Dollar Tree mulls sale or spinoff of Family Dollar business

(Source: Bigstock)

Discount retailer Dollar Tree has started a formal review of strategic alternatives for its Family Dollar business, which include a potential sale or spinoff.

The news came after the company announced the planned closure of about 970 underperforming Family Dollar stores in March. The move was to focus on remaining stores with better opportunities for long-term growth and transformation.

“The unique needs of each banner at this time – transformation at Family Dollar and growth acceleration at Dollar Tree – lead us to the decision to conduct a thorough review of strategic alternatives for the Family Dollar business,” said Rick Dreiling, chairman and CEO of Dollar Tree.

There is no deadline for the review process, and there is no assurance that it will result in any transaction, the company stated.

Neil Saunders, MD of GlobalData, described Family Dollar as the “weight” Dollar Tree has encumbered since acquiring the business in 2015. Streamlining this segment will help the company focus more on its core business which has better prospects and a much stronger position in the market, he added.

Regarding the potential sale, Dollar Tree would get nowhere near the $8.5 billion it originally paid, and the fact that Family Dollar needs a lot of work will also thin out the number of bidders, the analyst remarked.

 “A spin-off into a separate entity may be an easier option although, again, Dollar Tree will likely take a loss on the original purchase price.”

For the first quarter, the company recorded a 4.2 per cent increase in sales to $7.63 billion, with diverging performance of the two divisions. 

At Dollar Tree, sales grew by 5.9 per cent on an overall basis and by 1.7 per cent in comparable terms. The chain’s ranges and assortments are strong and the expansion into some higher-priced products is working well to create a more balanced and interesting offer for consumers, Saunders said.

Meanwhile, Family Dollar’s sales grew 2.2 per cent but comparable sales increased by a shallow 0.1 per cent. With these numbers, Saunders believed Family Dollar continues to cede a lot of market share to other players, and profit performance is also weak with an operating margin of just 1.1 per cent.

For the full year, the company forecasts net sales to be between $31 billion and $32 billion. Comparable net sales growth is expected to be in the low-to-mid-single digits, including mid-single-digits for Dollar Tree and low-single-digits for Family Dollar.

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