DLTR Dollar Tree Inc

Retailer lowers value of Family Dollar chain by $2.73 billion, plans to close stores

By Sarah Nassauer and Micah Maidenberg 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (March 7, 2019).

Dollar Tree Inc. sharply marked down the value of its Family Dollar chain and announced plans to close hundreds of Family Dollar stores this year as the retailer struggles with a business it acquired over three years ago.

The company said Wednesday it booked a $2.73 billion charge in its fiscal fourth quarter to lower the value of Family Dollar, which it purchased in 2015 for nearly $9 billion in cash and stock.

The merger, after a bidding war, was supposed to revive Family Dollar and give it more heft to better compete with rivals Dollar General Corp. and Walmart Inc. Instead, sales at Family Dollar have lagged behind competitors, dragging down performance at Dollar Tree.

In January, activist investor Starboard Value LP revealed a stake in Dollar Tree and asked management to consider selling Family Dollar, even at a loss.

Family Dollar's sales have lagged behind for years, hurt by neglected stores, poor product selection and unhappy workers, according to analysts. The problems date to before Dollar Tree beat out Dollar General to acquire the chain, and left Family Dollar unprepared to benefit from a decade of overall strength in the dollar-store segment as shoppers gravitated to low-cost goods in the wake of the recession.

Now Dollar Tree is accelerating plans to close or renovate Family Dollar stores, responding to investor concerns that the merger isn't paying off. On Wednesday, Dollar Tree said it plans to close up to 390 Family Dollar stores this year and convert about 200 more to Dollar Tree shops. Executives have previously said Dollar Tree would renovate at least 1,000 Family Dollar stores this year. The company had around 8,200 Family Dollar stores and 7,000 Dollar Tree stores at the end of the latest quarter.

"I know it's worth more to us than we are getting credit for and quite frankly it's not worth that much to anyone else," Dollar Tree CEO Gary Philbin said in an interview discussing Family Dollar's future. "We are the ones committed to fixing and growing it."

Same-store sales in the fourth quarter rose 3.2% at the Dollar Tree brand, while sales at stores open at least a year under the Family Dollar banner increased 1.4%, the highest increase since 2017, but still a drag on overall sales.

Shares of Dollar Tree rose more than 2% in morning trading Wednesday. Dollar Tree's shares are up about 20% since the deal closed in July 2015, while Dollar General's have increased more than 50%.

In addition to pushing for a sale of Family Dollar, Starboard has asked Dollar Tree to consider joining its competitors in selling some items at price points above $1, such as $1.50 or $2, to boost profits. Starboard has also nominated seven new board members, including Bill Simon, former chief executive of U.S. stores for Walmart Inc. and Kathleen Guion, former president at Dollar General.

Starboard has met with Dollar Tree executives a few times, said Mr. Philbin. In those meetings, executives emphasized to Starboard that the Dollar Tree brand is more than "just a price point," said Mr. Philbin. "And we reiterated there is a lot of value around our plan with Family Dollar," he said. Dollar Tree is open to testing more price points at Dollar Tree, as it has in the past, he said.

Dollar Tree said Wednesday that Carrie Wheeler, a former executive at private-equity investor TPG Global, has been appointed to serve as an independent director on the company's board.

The three large dollar chains target slightly different customers. Dollar Tree stores are mostly in suburban locations and sell all items for $1. Dollar General has more rural locations and aims to attract low-income shoppers by selling frequently purchased products at different price points. Family Dollar targets similar low-income shoppers, but nearly half of its stores are in urban locations. Dollar Tree aims to expand Family Dollar's footprint in rural America, said Mr. Philbin, grabbing more business in areas where independent grocers and other retailers are closing stores.

Dollar Tree reported $6.21 billion in consolidated net sales for the quarter ended Feb. 2, down about 2% from the comparable period. Weakness in the Family Dollar chain, where sales slipped about 5%, hurt overall results.

Dollar Tree executives have said their plan to improve sales at Family Dollar is in motion. The retailer aimed to finish around 500 Family Dollar renovations during the past fiscal year, at least 1,000 this year, and another 1,000 the following year, Chief Executive Gary Philbin said in an interview last November.

Due to the charge against Family Dollar, the retailer reported a net loss of $2.31 billion for the fourth quarter, compared with a profit of $1.04 billion in the year-earlier period, when it was helped by a tax benefit that wasn't repeated.

Write to Sarah Nassauer at sarah.nassauer@wsj.com and Micah Maidenberg at micah.maidenberg@wsj.com

(END) Dow Jones Newswires

March 07, 2019 02:47 ET (07:47 GMT)

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