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For Dollar Tree, the blockbuster deal to buy Family Dollar in 2015 was meant to give the discount retailer the heft to compete against market leaders Dollar General and Walmart.
It hasn’t worked out that way. The Family Dollar deal, struck at an enterprise value of $9.2bn after a fierce bidding war with Dollar General, has instead left the retailer exposed to the toughest part of a struggling bargain retail market.
Last week, Dollar Tree announced plans to close down nearly 1,000 — or 12 per cent of — Family Dollar stores. It also took a fresh $2bn impairment charge on Family Dollar that wiped out its earnings for the year. Including the latest writedown, Dollar Tree has taken $5bn in impairments on Family Dollar over the past five years.
Dollar Tree said it was a victim of the macro environment. There is some truth in that. In the past, dollar stores have done well when times are tough. Penny-pinching shoppers turned to them to save money. But these days, the poorest Americans are being squeezed to such an extent by high inflation and an end to pandemic-era government aid that they are spending less altogether.
The result is that the fortunes of dollar stores have been determined by which particular stratum of low-income consumer they serve. Family Dollar, which caters mainly to low-income urban customers, reported a 1.2 per cent decline in same-store sales during the fourth quarter. Sales of higher-margin discretionary items like home decor were down 12 per cent.
By contrast Dollar Tree, whose stores are mostly in suburban locations and focus on middle-income households, has fared far better. Its same-store sales rose 6.3 per cent during the quarter.
Efforts to fix Family Dollar have been costly. Many stores were in poor shape, bad locations and suffered from logistics problems. Although both chains pull in similar revenues, Family Dollar is barely profitable. Adjusted operating margin was negative last year, compared with Dollar Tree’s 13.7 per cent.
But arch-rival Dollar General is struggling too. The latter, whose core customers are lower income Americans living in rural areas, eked out a 0.7 per cent rise in same-store sales but suffered a 39 per cent drop in net income during the fourth quarter.
The resilience of the Dollar Tree chain allowed the company to trade at a premium to Dollar General throughout much of 2023. The gap has since closed and reversed in the wake of the Family Dollar write down.
This isn’t just a deal gone bad. The problems across the dollar store sector are a reminder that lower income Americans are suffering disproportionately post-pandemic.
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