Dollar Tree weighs sale of struggling Family Dollar discount stores

US discount retailer Dollar Tree has launched a process that could lead to the sale of its Family Dollar chain, almost a decade after it purchased the business in an $8.5bn deal. 

Dollar Tree disclosed the review of strategic alternatives on Wednesday as it reported results that underscored the struggles of Family Dollar, which accounts for almost half of the company’s more than 16,000 stores in the US and Canada. 

While the company’s Dollar Tree-branded stores have a larger suburban footprint, Family Dollar outlets tend to be located in poorer urban and rural areas and carry a larger portion of grocery items. 

The company earlier this year announced it would close 600 Family Dollar stores in the first half of this financial year, with another 370 closing over the coming years. All 600 in the first round had been shut down by the end of May, chief executive Rick Dreiling told analysts. 

He said the strategic review “includes evaluating how each separate banner might appeal differently to different sets of owners”, adding that the outcome was uncertain. 

Any sale would amount to a reversal for Dollar Tree, which under previous management agreed to acquire Family Dollar in 2014 as the latter faced pressure from activist investors Carl Icahn and Nelson Peltz to sell itself. 

Starboard, another activist investor, later pushed Dollar Tree to unwind the merger, calling Family Dollar a distraction. The activist fund Mantle Ridge then built a stake in Dollar Tree, which led to a deal that put Dreiling on its board. Dreiling became chief executive last year. 

Dollar Tree and Family Dollar, along with rival Dollar General, are the leading operators of what were long known as “dollar stores”, which historically capped prices at $1.

Inflation has cracked that price ceiling, however. Dollar Tree-branded stores now sell most items at $1.25, and some stores have also begun offering certain products at even higher prices under a programme the company calls More Choices.

“Multi-price has never been about raising prices on existing items. It’s about adding new items at new price points that are incremental to our core assortment,” Dreiling said in the call with analysts. 

In the quarter that ended on May 4, the company said same-store net sales rose 1.7 per cent year on year at Dollar Tree-branded stores, but only 0.1 per cent at Family Dollar. Total net sales of $7.6bn in the quarter rose 4.2 per cent year on year, while net income of $300.1mn was up 0.4 per cent.

Even as it reviews the future of Family Dollar, Dollar Tree has been adding stores largely under its namesake banner. The company foresees 600 to 650 opening in this financial year.

Shares in Dollar Tree were down almost 5 per cent at $114.41 in lunchtime trading, valuing the group at about $25bn.

Additional reporting by Antoine Gara in New York