Inflation, bad economics, and slower consumer spending have hit even the nation’s most affordable retail stores – Family Dollar.
On Wednesday, 13 March Dollar Tree announced its fourth-quarter earnings, and despite the revenue growth over recent months, the company announced that it’s planning on closing nearly 1,000 of its Family Dollar-owned stores.
Back in 2015, Dollar Tree acquired Family Dollar in a $8.5 billion deal in an attempt to create a coup de grace that would challenge nearest discount competitors Dollar General and Walmart.
Unfortunately, Dollar Tree had to learn these lessons the hard way, following the acquisition and the difficulty of having to rebuild the reputation of the downtrodden Family Dollar brand that has been ridiculed with bad publicity and increasing competition within an already slow consumer market.
The company is expected to close more than 600 stores within the first half of 2024, with an additional 370 on the books in the coming years. Nearly 30 store locations will close permanently following lease expirations.
Dollar Tree executives have tried nearly every trick in the corporate playbook, however putting all the pieces of the broken puzzle back together has been nothing but an unwavering challenge that has now cost the company $1.71 billion in losses, or roughly $7.85 per share.
For investors, these numbers are flashing red signals, however, the company is optimistic that shedding some extra fat would make Dollar Tree more attractive for investors in the near future.
Yet, investors are looking at the numbers, which show that around last year this time, the company earned roughly $452 million, or $2.04 per share. Although, nothing is always what it seems, at least not when shopping at Dollar Tree.
A Challenging Quarter
The company has undertaken some major headwinds in recent months. For starters, it took up a $594.4 million charge for a portfolio optimization review at the end of last year. The review identified hundreds of underperforming stores due for closure and comes after the parent company, Dollar Tree received more than $13.1 million in fines due to overstepping more than 400 workplace safety violations since 2017.
Next, was a $1.07 billion goodwill impairment charge which was perhaps a further blow to the company. Finally, Dollar Tree had another $950 million in trade name intangible asset impairment charges, mostly coming from Family Dollar.
In total, the retailer posted more than $2.61 billion in charges for the quarter, not a pretty bill to foot when most recent quarterly earnings showed the company dropping the penny, or should I say dollar, on analysts’ expectations.
For the fourth quarter, the company reported a net income of $555.7 million, with an adjusted earnings per share (EPS) of $2.55. Both of these came in below analyst’s estimates as expected by Wall Street.
The adjusted EPS reflects a 25.% increase, however in the long-term, adjusted EPS was down 18.3% to $5.89 per share for the full fiscal year 2023. Revenue managed to improve, climbing from $7.72 billion to $8.62 billion, but was slightly below Wall Street’s estimate of $8.67 billion.
The retailer noticed some improvements in same-store sales, especially for Dollar Tree which saw this segment improve by 5.8%. On the other hand, Family Dollar same-store sales slumped 1.2% for the fourth quarter, despite foot traffic steadily increasing, although ticket totals were down across the board.
Rats And Fines
The underwhelming fourth quarter performance is influenced by a combination of factors that have come into play, especially since the company acquired Family Dollar nearly ten years ago.
For instance, Dollar Tree realized too late that the majority of Family Dollar stores were in a worse condition than they expected. Last year, the company was slapped with a $41.6 million fine, and made headlines as the “the largest-ever monetary criminal penalty in a food and safety case.” Not the headline you want to see your name associated with.
The fine comes after both Dollar Tree and Family Dollar employees complained about unsafe and unsanitary working conditions, with the Occupational Safety and Health Administration (OSHA) criticizing the corporation, saying that “the company cares more about profits than people.”
Things only started going downhill from there, after news broke that some Family Dollar locations were selling products that were stocked in a rat-infested warehouse in West Memphis.
As one thing led to another, both Family Dollar and Dollar Tree quickly found themselves in hot water, landing from the pot into the frying pan, and footing a more than $40 million fine.
After a tumultuous year, we found ourselves in this position where the company has decided that store closures will save them more money, both in fines and public relations costs, than having to operate under such conditions.
With Dollar Tree now expecting to close nearly a thousand stores, it’s uncertain how middle to low-income earners will be impacted by the shrinking number of options they have available.
Perhaps this could be an opportunity for Dollar General to step up to the plate and complete the work that Dollar Tree was initially excited about doing but lost steam halfway through due to the poor condition in which Family Dollar was acquired.
As the quarter unfolds, and Dollar Tree shakes off some dead leaves along the way, it would be interesting to see how much the company has learned from its past mistakes, and how their current near and long-term strategy will help remedy their situation.
