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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 changing economic environment that has prompted a portfolio review. Company executives have identified some 600 Family Dollar stores to close in the first half of the fiscal year that began February 3. Another 370 or so Family Dollar locations and 30 Dollar Tree stores are expected to close 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, chief executive officer Rick Dreiling said on June 5 during Dollar Tree’s first quarter earnings call.
Dollar Tree acquired Family Dollar in 2015 in a bid to keep pace with rival Dollar General’s growth trajectory.
Dreiling said the decision to explore strategic alternatives includes an evaluation of whether the acceleration of Dollar Tree’s growth and the completion of Family Dollar’s transformation might be best accomplished under separate leadership teams.
“Separating the two businesses could enhance the performance of each one individually and allow them both to reach their true valuation potential,” he said.
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 LLC in four western states. California-based 99 Cents Only Stores 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 Stores 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.”
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 in reporting the fiscal year performance.
The financial picture brightened a bit in the first quarter of fiscal 2024. Adjusted diluted earnings per share of $1.43 was at the higher end of Dollar Tree’s outlook. Net sales on a consolidated basis increased 4.2% to $7.6 billion. Traffic in the quarter ended May 4 increased 2.1%, though the average ticket declined 1.1%.
Dreiling said the ticket declines reflected weaker discretionary demand, particularly in the Dollar Tree segment. “Looking at performance by banner, Dollar Tree comps increased 1.7% on a 2.8% increase in customer traffic, partially offset by a 1.1% decrease in average ticket,” he said. “Dollar Tree’s consumables comp was 7.4%, and its discretionary comp declined 3.2%. While a 7.4% consumables comp is respectable in its own right, it is worth noting that this came on top of a 6.9% consumables comp last year. On the other hand, this was the first discretionary-comp decline we’ve seen at Dollar Tree since the first quarter of 2020, at the outset of the pandemic.”
The first quarter results reflect favorable freight costs and careful expense management, according to Dreiling.
“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.”
Dollar Tree continues to phase in its multi-price strategy, called More Choices. “Multi-price is designed to complement our core $1.25 strategy, not replace it,” Dreiling said. “We expect that at least 80% of the items in any Dollar Tree store will remain at that entry-level price point.”
