Dollar Tree Will Raise Prices 25% In 2022 Amid Inflation, Supply Chain Concerns

Low and middle-income consumers can expect to pay more at discount variety store chain Dollar Tree (DLTR), which will hike its prices by 25% in January amid rising inflation and supply chain issues plaguing the U.S. economy.

The price increase will affect all 8,000 of its stores and Dollar Tree plans to add $3 and $5 items in roughly 5,000 stores. The price increase signals an end to an era of boasting of being "the nation's leading operator of fixed-price point stores," after 35 years.

Dollar Tree's locations are mostly in underserved rural communities.

The Virginia-based company called the hike a "monumental step" in its quarterly earnings report.

"The $1.25 price point enhances our ability to materially expand assortments, introduce new products and sizes and provide families with more of their daily essentials," CEO Michael Witynski said in a call last week with analysts.

Witynski called the price hike "permanent" and "not a reaction to short-term or transitory market conditions.”

Dollar Tree’s business model relies on keeping costs low for labor, shipping and transportation as it imports 40% of its products from overseas.

Costs are spiking for businesses as the producer price index jumped 0.6% last month and 8.6% annually, according to the Labor Department. The company’s profit margins have fallen 1.5% through the first three quarters of the year and 4.7% from a year ago.

Dollar Tree says the rising prices will help offset costs, expand merchandise and attract new customers.

"Our shoppers are responding favorably," said Witynski, adding that shoppers are "seeing price increases across the market" and can still find cheaper products at Dollar Tree.

Economist and Harvard Business professor Willy Shih said on NPR's "All Things Considered" that Dollar Tree's move is "quite a change."

"When you have this escalation in shipping costs and you also have these bottlenecks in their supply chain because a lot of their inexpensive goods come from China, it makes it a real challenge for them to be able to offer a variety of goods," Shih said. "By going up to a $1.25, they can really increase the range of what they can squeeze in under that price umbrella."

Goldman Sachs downgraded Dollar Tree's stock to "neutral" from "buy," on the view that it trades at full valuation and with an expected slowdown in store traffic.

As of Tuesday at 2:33 p.m. ET, shares of Dollar Tree were trading at $134.76, down $6.59, or 4.66%.