Discount retail Dollar Tree needs to test breaking the $1 price point as most shoppers welcome the change, according to Jefferies.
The bank surveyed nearly 1,000 Dollar Tree shoppers across the U.S. and found that 76 percent of the customers are willing to pay more than $1 on select items for higher quality and more options. A move to increase pricing on select items could boost Dollar Tree's earnings and other financial metrics, Jefferies said.
"The time seems ripe now for a multi price-point strategy as the Dollar Tree format is better positioned to test the concept given its on-going investments in co-bannered distribution centers, better global sourcing capabilities and existing relationships with Family Dollar suppliers," Jefferies equity analyst Christopher Mandeville said in a note Wednesday.
Based on Jefferies' estimates, upping the price point could lead to 300 basis points of earnings expansion over the five years and its shares would climb to $155 by 2024. The stock has gained more than 16 percent in 2019 to $105.25 on Wednesday.
However, the change has to be executed carefully and gradually. The analyst suggested Dollar Tree test the strategy first in the Canadian market before rolling it out full-scale, and the discount store should step up the price by 25 cents per year for the next five years in order to "stay true to the brand," Jefferies said.
"The Canadian market would be an ideal environment given its immaterial contribution to total company sales/earnings, relatively less competitive pressures vs. the US and a discount retail industry that appeals to consumers of multiple income levels that value a more diverse basket," Mandeville said.
The higher pricing strategy is also being pushed by activist investor Starboard Value, which has a 1.7 percent stake in the company. Starboard, in a January letter to Dollar Tree CEO and board of directors, called for "a wide-scale market test of a multi-price point strategy."