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Dollar Tree's $9 billion problem: Family Dollar

The Wall Street Journal. logo The Wall Street Journal. 11/7/2018

  
© Joe Raedle / Getty

Dollar Tree Inc. won a hard-fought battle to buy Family Dollar more than three years ago, beating out Dollar General Corp. for the roughly 8,200-store chain that caters to low-income shoppers by selling everything from $40 wireless speakers to 55-cent cans of Vienna sausage.

Dollar Tree at the time was the smallest of the three discount retailers, and sought more heft to compete with Dollar General and the likes of Walmart Inc. and Target Corp. But now Dollar Tree executives are trying to prove the nearly $9 billion cash-and-stock purchase wasn’t a mistake.

Family Dollar’s sales have been sputtering, pulled down by neglected stores, poor product selection and unhappy workers, according to analysts. The problems stretch back to before Dollar Tree bought the business. But executives had hoped to be further along in solving them, say people familiar with the company, and now the stores are dragging on Dollar Tree’s sales and stock price.

In the most recent quarter, sales at Dollar Tree stores rose 3.7%, the same growth figure reported by rival Dollar General amid a strong economy and continued demand for inexpensive items. But Family Dollar’s sales—which account for roughly half of the corporate total—were flat, cutting Dollar Tree’s overall sales growth to 1.8%.

Dollar Tree’s stock were off 21% year to date through October, while Dollar General shares rose 20%.

“At this point [Family Dollar] has been losing traffic for years. The store managers are tired, employees are tired and the energy and culture are just not there,” said Karen Short, retail analyst at Barclays Capital. “I don’t know if there is any easy fix.”

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Dollar Tree Chief Executive Gary Philbin said Family Dollar is fixable and managers are energized, but the chain needs more work than the company originally thought. Mr. Philbin, who became chief executive of Dollar Tree last year and ran Family Dollar in the wake of the acquisition, said basic changes like clearing out aisles, stocking shelves better and waxing the floors haven’t increased sales in some stores the way the company expected.

“We have to do renovations,” said the 61-year old executive, who started at Dollar Tree in 2001 as head of stores. “Maybe that is a little clearer to me than when we started out.”

Dollar Tree stores are mostly in suburban locations and sell all items for $1, often to middle-income shoppers browsing knickknacks for fun. Dollar General is concentrated in rural areas and sells products at different price points to attract shoppers from households earning $40,000 or less. Family Dollar aims to attract the same low-income shopper, but nearly half its stores are in urban locations. Including Family Dollar outlets, Dollar Tree has about 15,000 U.S. stores, roughly equal with Dollar General.

Family Dollar’s drag on Dollar Tree stands out at a time when competitor Dollar General is growing rapidly and a strong economy is boosting sales at big-box competitors including Walmart and Target.

Dollar General, which is based in Tennessee, has ramped up new store openings since it lost out on buying Family Dollar, adding around 1,000 a year in mostly rural locations. That is in part because Dollar General executives say they see a window of opportunity to head off expansion by Dollar Tree as it tends to Family Dollar’s woes.

This year Virginia-based Dollar Tree will renovate 500 Family Dollar stores, on top of the 377 done last year, and will accelerate renovations next year to boost sales further, Mr. Philbin said. It will put more snacks and drinks near registers, add more frozen and refrigeration units, and sell more items for $1, he said.

It also will change the layout of stores, he said. Store-brand diapers are best sellers but sit across from dog food in some Family Dollar stores because they both need deep shelves. In renovated stores, baby and toddler items will be stocked across from diapers to better catch parents’ eyes, Mr. Philbin said. And it is selling beer in more locations and revamping Family Dollar’s store-brand products.

Mr. Philbin said the company plans to close an unspecified number of Family Dollar stores and turn some locations into Dollar Tree outlets. He said there is still room for Dollar Tree to add Family Dollar stores in rural America because grocery, drugstore and big-box chains aren’t adding to their totals. “I think in rural America, it’s an opportunity,” he said.

Investors have speculated that an activist investor could take a position in Dollar Tree to advocate for a sale of Family Dollar.

In 2014, activist investors—including Carl Icahn and Nelson Peltz’s Trian Fund Management—pushed Family Dollar to sell itself. Today, there isn’t a clear buyer if it were put on the block, some analysts say.

One reason Dollar General lost the contest for Family Dollar three years ago were antitrust concerns on the part of Family Dollar’s board. Those issues could be magnified now as Dollar General has added thousands of stores, analysts say.

Dollar General will “look at anything that’s an opportunity to continue to grow,” said its CEO, Todd Vasos, at a recent investor meeting when asked about a possible acquisition.

Mr. Philbin declined to comment on activist interest in Dollar Tree but said the company’s current board-approved plan to accelerate full-store renovations will buck up Family Dollar.

“This sector is the right sector to be in,” said Mr. Philbin. “Discount, small-box retail. I’d rather be here than anywhere else.”

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