Dollar Tree (DLTR) Multi-Price Point Strategy Poised to Backfire?

0:00All time now for our 360 round, diving into the state of discount retail after Dollar Tree. Release its quarterly report card today, those shares trading higher despite some caution in its forecast. Joining us now for reaction is Bert Flickinger, managing director, strategic resource group, and Arun Sundaram, senior vice president of equity research, C-F-R-A. Thank you both for joining us today, Bert, I'll start with you. We got better than expected on the bottom line for Dollar Tree. Guidance looks a little cautious, your take on Dollar Tree. Full disclosure, Diane, strategic resource group did all the due diligence on the original combination of M&A for Dollar Tree, Family Dollar, and Dollar General, over almost 30,000 stores, over 40 distribution centers. All the Dollar Stores are over-stored, credit to the company, good results today, with their facing headwinds, in that consumers in trouble and through their four quartiles,

1:03and it's much more cost effective to go to Walmart, Winco, Costco, Kroger, Aldi, and Lietl. So the company is doing well with new specialty items, new party items, eclipsing party city, eclipsing the bankrupt and closed drug chains, so good management team, solid, constructive results, but the headwinds that were there this quarter may not be there during calendar year 2026 and 2027. All right, Runa, I want to get your take on Dollar Tree. The shares are actually moving higher today, which surprised me, I'll say, especially given how it looked in the pre-market and the CFO, making this comment saying, quote, we remain cautious because of the potential for further near-term tariff changes and because of the potential for negative freight and other costs related to conflict in the Middle East. What are your thoughts on Dollar Tree? Yeah, yeah, thanks for having me. Yeah, I know, I thought on the top line, there was a good sales beat, but if you break

2:04down their comp sales, the group comp sales is about 5% this quarter, we already got to around 4%. It's a little bit better than we expected, but if you break down that 5% comp sales growth number, their traffic actually declined about 1.2% this quarter, and it's actually worse than their previous quarter, and in Q3, traffic declined about 0.3%. Traffic is moving in the wrong direction. The reason they're seeing a really strong comp growth is because average ticket was up about 6.3% this quarter, and that's largely because Dollar Tree is rolling out a multi-price point strategy across more and more of its stores. Now a few years ago, they broke away from a dollar, they went from a dollar to a dollar 25 as their floor price, and over the last year or two, they've now been rolling out higher price points in their store, so these $3 price points, $5 price points, and that's benefiting results now, but our big concern is about the sustainability of these results. Once they start to lap this multi-price point roll out, you know, wheel traffic recover,

3:06that's kind of a big concern here because they, because as you introduce higher prices into your store, you also introduce more competitors, especially competitors with bigger pocketbooks like Walmart, Amazon, so that's our big concern that, you know, I think competitive activity will probably increase because they're introducing these higher price points in their stores. Arun, I want to ask a quick follow-up question because we've heard from both Dollar Tree and Dollar General that there is a shift in consumers from certain, higher income households coming over to the value chains. We saw that shift from Walmart several years ago, and I know you've got a sell rating on this stock, but do you think there is anything to that potential shift of higher income households lasting longer? Yeah, I think we're certainly still seeing this shift and trade down from the middle and higher income customer base. It's really about this case-shaped economy that we've been talking about for the last year or two, and that's still continuing where the middle and higher income households are doing much better than the lower income households. Now, I'd like to continue this year as well, especially given what's going on with fuel

4:09prices right now. Higher fuel prices tend to disproportionately impact lower income households. So, that's another kind of concern of ours for these dollar stores, like Dollar General and Dollar Tree, is that their core customer base could feel a little bit more pressure to share. But again, that might be offset by the fact that they are seeing more middle and higher income consumers coming into their stores. Bert, I saw you nodding in agreement with some of the things that Arun was just sharing. But I'm curious to know your thoughts in terms of what you notice about traffic and ticket size in the most recent earnings period. Goldman Sachs, Kate McChain, put out a great piece last week that 75% of Dollar Tree's customers have less disposable income this year than last year. Why is that important? Because of Arun and you said, Diane, higher fuel prices, energy is the second highest operating cost for the stores. That's not fully baked in. 70% of consumers are living paycheck to paycheck. So, this is really the high water mark for Dollar Tree because the purchasing power is

5:14going to be declining against most deciles and the big manufacturers are giving most of their marketing and merchandising money to the big box retailers. Dollar Tree can only move two cases per brand, per store, per week, where the big box retail is casco, Walmart, Winco, Croger, Walmart, Target, can all move several hundred cases, two thousands of cases per store per week. So less investment from the CPG vendors and less purchasing power from consumers leads to an uncertain future. Uncertain future. Arun, I want to give the floor to you a quick 30 second final thought. Yeah, I think one other thing to think about too is what's going on in the middle of the world. At least not only fuel prices rising, but with the keep an eye on ocean freight, if there's an increase in ocean freight rates, that will also disproportionately impact these dollar stores like Dollar Tree. Dollar Tree is actually a top 10 importer in the United States and they import low value

6:15goods. So that's another thing to keep an eye on as this year unfolds. All right. Thank you, Arun. That's Arun Sundaram, Senior Vice President of Equity Research at CFRA. We have Bert Flickinger, Managing Director of Strategic Resource Group joining us here at the New York Stock Exchange.