Dollar Tree’s 1,000 store closure tells the perils of poor acquisitions

Dollar Tree (DLTR) is marking down its footprint as it continues to struggle with its Family Dollar acquisition.

The dollar store chain announced on Wednesday plans to close 600 Family Dollar stores in the first half of fiscal 2024. It’ll shutter another 370 Family Dollar and 30 Dollar Tree locations once their current leases expire, bringing the total closure to 1,000 stores.

“We believe rationalizing these unprofitable locations will help to unlock meaningful value at the enterprise level,” CEO Richard Dreiling said on an earnings call. He added that the company could lose $730 million in annual sales due to the store closures, but boost its earnings by $0.30 EPS with cost savings.

The announcement came after another disappointing quarter for Dollar Tree. In Q4, the company posted revenue and earnings that missed Wall Street’s expectations, running a net loss of $1.7 billion, compared to net earnings of $452 million from a year ago. For fiscal 2023, the company lost $998 million, versus a profit of $1.6 billion in 2022.

The key reason for its loss is a $594.4 million charge for portfolio review, a $1.07 billion goodwill impairment charge, and a $950 million trade name impairment charge. Same-store sales beat estimates at Dollar Tree, but came in lower than the Street anticipated for Family Dollar, down 1.20%.

As of Q4, Dollar Tree had 16,774 total stores, with 8,415 Dollar Tree and 8,359 Family Dollar locations.

The latest development is the culmination of nearly a decade-long struggle for the discount retailer to integrate Family Dollar into its portfolio. Dollar Tree fought hard to win the chain, competing with Dollar General (DG), which offered $9.7 billion for Family Dollar in 2014.

But Dollar Tree won the bid with $8.5 billion due to fewer anti-competition concerns among lawmakers and closed the deal in July 2015. At the beginning of 2016, the chain had 5,954 Dollar Tree and 7,897 Family Dollar stores, per Bloomberg data.

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However, its newest prize was a “suboptimal” business in need of a turnaround, with a “weak brand image” and “quite weak brand loyalty,” Neil Saunders, GlobalData’s managing director of retail, told Yahoo Finance.

Family Dollar also didn’t lead the category in pricing and had a multitude of supply chain issues with its warehouses. Efforts since to turn around the brand’s identity have been “piecemeal,” when the business needed fundamental changes.

“They’ve rebranded some of the stores to Dollar Tree … done a bit of work on private label, they’ve tried to shop price points,” said Saunders. “All of these things are sensible, but they’re sort of drops in the ocean, they’re sort of papering over the cracks.”

The closures are a tell that for the first time the company is recognizing that its Family Dollar business isn’t working. Dollar General, which is set to report its Q4 earnings on Thursday, Mar. 14, is likely thanking “its lucky stars” that it didn’t win, Saunders added.

Dollar Tree’s share price dropped 14% on Wednesday after the announcement. Its stock is down 10% over the past 12 months, far less than its rival Dollar General’s 28% drop. Both underperform the S&P 500 (^GSPC), which is up 34% from a year ago.

In the near term, the closures will be “painful” for Dollar Tree, but the business can now improve revenue and earnings without being weighed down by its worst stores, said Saunders.

The ongoing issue of Family Dollar isn’t the only potential risk to Dollar Tree though, per Citi analyst Paul Lejuez.

In a note to clients, he said other risks that would impede it from reaching its price target of $163 include “weakness with the low-end consumer” as well as “overall macro uncertainty” that could negatively impact Dollar Tree’s sales and margins and higher labor inflation and overall costs.

How Dollar Tree moves forward will be a major test for Dreiling, a former Dollar General CEO who took over his current role in January 2023.

“This management team is doing their best with the cards they’ve been dealt,” said Telsey Advisory Group’s managing director Joe Feldman.

Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.

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