Dollar Tree to Close 390 Family Dollar Stores And Rebrand 200 More
Retailer Rethinks Strategy Amid Discounters’ Rapid US Growth
BY JENNIFER WATERS
Dollar Tree announced it will close up to 390 Family Dollar stores and rebrand another 200 under Dollar Tree banners. Photo: CoStar
Dollar Tree said it would shut down 390 Family Dollar stores and rebrand hundreds more as it struggles to revive the marquee it bought only four years ago.
The move, coming at a time when deep-discount stores have defied the so-called retail apocalypse and opened at rapid rates nationwide, is a shallow admission that the $9 billion purchase of Family Dollar is falling well short of expectations.
It also comes only two months after activist shareholder Starboard Value took a 1.9 percent stake in Dollar Tree with the intent of pushing it to shake up the status quo.
Dollar Tree, based in Chesapeake, Virginia, said it booked a $2.73 billion charge in the fourth quarter, a huge swipe at the value of Family Dollar, which has been a drag on earnings since its 2015 purchase. Comparable-store sales, a key industry benchmark of sales at locations open longer than a year, tell the story: Dollar Tree’s climbed 3.2 percent while Family Dollar’s slid 1.4 percent.
Dollar Tree and Family Dollar stores are both discount retailers in different genres. Dollar Tree stores are mostly open in urban areas where it sells items that cost only $1 or less – a model it has followed since it opened in 1986.
Family Dollar stores have a wider price range and larger number of items. They are mostly found in rural areas, sometimes as the only general-merchandise store in town. At the end of the quarter, the company operated 15,237 stores in total across 48 states and five Canadian provinces.
Dollar Tree saw gross profit and margins tumble in the quarter, pulled down by lower net sales at both stores, higher markdowns at Family Dollar and a spike in one-time charges tied to administrative expenses for the 13 weeks that ended Feb. 2. The company reported a $2.31 billion net loss in the quarter compared to a $1.04 billion profit a year ago that was pumped up by a one-time tax benefit.
To crawl out of that hole, Dollar Tree said it closed 84 Family Dollar stores last year – 37 more than what was originally planned – and said that it would shutter as many as 390 more under-performing stores this year, according to its earnings statement. The company noted that it is working to achieve “material rent concessions from landlords,” and the total number of stores slated to go dark could fluctuate based on the results of those talks.
At the same time, the company will renovate at least 1,000 Family Dollar stores, adding $1 Dollar Tree merchandise sections, and rebrand another 200 to Dollar Tree banners. It also will open 200 new Family Dollar stores while adding 350 Dollar Tree stores to the portfolio.
“Our Dollar Tree business has continued to perform extremely well,” Chief Executive Gary Philbin said in a statement. “It’s a concept our customers love, as validated by our streak of 44 consecutive quarters of comp sales growth.
“We are confident we are taking the appropriate steps to reposition our Family Dollar brand for increasing profitability as business initiatives gain traction in the back half of fiscal 2019,” he added.
That might not be enough for Starboard. Since January, the activist fund has prodded Dollar Tree to rethink its dollar-only strategy by creating a multiprice strategy and to consider “strategic alternatives” for Family Dollar.
Noting Dollar Tree’s “inability to execute a turnaround at Family Dollar,” Starboard said in a Jan. 7 letter to the board, “there is little benefit in keeping the Family Dollar and Dollar Tree businesses together.”
As for the dollar-only strategy, Starboard called it a “fallacy,” given sales taxes, and questioned the value proposition to customers.
“Products today are generally smaller or include fewer units or are of lower quality than they were five or 10 years ago,” the letter said. “There are items that are not even available at Dollar Tree stores today because of the company’s strict adherence to the $1 price ceiling, further reducing the value Dollar Tree is able to offer its customers.
The letter pointed out that competitors such as Dollar General, FiveBelow and 99 Cents Only have introduced multipriced items.
Dollar Tree appears to be acquiescing – at least a little, according to its fourth-quarter earnings statement. Remarking that the $1 fixed-price point has been a “critical element to Dollar Tree’s success,” the company said it is testing multiprice items.
However, the company noted that multipricing has “been done on prior occasions,” without commenting on the results and adding that Family Dollar’s expertise will help guide it going forward.