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Dollar Tree Struggles to Fix Its $9 Billion Family Dollar Albatross

Phil Wahba
By
Phil Wahba
Phil Wahba
Senior Writer
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Phil Wahba
By
Phil Wahba
Phil Wahba
Senior Writer
Down Arrow Button Icon
November 30, 2018, 10:19 AM ET

It seemed like a good idea at the time.

Dollar Tree’s (DLTR) $9 billion acquisition of Family Dollar in 2015 after a knock-down-drag-out fight with Dollar General (DG) has turned into a big weight on its results as fixing the damaged chain is proving to be harder than expected.

The company said on Thursday that same-store sales, a metric that strips out the impact of stores opened or closed in the last year, had risen 2.3% at its namesake Dollar Tree banner in the quarter ended Nov. 3. But at Family Dollar, long the weakest of the three major dollar store chains, they fell 0.4%, despite a strong economy and big investments to improve the business and closing weak stores and renovating existing ones.

That’s not a catastrophic decline, but it shows how hard fixing Family Dollar is turning out be and what a drag on profit: operating income margin in the quarter 7.0%, down from 8.0% of sales in the year earlier quarter.

“The weakness in Family Dollar has persisted longer than we originally anticipated and we expected the Family Dollar banner to pressure results for the remainder of the year,” Moody’s wrote in a research note. And Dollar Tree’s CEO Gary Philbin has acknowledged as much.

Prior to the acquisition, Family Dollar was already damaged by neglected stores and poor merchandise selection, landing the company in the crosshairs of activist investor Carl Icahn who pushed the company to sell itself. And Dollar Tree, the smallest of the three main dollar chain, wanted to bulk up to better compete head-on with Dollar General, and to a lesser extend general merchandise chains like Walmart and Target.

What’s more, Dollar Tree sells items for $1 and tends to be in suburbs, while Family Dollar has a big urban presence and sells items at different prices.

Dollar Tree has tried to get Family Dollar back on track by tidying up stores and aisles and better stocking its shelves. Indeed, since the deal closed, to fix Family Dollar, Dollar Tree has brought in new executives, worked to avoid product shortages, introduce new compensation programs to motivate managers, and improve its private label. It has renovated 865 stores, closed 195 Family Dollar stores, turned another 354 of them into Dollar Tree locations.

So far the progress is limited, so the company is accelerating its Family Dollar renovation program. And while Dollar Tree works to fix its problem, Dollar General has been thriving, expanding and launching a new concept store for younger shoppers.

As Neil Saunders, a managing director at GlobalData Retail, put it in a research note on Thursday, people go to Family Dollar because they need to, not because they want to. So the company will have to redouble efforts to make shopping there enticing, lest customers bolt to Family Dollar or even Aldi when their finances improve. Writes Saunders: “The whole customer experience needs to be elevated so that Family Dollar becomes a destination of choice rather than a retailer people visit by default.”

In other words, three and a half years in, Dollar Tree still has to reposition Family Dollar, with a lot of work yet to do.

Mergers and acquisitions are often tempting. But as the dollar store saga, and other consumer-facing deals in the last few years, like Coty buying Procter & Gamble’s beauty business and Men’s Wearhouse acquisition of Jos A. Bank show, fixing a damaged company is almost always a bigger project than it appears at first glance.

About the Author
Phil Wahba
By Phil WahbaSenior Writer
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Phil Wahba is a senior writer at Fortune primarily focused on leadership coverage, with a prior focus on retail.

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