TLDR
- Dollar Tree is selling its Family Dollar business for $1.007 billion to Brigade Capital Management and Macellum Capital Management
- The company reported Q4 sales of $8.26 billion, beating analyst estimates
- Dollar Tree projects 3-5% same-store sales growth as a standalone business
- The sale comes after years of struggles with the Family Dollar brand, which was purchased for $9 billion in 2015
- Management believes the divestiture will maximize shareholder value and position both businesses for success
Dollar Tree Inc. announced today it has reached an agreement to sell its Family Dollar business segment for $1.007 billion. Brigade Capital Management and Macellum Capital Management will partner to acquire the struggling discount chain.
The sale follows an extensive evaluation of options for the Family Dollar segment. Dollar Tree leadership concluded this move would create the greatest value for shareholders.
Net proceeds from the sale are estimated to total approximately $804 million. The transaction is expected to close next quarter, pending regulatory approval.
Mike Creedon, CEO of Dollar Tree, stated the company is focused on “setting Dollar Tree on a path to realize its full potential.” The decision marks the end of a troubled partnership that began in 2015.
Financial Performance
Dollar Tree reported strong fourth-quarter results. The company posted sales of $8.26 billion, exceeding analyst expectations of $8.24 billion.
Adjusted earnings per share reached $2.29, also beating the consensus estimate of $2.19. These figures include Family Dollar’s discontinued operations.
Same-store sales for the Dollar Tree segment increased by 2%. Overall sales gained 0.7% on a continuing operations basis.
Gross profit for the quarter decreased 2.8% year-over-year to $1.9 billion. The gross margin contracted 130 basis points to 37.6%.
Operating income dropped 26.5% to $533.6 million. The operating margin contracted 390 basis points to 10.7%.
Looking ahead, Dollar Tree projects fiscal year 2025 sales from continuing operations between $18.5 billion and $19.1 billion. The company anticipates same-store sales growth of 3% to 5%.
Dollar Tree expects adjusted earnings per share from continuing operations of $5.00 to $5.50 for the full year. For the first quarter, the company forecasts revenue between $4.5 billion and $4.6 billion.
First-quarter same-store sales are projected to grow 3% to 5%. The company expects first-quarter adjusted earnings per share of $1.10 to $1.25.
Dollar Tree ended the fiscal year with $1.25 billion in cash and equivalents. Operating cash flow totaled $2.2 billion with free cash flow of $893 million from continuing operations.
A Failed Merger
The sale of Family Dollar represents a dramatic loss on Dollar Tree’s initial investment. Dollar Tree purchased Family Dollar in 2015 for $9 billion.
The merger was intended to help Dollar Tree compete against bigger rivals like Walmart and Dollar General. Management hoped the combined company could grow its customer base and reduce costs.
However, the match between the two different chains proved to be a poor fit. Dollar Tree misjudged the deal and struggled to manage the larger Family Dollar store base.
Family Dollar stores were in worse condition than Dollar Tree management had anticipated. Early strategies to improve sales fell short of expectations.
Many Family Dollar locations were too close to each other. This resulted in stores cannibalizing each other’s sales.
Family Dollar’s Struggles
Family Dollar operates approximately 8,000 stores across the United States. The chain caters primarily to low-income customers in urban areas.
Prices at Family Dollar typically range from $1 to $10. The chain has faced increasing competition from larger retailers in recent years.
Last year, Family Dollar announced plans to close more than 900 stores. The company cited poor performance as the primary reason for the closures.
Analysts point to messy stores, high prices, and over-expansion as key factors in Family Dollar’s decline. The chain has also struggled with increased operating costs due to inflation.
Family Dollar faced additional challenges last year. The company was hit with a record $41.6 million fine by the Justice Department for violating product safety standards.
The fine stemmed from selling items stored in a rat-infested warehouse. The facility in West Memphis was found to contain live, dead, and decaying rodents.
The entire dollar store industry has faced pressure in recent years. Both Dollar Tree and Dollar General have reported challenges as low-income customers struggle with inflation.
Many shoppers are cutting back on spending, even for basic necessities. This trend has impacted dollar stores across the board.
Dollar Tree raised its base prices to $1.25 in 2021. This change came after 30 years of selling items for just one dollar.
The company now sells some products for up to $7. These price increases reflect the challenges facing discount retailers in the current economic environment.
Tariffs on imported goods present another potential challenge. An estimated 40% of Dollar Tree’s sales rely on imported products.
This exposure to imports makes Dollar Tree particularly vulnerable to tariff increases. The company has indicated it may need to adjust product offerings or further increase prices in response.
Stay Ahead of the Market with Benzinga Pro!
Want to trade like a pro? Benzinga Pro gives you the edge you need in today's fast-paced markets. Get real-time news, exclusive insights, and powerful tools trusted by professional traders:
- Breaking market-moving stories before they hit mainstream media
- Live audio squawk for hands-free market updates
- Advanced stock scanner to spot promising trades
- Expert trade ideas and on-demand support
