Dollar Tree rejig is tale of haves and have nots
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Jennifer Saba
NEW YORK, June 5 (Reuters Breakingviews) -Not all dollar stores are created equal. Dollar Tree DLTR.O is planning to cut loose its down-market cousin Family Dollar, which it acquired a decade ago after a takeover battle with rival Dollar General DG.N. The $26 billion U.S. company’s main brand is attracting shoppers with deeper pockets. A split could uncover a bargain.
Dollar Tree Chief Executive Rick Dreiling said on Wednesday the company was considering strategic alternatives for Family Dollar because, after years of underinvestment, the capital required to fix the stores would not earn an acceptable return. The retailer plans to shut 970 Family Dollar outlets and in February it shelled out $42 million to settle a case with the U.S. Department of Justice in part because of rat-infested stores.
It's an embarrassing end to Dollar Tree’s ownership, which started in 2015 with an acquisition which valued Family Dollar at more than $9 billion, including debt. The divergence of the two chains is reflected in first-quarter results. Dollar Tree’s net sales grew faster than those at Family Dollar in the three months ending May 4, while its gross profit margin of 35% was 10 percentage points higher than its inferior subsidiary.
Dollar Tree, whose stores are mostly in suburban areas, has been wooing higher income shoppers. In 2021, the brand successfully raised prices above $1. Giant retailer Walmart WMT.N noted recently that wealthier customers were coming in the door and buying more apparel and furniture online as well. Meantime, Family Dollar stores tend to be in cities and serve customers who are more sensitive to stimulus packages. A recent federal benefit for food assistance ended last year.
While the marriage of the two dollar-store chains has destroyed value, the divorce could be beneficial for shareholders. After a 5% drop in its stock price on Wednesday morning, the company is worth about $28 billion including net debt. UBS analysts reckon Family Dollar’s enterprise could fetch little more than $2 billion. That would imply the newly single Dollar Tree is worth 9 times the EBITDA Wells Fargo analysts expect it to earn this year, in-line with the multiple investors award to long-term rival Dollar General. But if Dollar Tree keeps attracting a better class of dollar store shopper, investors may eventually reward it with a markup.
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CONTEXT NEWS
Dollar Tree said on June 5 it is seeking strategic alternatives for its business segment Family Dollar. The discount chain said it had underinvested in the stores for years and the capital investment required to fix them could not deliver an acceptable rate of return.
Dollar Tree acquired Family Dollar in 2015 for $9 billion including debt.
Dollar Tree shares were down 4.4% at $115 by midday in New York.
Graphic: Dollar Tree shares have underperformed Walmart's Dollar Tree shares have underperformed Walmart's https://reut.rs/3KuehSb
Editing by Peter Thal Larsen and Pranav Kiran
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