In a stunning admission of defeat, discount retail giant Dollar Tree announced this week that it will shutter nearly 1,000 of its troubled Family Dollar stores over the next few years. The long-awaited move signals the company is finally conceding that its controversial 2015 acquisition of the Family Dollar chain has been nothing short of a nightmare.
When Dollar Tree trumpeted the $9.2 billion Family Dollar deal nearly a decade ago, executives painted a rosy picture of “transformational opportunity” and becoming a leading discount powerhouse. Analysts, however, have spent years describing Family Dollar as Dollar Tree’s problem child – a relentless drag on profits and operations that has only continued to fester.
“This is the coup de grâce in Dollar Tree’s botched acquisition of Family Dollar,” said Neil Saunders, a retail analyst at GlobalData. “Family Dollar has been an absolute nightmare from pretty much the day Dollar Tree acquired it. They likely underestimated the extent of remodeling and streamlining required.”
While some efforts were made to improve Family Dollar’s dowdy stores, uncompetitive pricing, and haphazard merchandising, those Band-Aids proved woefully insufficient. Supply chain disarray, frequent stockouts, and an inability to win customer loyalty have continued to plague the bargain chain. Most problematically, Family Dollar has been engulfed in a seemingly endless cycle of scandals involving rodent infestations and store insalubrities that culminated in it paying $42 million in fines just last year.
“Family Dollar remains a laggard in the value segment,” lamented Saunders. “Its core shoppers are not particularly loyal and tend to use it out of convenience more than anything else.”
For its part, Dollar Tree has long defended the Family Dollar acquisition by arguing the struggling chain had strong locations and unrealized potential. But with this week’s capitulation – shuttering around 12% of Family Dollar’s footprint – it seems those assurances have finally run their course. While the closures won’t magically solve underlying issues, analysts suggest they should at least help staunch heavy financial losses.
“Store closures don’t bring success, but they do help reduce losses,” said Saunders. “The 1,000 closures give Dollar Tree a chance to finally excise some of its worst-performing locations.”
UBS analysts estimate shutting or converting the bottom 10% of Family Dollar’s store fleet could generate $100 million in improved annual operating profits. Those numbers, coupled with Dollar Tree’s own stated goals of stealing market share from rivals like Dollar General, suggest the”nightmare” formative years of Family Dollar may be finally ending. Most investors will likely celebrate the closures as an overdue step towards rationalizing the troubled business.
Of course, many questions still loom – like whether additional closures could be forthcoming, and if the Family Dollar brand itself will ultimately survive Dollar Tree’s retrenchment efforts. For now though, the message is clear: The disastrous acquisition that was supposed to create a discount juggernaut has been rudely awoken from its fever dream of “transformational opportunity.” After years of struggling to make Family Dollar work, Dollar Tree seems to be finally waving the proverbial white flag and cutting its losses.
For the company’s shareholders, that dose of realism – however belated – could finally start providing the transformation they were seeking nearly a decade ago. Though likely not in the way executives originally promised.
