4 reasons why Dollar Tree is raising prices above $1 but below $3 and why the stock has 30% upside ahead, according to JPMorgan

• Dollar Tree surprised many on Wednesday with its announcement that it would raise the prices of its goods to more than $1.
• While part of the decision has to do with rising inflation, there are other reasons for the move.
• These are the 4 reasons why Dollar Tree is raising its prices above $1 but below $3, according to JPMorgan.
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Dollar Tree shocked many after raising the prices of its goods above $1, but Wall Street sees advantages to the move beyond offsetting higher costs. Shares dipped Thursday after surging 16% Wednesday.

The deep discounter had a long-held practice of pricing every good on its shelves at $1. But Dollar Tree isn't immune to rising inflation, higher shipping costs, and supply-chain bottlenecks that have ravaged nearly all industries since the start of the COVID-19 pandemic last year. That's why the company is doing the inevitable, raising prices to maintain - if not grow - its bottom line.

JPMorgan analysts view the move as a positive for the stock, as it will help fuel long-term growth and insulate the company from a further jump in inflation. The bank rates the dollar-store retailer at Overweight with a $131 price target, representing potential upside of 30% from Wednesday's close.

These are the four reasons why Dollar Tree is raising its prices above $1 but below $3, according to a Wednesday note from JPMorgan.

1. "Test & learn process."

Dollar Tree has seen "validated reception" among its customers of price points that were above $1 in select locations it tested the price increases.

2. "Dynamic macro backdrop."

Dollar Tree's price increases account for both transitory cost bumps from shipping and supply-chain bottlenecks, and structural cost bumps, including higher wages and commodity costs.

3. "Improved assortment opportunity."

The selective price increases give Dollar Tree more flexibility in adding new and different products to its shelves that customers have been asking for and at targeted margin thresholds.

4. "Increased merchant flexibility."

Dollar Tree's price increases will give merchants flexibility for larger package sizing in an environment in which industry suppliers with limited inventory prioritize more profitable larger pack sizes relative to Dollar Tree's smaller $1 pack sizes.

"Importantly, management's overarching #1 priority will remain 'value,' which ultimately will determine out-the-door price point per SKU citing opportunity to grow the customer base, improve sales productivity, better leverage fixed costs, and accelerate bottom-line operating profit dollars," JPMorgan said.