Dive Brief:
- Dollar Tree has agreed to sell its Family Dollar banner to private equity firms Brigade Capital Management and Macellum Capital Management for just over $1 billion, the discounter said Wednesday. Family Dollar will remain headquartered in Chesapeake, Virginia.
- Dollar Tree acquired its rival about a decade ago for much more — $8.5 billion — and since then Family Dollar has been a drag on results. The sale to the financial firms, subject to customary closing and regulatory conditions, is expected to close in Q2.
- The company on Wednesday also reported that, with one less week last year, Q4 net sales rose just 0.7% from 2023 to $5 billion, and store comps rose 2%. Gross margin contracted 130 basis points to 37.6%, and net loss more than doubled to $3.7 billion.
Dive Insight:
Dollar Tree has floated the possibility of selling Family Dollar since June. By then there were signs that the banner's troubles were coming to a head: In March, Dollar Tree had said it would close 1,000 stores, mostly Family Dollar locations. But this announcement may nevertheless be unexpected, if only because many observers thought the chain would be difficult to unload.
“We see this as an upside surprise, as most investors did not expect [Dollar Tree] to find a buyer given this underperforming business,” Wells Fargo analysts led by Edward Kelly said in a client note Wednesday.
Dollar Tree has struggled to make its acquired business work, as Family Dollar was beset by supply chain challenges, poorly located stores, a weak value proposition and other operational issues, according to GlobalData Managing Director Neil Saunders. Many of its stores operate in areas where competition is steep and growing more intense, he said in emailed comments.
“Basically, Dollar Tree bit off far more than it could chew,” he said. “And, to add insult to injury, the amount it paid for Family Dollar was inflated by a mild bidding war with Dollar General.”
Activist investors in 2014 urged Family Dollar to accept Dollar General’s higher bid, but Dollar Tree reportedly won due to its plan to mitigate antitrust concerns.
Dollar Tree estimates that net proceeds from this deal will total about $804 million. Mostly though, the puzzle of how to revive Family Dollar falls to its new owners.
“While the issues reflect the relatively low price paid for the business – far less than Dollar Tree originally bought it for – they are not easily resolved,” Saunders said. “Private equity has a habit of playing financial games with retailers for short-term returns. In the case of Family Dollar, that may deliver something of a return, but what’s really needed is an injection of investment and operational discipline to put the business back on track.”
In statements Wednesday, Brigade and Macellum executives revealed little of their plans. They noted that Family Dollar was founded in 1959 and referred to it as “an iconic business.” Macellum CEO Jonathan Duskin said that former Family Dollar Chief Operating Officer Duncan MacNaughton will join the company as board chairman.
