Dive Brief:

• Dollar Tree plans a major expansion for a new concept store, introduced a little over a year ago, that combines its namesake and Family Dollar banners into a single storefront. 
• The format targets rural communities of 3,000 to 4,000 people. CFO Kevin Wampler told analysts the combination format could reach 3,000 stores "at a minimum," according to a Seeking Alpha transcript.
• The retailer opened 32 combination stores in the second half of 2020, and now operates a total of 50. Comparable sales are up 20% on average at the new format stores, Dollar Tree said. 

Dive Insight:

Since Dollar Tree's acquisition of Family Dollar in 2015, the latter has been something of a problem child for the deep discounter. Family Dollar's sales often have lagged Dollar Tree's, and the company has closed hundreds of Family Dollar stores. That trajectory, however, reversed during the pandemic, when Family Dollar's offering of food and household essentials helped feed sales as consumers stocked up their houses and consolidated trips. 

The combined stores provide a deeper entangling of the two banners and a way to play them off each other while also opening new markets for the retailer. 

The new format is meant to combine "Family Dollar’s great value and assortment with Dollar Tree's 'thrill of the hunt' and fixed price-point — creating a new strategic store format targeted for small towns and rural communities," the company said. Those markets, it added, are areas where the retailer "would traditionally not open a Dollar Tree store alone."

The format also combines the differing assortments of the two banners, bringing food and household essentials from Family Dollar together with crafts, party supplies, decor and other categories from Dollar Tree. 

"Combination stores are more productive, delivering higher gross margins and are better leveraged in store costs," CEO Michael Witynski said on the analyst call. "Our successful H2 stores and combination stores will both be part of the Family Dollar new store and renovation strategy moving forward."

In a video for investors, Dollar Tree COO Tom O'Boyle touted the stores as a way to expand retail options for underserved rural communities, whose residents may have to travel to purchase what they need. 

Dollar Tree already operates nearly 15,700 stores across its two banners. Some communities it and other dollar stores operate in have pushed back against their expansion, saying the massive dollar retailers have muscled out local retailers and grocery stores. 

In the previous fiscal year, which wrapped up at the end of January, both the Family Dollar and Dollar Tree banner posted top-line sales growth amid a retail environment defined in nearly every aspect by the COVID-19 pandemic. That growth continued into the fourth quarter for both banners, with Family Dollar same-store sales up 8.1% and Dollar Tree's up 2.4%. 

Overall comps missed projections by Telsey Advisory Group analysts led by Joseph Feldman while operating margins beat their estimates. In an emailed research note the analysts said that "we continue to believe Dollar Tree is well-positioned to gain market share in a volatile macro environment, given its convenient locations, value-focused merchandise (including half the items priced at $1 and private brands), and defensive product mix of consumables and essentials."