Dollar Tree will sell more stuff for above $1

The company said Tuesday that it will begin selling items at $1.25 and $1.50 at some locations for the first time. It will also add $3 and $5 items to more stores, expanding on a prior strategy in recent years to move away from only offering goods for $1.

Dollar Tree (DLTR) has a treasure hunt-like atmosphere in stores and caters to suburban, middle-income shoppers. It carries primarily seasonal goods, toys, stationary, home decor, kitchenware and party items. The company said its latest moves to raise prices will allow it to expand its assortment and introduce new products.

Dollar Tree CEO Michael Witynski also told the Wall Street Journal that the addition of items above $1 was in part a response to rising costs the chain is facing.

Dollar Tree, which also owns the Family Dollar chain, has rolled out a new “combination store” concept that features elements of Dollar Tree and Family Dollar outlets and sells a mix of merchandise. The company said Tuesday that it will bring its higher-priced merchandise to up to 3,000 of these locations over the next several years.

More recently, higher costs have taken a toll on Dollar Tree. The company in August slashed its profit forecast for the year, citing the impact of higher freight costs. Retailers across the industry have faced higher costs during the pandemic, but Dollar Tree’s fixed $1 price strategy has given it less flexibility than other chains to raise prices to offset inflation.

“The Dollar Tree banner is more sensitive to freight cost than others in the industry. Our products have lower price points than other retail importers,” Witynski said on an earnings call last month.

Dollar Tree’s stock surged around 15% Wednesday, as some investors bet the moves will help the chain mitigate cost increases.

“While the $1.00 price point has been devoutly maintained for decades, inflation is likely to remain higher for longer forcing the tough but necessary decision to adapt the model,” Michael Montani, a retail analyst at Evercore ISI, said in a note to clients. Higher prices will help Dollar Tree manage “margin pressure from inflation.”

Raising prices does come with the risk of turning off customers, however, especially for chains targeting shoppers on tighter budgets.

“Dollar Tree should benefit from changes in its pricing strategy, although we worry about the customer reaction, given their high sensitivity to prices,” Joseph Feldman, an analyst at Telsey Advisory Group, said in a note Wednesday.