35.8% gross margins on $1.25 products?

Dollar Tree just proved constraint beats choice. While competitors obsess over pricing complexity, they built a treasure-hunt empire around one number: $1.25

Author

Nick Horob
July 20, 2025

As I built Harvest Profit, I implemented what is commonly thought of as a business "worst practice".

We launched with one price. Everything I read told me that you need to offer different tiers and prices. But there weren't enough obvious feature buckets for that to make sense for me so I just ran with the one price.

Today's report shows just how powerful a lack of choice can power a brand. That's the story of Dollar Tree.

While most retailers obsess over pricing complexity with the goal of optimizing margins and AOV (average order value), Dollar Tree built a $17.6 billion business around one number: $1.25. They recently dumped their struggling Family Dollar acquisition to double down on what works.

Here's what caught my attention:

  • Price as positioning: No comparison shopping, no mental math, no decision fatigue

  • Treasure hunt psychology: Rotating inventory makes bargain hunting feel like entertainment

  • Operational simplicity: Fixed pricing streamlines everything from procurement to checkout

  • 35.8% gross margins: Better than most "premium" retailers despite rock-bottom prices

The lesson isn't about discount retail. It's about how artificial constraints can become competitive advantages.

Most businesses add complexity to seem sophisticated. Dollar Tree removed it and built a moat.

And speaking from experience, a trip to Dollar Tree (especially with young kids) will show you that the company's simple pricing has done a surprisingly effective job at raising its average order value! Contrary to what best practices would suggest.

With that, I'll talk to you tomorrow.

Nick

TL;DR

  • Core model: Everything for $1.25 (recently bumped from $1.00 after 36 years)

  • Scale: 8,881 stores generating $17.6 billion revenue with 35.8% gross margins

  • Strategic focus: Divested struggling Family Dollar in 2025 to concentrate on core operations

  • Key advantage: Price simplicity eliminates customer decision fatigue and comparison shopping

  • Treasure hunt experience: Rotating inventory creates urgency and entertainment value

  • Lesson for entrepreneurs: Constraint (one price point) can become your biggest competitive strength

The 30,000-Foot View

Dollar Tree operates discount variety stores with a unique fixed-price model across 8,881 locations. Their "thrill of the hunt" approach turns bargain shopping into entertainment through constantly rotating inventory.

Revenue Sources:

  • Core merchandise: $1.25 fixed-price items (consumables, seasonal, variety goods)

  • Dollar Tree Plus: $3-$7 items in ~30% of stores

  • E-commerce: estimated at only $120M (<1 % of revenue)

  • Seasonal merchandise: ~18% of annual revenue

Key Stats:

  • Market cap: $22-23 billion

  • TTM revenue: $17.6 billion

  • Gross margin: 35.8%

  • Net income: $1.04 billion

  • Employee count: 214,710

  • Geographic footprint: 48 U.S. states, 5 Canadian provinces

Company History

1986 → Founded as "Only $1.00" with 5 stores 1995 → IPO at $15/share on NASDAQ 2008 → Entered Fortune 500 with top-performing stock 2015 → Acquired Family Dollar for $9.2 billion 2017-2024 → Multiple CEO changes signal strategic uncertainty 2022 → Historic price increase from $1.00 to $1.25 (first in 36 years) 2025 → Sold Family Dollar for $1 billion to refocus on core operations

Show Me the Money

FY 2024 reflects continuing operations only (post-Family Dollar divestiture)

Stand-out Features:

  • Dramatic improvement after Family Dollar divestiture.

  • Gross margins jumped from 30.4% to 35.8% while generating strong free cash flow ($893M in 2024) with modest capex needs.

Financial Data

Metric

FY 2021

FY 2022

FY 2023

FY 2024 (TTM)

Revenue

$26.29B

$28.33B

$30.60B

$17.58B

Gross Profit

$8.48B

$8.92B

$9.31B

$6.28B

Gross Margin

32.2%

31.5%

30.4%

35.8%

Ops Profit

$1.81B

$2.24B

($882M)

$1.46B

Ops Margin

6.9%

7.9%

(2.9%)

8.3%

CapEx

$1.25B

$1.25B

$2.10B

$1.30B

Net Debt

~$2.8B

$2.78B

$2.74B

$2.17B

The N.O.O.B. Nine — Competitive Powers

The Nerd Out on Business Nine is made up of Hamliton Helmer’s famous “7 Powers” of competitive advantage (Scale Economies, Network Economies, Counter-Positioning, Switching Costs, Branding, Cornered Resource, and Process Power) combined with two of my own (Data Flywheel and Distribution Advantage).

Power

Score

Rationale

Branding

4/5

Strong "thrill of the hunt" identity creates emotional connection beyond price. The $1.25 price point itself is a brand promise.

Data Flywheel

2/5

Limited but growing through mobile app and 1.5 million rewards program members.

Process Power

4/5

Efficient supply chain with 4.5 inventory turns annually and 22 distribution centers optimized for fixed-price model.

Scale Economies

5/5

Massive $7.5 billion annual procurement budget creates cost advantages through exclusive supplier deals and private label development.

Switching Costs

2/5

Moderate switching costs from customer familiarity and treasure-hunt experience, but low financial barriers.

Cornered Resource

3/5

Unique access to closeout merchandise through established supplier relationships, though not completely defensible.

Network Economies

3/5

Dense store network (average 3.7 miles between stores) provides customer convenience but limited cross-store network effects.

Counter-Positioning

5/5

Fixed-price model fundamentally differentiates from variable-price competitors by optimizing simplicity over complexity.

Distribution Advantage

4/5

Strategic small-format locations (8,500 sq ft average) within 5 miles of most U.S. population drives convenience.

Average Score: 3.4/5 - Strong competitive position anchored by operational excellence and unique positioning.

Memorable Marketing

Dollar Tree transforms bargain hunting from necessity into entertainment through their "Thrill of the Hunt" positioning. Key campaigns include:

"Thrill of the Hunt" (2015-Present): Core positioning emphasizing discovery and urgency. Drives 80% customer repeat rate through treasure-hunting psychology.

Dollar Tree Plus Launch (2019): "More Choices, Same Great Value" expanded beyond $1 without abandoning core identity. Successfully attracted higher-income customers.

Mobile App Launch (2024): "Take the Thrill to the Next Level" connected digital and physical experiences with barcode scanning and favorites lists.

Seasonal Rotations: Six major campaigns annually with print circulars reaching 50 million weekly. Drives 18% of annual revenue.

Tactical Takeaways:

  • Constraint as competitive feature

  • Urgency messaging that feels fun, not stressful

  • Physical-digital integration enhances rather than replaces in-store experience

  • Store layout and inventory rotation function as marketing tools

AI Uses & Opportunities

Current Uses: Demand forecasting, inventory management, and mobile app personalization through machine learning algorithms.

Cost-Cutting Applications:

  • AI workforce scheduling across 8,881 stores

  • Predictive maintenance to prevent equipment failures

  • Energy management systems to reduce utility costs

  • Automated quality control to prevent contamination issues

Revenue Enhancement:

  • Personalized product recommendations

  • AI-driven inventory optimization

  • Digital advertising platform monetizing supplier partnerships

  • Enhanced e-commerce with intelligent recommendations to grow beyond 5.7% of revenue

Bumps in the Road

Operational Challenges: $22.7 million in OSHA fines since 2017 for safety violations. Family Dollar acquisition resulted in $5.3 billion impairment charges before $1 billion sale.

Legal Issues: $41.7 million DOJ settlement for Arkansas warehouse conditions. FDA warnings and $190,000 in fines for lead contamination in children's products.

Leadership Instability: Five CEO changes since 2017. Stock fell 40% in 2024 amid repeated forecast cuts.

Market Pressures: Core low-income customers strained by inflation. Competition from Amazon, Walmart, and Chinese retailers like Temu. Forced price increases threaten unique positioning.

Your Swipe File

  • Constraint as strategy: Limiting options (one price) creates competitive advantage by simplifying decisions

  • Experience over product: Transform commodity shopping into entertainment through treasure-hunting

  • Operational marketing: Store design and inventory rotation are marketing tools requiring no media spend

  • Price transparency: Fixed pricing eliminates comparison shopping and builds customer trust

  • Focus beats diversification: Family Dollar divestiture proves doubling down on core competencies often wins