idea long.
-- McGough
