CHESAPEAKE, Va. – Dollar Tree Inc. has launched a review of “strategic alternatives” for its beleaguered Family Dollar unit, including “a potential sale, spin off or other disposition of the business.”
The announcement comes as Dollar Tree confronts a challenging economic environment for deep discounters, prompting an ongoing portfolio review. As part of that review, company executives identified some 600 Family Dollar stores to close in the first half of the fiscal year beginning February 3, with another 370 or so Family Dollar locations and 30 Dollar Tree stores expected to be closed when their leases run out.
Many of these stores have lacked adequate investment for years, and the capital required to fix them is unlikely to deliver an acceptable return, CEO Rick Dreiling said June 5 on Dollar Tree’s first-quarter earnings call.
“The decision to explore strategic alternatives includes evaluating how each separate banner might appeal differently to different sets of owners,” Dreiling said. “It also includes evaluating whether accelerating Dollar Tree’s growth and completing Family Dollar’s transformation might be best accomplished by separate, dedicated leadership teams. Separating the two businesses could enhance the performance of each one individually and allow them both to reach their true valuation potential.”
Dollar Tree still sees growth potential in the pursuit of new-store openings: The company late last month acquired the designation rights for 170 leases of 99 Cents Only Stores in four states Western states. California-based 99 Cents Only Stores LLC filed a bankruptcy petition earlier this year and announced it would close all 371 of its locations and liquidate assets.
“As we continue to execute on our accelerated growth strategy for the Dollar Tree brand, this was an attractive opportunity to secure leases in priority markets where we see strong profitable growth potential,” Michael Creedon, Dollar Tree’s chief operating officer, said of the bid for 99 Cents Only assets. “The portfolio complements our existing footprint and will provide us access to high-quality real estate assets in premium retail centers, enabling us to rapidly grow the Dollar Tree brand across the western United States, reaching even more customers and communities.”
If the deal goes through, Dollar Tree could begin opening some of the converted 99 Cents Only locations later this year.
Dollar Tree began the fiscal year with 16,774 stores across 48 states and five Canadian provinces. The stores operate under Dollar Tree, Family Dollar, and Dollar Tree Canada banners.
Dollar Tree swung to a net loss of $99 million for fiscal 2023, compared to a $1.6 billion profit in the previous 12 months. Factors driving the loss included inflation, a reduction in government benefits for the Supplemental Nutrition Assistance Program (SNAP), and increased inventory losses, Dreiling said.
The financial picture brightened a bit in the first quarter of fiscal 2024. Dollar Tree said net sales on a consolidated basis increased 4.2% to $7.6 billion. Traffic in the quarter ended May 4 was up 2.1%, though the average ticket declined 1.1%. Dreiling said the average ticket declines reflected weaker discretionary demand, particularly in the Dollar Tree segment.
First-quarter adjusted diluted EPS of $1.43 was at the higher end of Dollar Tree’s outlook range. “These results reflect favorable freight costs and careful expense management during the quarter,” Dreiling said this week on the earnings call. “You’ve heard me say many times that the three key fundamentals in retail are growth in transactions, sales per square foot, and units. And, I’m pleased to report, all three of these metrics continue to move in the right direction.”
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