Why Dollar Tree Stock Is Soaring Today

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What happened

Shares of discount retailer Dollar Tree (NASDAQ:DLTR) traded 11.5% higher at 3 p.m. ET on Tuesday, following a solid third-quarter earnings report and an important business strategy update.

So what

Dollar Tree saw top-line sales rise 3.9% year over year to $6.42 billion. Earnings per share (EPS) fell from $1.39 to $0.96, but sales and earnings figures both exceeded Wall Street’s consensus estimates. Your average analyst firm would have settled for EPS of $0.95 on sales in the neighborhood of $6.41 billion.

Looking ahead to the holiday quarter, management posted earnings guidance in line with the current Street view, but the midpoint of Dollar Tree’s revenue target range stopped at $7.1 billion, far ahead of the consensus $6.41 billion estimate.

Image source: Getty Images.

Now what

The company also updated its operating model. Most of the inventory at every Dollar Tree store is stepping away from the namesake $1 price point. The new standard price of $1.25 per item has proven to lift revenue without lowering the foot traffic in selected testing stores, so the higher prices are rolling out across the whole store network.

Higher prices will also allow the company to bring back some customer favorites that were canceled due to high production and distribution costs.

“We’ve been able to manage through inflationary periods to maintain the ‘Everything for $1’ philosophy that distinguished Dollar Tree and made it one of the most successful retail concepts for three decades,” CEO Mike Witynski said on the earnings call. “However, we strongly believe this is the appropriate time to shift away from the constraints of the $1 price point in order to continue offering extreme value to our customers.”

The upcoming holiday shopping season will either confirm or refute the wisdom of Dollar Tree’s price-lifting strategy. The company is making this radical move from a position of strength, as the stock trades at all-time highs today while revenue is trending relentlessly higher.

Ironically, Dollar Tree’s stock isn’t all that affordable at 25 times trailing earnings. That’s OK because we’re looking at a well-run company with an inviting market position in this unstable coronavirus economy. As Dollar Tree hopes to prove over the holidays, sometimes you get what you pay for, and the higher price could be worthwhile.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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