The dollar store is officially dead

• Dollar Tree on Tuesday said it's raising its prices to $1.25.
• Until now it was the last big dollar-store chain sticking to a $1 price cap.
• The news signals the death of the traditional dollar-store concept in the US.

Dollar Tree, the last of the big dollar-store chains selling items for $1 or less, on Tuesday said it was officially "breaking the buck" and raising prices to $1.25 after testing these prices earlier in the year.

The news gave a boost to its stock price as investors eyed sales growth without the restraint of $1 pricing. It also signaled the end of the true $1-and-under concept among US retailers.

Dollar stores have existed in the US for decades and started to take off in the post-World War II economy. While these stores began life selling products at $1 or less, most were quick to diversify and raise prices in line with inflation. But Dollar Tree didn't.

Dollar General, the largest dollar-store chain in the US by store count, opened its first location in 1955. Created by the father-son duo J.L. and Cal Turner, their idea was to replicate "Dollar Days" sales found year-round at department stores in Nashville, Tennessee, and in Louisville, Kentucky.

According to Cal Turner's son, it didn't take long for prices to creep up. Today, the chain offers most private-label and national brands at $10 or less, and only a small portion of the store is devoted to $1 items.

Similarly, the Dollar Tree-owned Family Dollar, which started off selling items below $2, has since moved to a $1-to-$10 price point.

The West Coast chain 99 Cents Only faced lawsuits from customers after it raised its top price to 99.99 cents in 2008 on account of inflation. These customers alleged that it was misleading given the company's name.

As these chains raised prices, Dollar Tree (originally called Only $1.00 before a name change in 1993) stood by its promise, even as investors piled on the pressure to add new price points.

The biggest change in strategy until now came in 2019, four years after Dollar Tree acquired Family Dollar, when it started to test higher prices in a handful of stores. The assortment, dubbed Dollar Tree Plus, featured $3 and $5 items — similar to what shoppers might find in a Family Dollar store.

The change came after the activist investor Starboard Value challenged the store's commitment to $1 pricing in a letter to Dollar Tree's CEO at the time, Gary Philbin.

"Dollar Tree has kept its prices at $1.00 since its founding thirty years ago," Starboard wrote in 2019, "despite the fact that $1.00 in 1986 is worth approximately $2.30 today, due to inflation."

Bu today's inflationary pressures and rising freight and labor costs have made it harder for Dollar Tree to stick to its $1 price point, which makes it all the most sensitive to these costs.

CEO Michael Witynski said in a call with investors Tuesday that its $1.25 pricing will allow it to absorb these costs and return profit margins to between 35% to 36%.

For the moment, Witynski is promising that it won't go above the $1.25 mark to keep things simple for the customer.