Dollar Tree's 1,000 store closure shows the dangers of bad buys

Dollar Tree (DLTR) is shrinking as it struggles with its Family Dollar acquisition. Family Dollar stated Wednesday that 600 shops will close in the first half of fiscal 2024. The company will close 370 Family Dollar and 30 Dollar Tree stores when their leases expire, totaling 1,000 stores.

“We believe reducing these unproductive locations would help to unleash considerable value at the enterprise level," CEO Richard Dreiling said on an earnings teleconference. The retail closures could cost the business $730 million in yearly sales, but cost savings could raise profitability by $0.30 EPS.

Dollar Tree announced it following another poor quarter. The company lost $1.7 billion in Q4, compared to $452 million a year earlier, missing Wall Street's estimates. In fiscal 2023, the corporation lost $998 million after making $1.6 billion in 2022.

A $594.4 million portfolio review charge, $1.07 billion goodwill impairment charge, and $950 million trade name impairment charge drove its deficit. Dollar Tree had better same-store sales than expected, but Family Dollar fell 1.20%. Dollar Tree had 16,774 stores in Q4, 8,415 Dollar Tree and 8,359 Family Dolla

Family Dollar's integration into the bargain retailer's portfolio has taken nearly a decade. Dollar General (DG) offered $9.7 billion for Family Dollar in 2014, but Dollar Tree worked hard to win. Dollar Tree won the bid with $8.5 billion due to fewer lawmakers' anti-competition concerns and concluded the purchase in July 2015. Beginning 2016, Bloomberg reported 5,954 Dollar Tree and 7,897 Family Dollar outlets.

The company's latest acquisition was a "suboptimal" business with a "weak brand image" and "quite weak brand loyalty," according to GlobalData's retail managing director Neil Saunders, who told Yahoo Finance. Family Dollar has many warehouse supply chain concerns and didn't lead in pricing. Since then, brand identification efforts have been "piecemeal," when the business needs major adjustm

"They've rebranded some of the stores to Dollar Tree ... done a bit of work on private label, they've tried to shop price points," he said. "All of these things are sensible, but they're sort of drops in the ocean, they're sort of papering over the cracks."

The closures indicate that Family Dollar isn't working for the corporation for the first time. Dollar General, which reports Q4 earnings on Thursday, Mar. 14, may be thanking "its lucky stars" for not winning, Saunders said. Dollar Tree's stock fell 14% Wednesday after the announcement. Its 12-month stock decline is 10%, compared to Dollar General's 28%. Both lag the S&P 500 (^GSPC), up 34% year-over-year.

Dollar Tree will suffer "painful" closures in the short term, but Saunders said the company can now boost revenue and earnings without its weakest stores. In addition to Family Dollar, Citi analyst Paul Lejuez sees other risks for Dollar Tree.

In a note to clients, he warned "weakness with the low-end consumer" and "overall macro uncertainty" might hurt Dollar Tree's sales, margins, labor inflation, and costs.


follow for  more updates