Last week’s story--Essentials Retail: A Tough 2024 Continues--was reinforced this week with Dollar Tree news that “it has initiated a formal review of strategic alternatives for the company’s Family Dollar business segment, which could include among others, a potential sale, spin-off, or other disposition of the business” per the earnings release.
The catalyst for the decision likely is shareholder frustration stemming from Inc’s inability to generate sustained profit growth for Family Dollar; for the past twelve months, the segment posted a loss of $10M, and more capital is required. Family Dollar's struggles include the increasingly challenged everyday-value standard assortment dollar store industry (i.e., not treasure hunt), a higher level of competitive intensity from Dollar General, and a portfolio of stores and supply chain that need significant upgrades. Interestingly, management shared that the two businesses have largely not been integrated, only sharing legal, human resources, and the C-suite. Private equity has been involved in the sector, most prominently with Dollar General. Should that be in Family Dollar's future, we’d expect a rationalization of locations in addition to the current plan to close 920 locations (Family Dollar will exit the year with 7,659 locations). Discontinuing Family Dollar's loss-making locations is the only way a private buyer could make an adequate return. As to a spin-off of Family Dollar, that move would burden the new company with central costs of over $200M, or half of the $400M in EBITDA that Family Dollar generated last year. That’s doable, but it would result in Dollar Tree not being able to offload debt onto the spun-off Family Dollar.
On the decision, CEO Rick Dreiling said, “Today, each banner is at a different stage of its respective journey and each has its own set of unique needs. This is why we believe now is the right time to conduct a thorough review of strategic alternatives for Family Dollar so we can determine what is the proper operational and ownership structure to best support and enable its transformation. At the same time, that should allow us to fully unlock the value of the Dollar Tree banner. In the end, we want to ensure that both the Dollar Tree and Family Dollar banners have the right strategic operational and capital structures necessary to meet the evolving needs of their customers and to maximize value creation in each business.” We read this to also imply that given the industry challenges that the demands on management’s time and attention to maintain and grow Dollar Tree are increasing, and so they are cutting their losses on Family Dollar to do a better job with Dollar Tree.
For the quarter, Dollar Tree reported a +1.7% increase in comparable sales, composed of a +2.8% increase in comparable transactions and a -1.1% decline in average ticket. The ticket decline reflected a -3.3% decline in general merchandise; consumables increased +7.4%, which was a moderation and likely reflects the absence of inflation. On a three-year CAGR basis, the only notable trend was a continuation of improving traffic. Profitability was pressured by sales mix, shrink, store refresh investments, and higher labor.
Family Dollar reported +0.1% comparable sales growth, composed of a +0.9% increase in comparable transactions and a -0.8% decline in average ticket. The ticket decline reflected a -4.7% decline in general merchandise; consumables increased +1.4%, which too reflects the absence of inflation. Management noted that the trend for general merchandise is improving, but that is solely due to easier comparisons as the three-year CAGR dropped hard. Like Dollar Tree, the three-year CAGR on traffic improved. Profitability was pressured by lower markups, sales mix, and store refresh investments. On the store closure program, 550 locations have closed, and 150 are now planned to be closed in the second half of 2024. (320 more in the years beyond as leases expire.)
On its acquisition of “up to 170” 99 Cents Only locations that are to be converted into Dollar Trees, Dreiling said, “These stores are highly complementary to the Dollar Tree banner and are expected to produce sales, profits and returns that are well above our portfolio average. We are pleased to bring these locations under the Dollar Tree banner and look forward to their openings later this year.” Recall that 80% of 99 Cent’s sales mix was consumables versus 50%/50% consumables/ discretionary general merchandise, so these are really a different consumer proposition.
