Dollar Tree Profits Come In Small Sizes
[Financial Analysis and Commentary]</br></br>Imagine a wave of inflation that sends retailers scrambling to pass on expenses to consumers. What if a retailer tied itself down to constant sales prices?</br></br>Investors could soon find out, as Dollar Tree begins to cope with rising commodity and labor costs. In the past the company, which charges one dollar for everything, benefited from lower costs by offering bigger sizes or higher quality.</br></br>To protect margins, Dollar Tree may now need to try the reverse. In one sense, the company's prices look good enough to withstand some downsizing. Its prices for a group of 50 items such as aspirin are 28% cheaper than Wal-Mart Stores, says Wells Fargo's Matt Nemer.</br></br>Unfortunately, that isn't enough to keep all consumers happy. For items that come in standard sizes like eggs, consumers may not want to buy odd amounts. J.P. Morgan's Charles Grom notes that in a recent inflation cycle the company reduced the size of a string of Christmas lights when they became more expensive, and ultimately stopped selling the product. It also is possible to use lower-quality replacements, but consumers are savvy enough to notice shabby merchandise.