Family Dollar was never a good fit for Dollar Tree Inc., and now the dollar store is putting the banner up for sale.
Dollar Tree began a comprehensive review of its Family Dollar portfolio last November, which was focused on its store base and contributed to the decision in March to shutter 1,000 stores, including 970 Family Dollar locations. The strategic review disclosed on Wednesday is now focused on what to do about the business, which includes a sale of the operation.
Dollar Tree chairman and CEO Rick Dreiling said that the streamlining of Family Dollar store was to “focus on enhanced investments in remaining Family Dollar stores that present favorable opportunities for long-term growth and transformation, with more attractive returns on capital.” He added that the company has started seeing progress in its “targeted strategy in the streamline Family Dollar banner.”
But Dreiling also said that the company is “aggressively” growing its core Dollar Tree banner, which includes its successful bid to acquire up to 170 stores from 99 Cents Only, a former competitor that in April called it quits and is now in liquidation mode.
The 99 Cents business had been struggling due to the impact of inflationary pressures on its low-income customer base. But it also had been dealing with rising levels of shrink, a sore point at dollar store competitor Dollar General, which last month added another 3,000 stores to the 9,000 locations where it had already converted self-checkouts to traditional registers. Dollar General CEO Todd Vasos said last week on its first quarter earnings call that “shrink continues to be the most significant headwind in our business.”
During a conference call to investors on Wednesday after posting first-quarter earnings results, Dreiling spoke about Dollar Tree’s shrink problem, noting that initiatives put in place last year had the retailer “ahead of the curve,” adding that its self-checkout exposure is basically nothing, “so we don’t have to revisit that.” And he said the company also began eliminating “high-shrink” stock-keeping units about a year ago.
“The shrink trends that we have, while still not good, they’re not getting away from us anymore. We’re definitely tracking in the right direction,” Dreiling said. “But I want to reinforce, shrink is still a problem, but it’s not deteriorating like it was last year.”
As for Family Dollar, Dreiling said the review includes “evaluating how each separate banner might appeal differently to different sets of owners. It also includes evaluating whether to accelerate Dollar Tree’s growth and completing Family Dollar’s transformation might be best accomplished by separate, dedicated leadership teams.”
Keeping the businesses separate won’t be hard to do for Dollar Tree. Dreiling said during the call that the Family Dollar business—supply chain, merchandising and retail—”are all pretty much separate,” confirming the thinking in the retail marketplace that the two operations were never fully integrated. And with Dreiling’s emphasis that the two banners are at different stages of their growth, having them as separate operations would also make Family Dollar an easier sale—provided Dollar Tree can find a buyer.
As for its store base, Dreiling said it shuttered 509 under-performing Family Dollar stores as part of its optimization program in the first quarter and the balance of its previously disclosed 600-store first-half target in May, with about 370 Family Dollar locations and 30 Dollar Tree doors closing over the next several years as store leases expire. Dollar Tree also said it now plans to “close an additional 150 stores by the end of fiscal 2024.”
When Family Dollar put itself up for sale in 2014, both Dollar Tree and Dollar General were kicking the tires. The company rejected Dollar General’s takeover proposal of $9.7 billion due to antitrust considerations. The company elected to proceed with Dollar Tree’s $8.5 billion offer, which closed in 2015 and resulted in the closure or divestment of over 1,800 locations to satisfy federal antitrust concerns. While the transaction was intended to expand Dollar Tree’s reach from suburban neighborhoods to urban and rural areas, some at the time thought Dollar General would have been a better fit. The analysts weren’t wrong. While Dollar Tree focuses on seasonal merchandise, both Family Dollar and Dollar General sold inexpensive household items and food. Dollar Tree also caters to a wider customer base that also includes middle-income households.
But Dollar Tree also has had other issues to contend with this year. In February, Family dollar was slammed with a $41 million fine for a rodent infestation at a Midwestern distribution center. And in April, a Dollar Treedistribution center in Marietta, Okla., was demolished by a tornado and remains closed. The retailer said it incurred losses totaling $117.0 million, split between $70 million in damaged inventory and $47 million related to property and equipment. Dollar Tree said it expects the losses for the damage to be covered by insurance.
Dollar Tree on Wednesday posted first-quarter results for the three months ended May 4. Net income inched up 0.4 percent to $300.1 million, or $1.38 a diluted share, from $299 million, or $1.35, a year ago. Total revenues rose 4.2 percent to $7.63 billion from $7.32 billion, which also included a 4.2 percent uptick in net sales. The dollar store retailer said same-store sales were up 1 percent, comprised of a 1.7 percent gain at its Dollar Tree banner and a slight 0.1 percent increase at it Family Dollar operation. During the quarter, the company opened 116 new Dollar Tree stores and 41 new Family Dollar locations. It also converted 926 Dollar Tree doors to its in-line multi-price format.
For the second quarter, Dollar Tree guided consolidated net sales to $7.3 billion to $7.6 billion, with adjusted diluted earnings per share (EPS)in the range of $1 to $1.10.
The company reiterated its full-year sales range of $31 billion to $32 billion, with adjusted diluted EPS between $6.50 and $7.
Jefferies retail analyst Corey Tarlowe has a “Hold” rating on shares of Dollar Tree, noting that “Family Dollar continues to drag on profitability ahead and visibility on margins remains challenged.”
