Family Dollar's rising costs and weakness ail Dollar Tree

Dive Brief:

Dollar Tree on Thursday reported that consolidated net sales rose 4.2% year over year to reach $5.54 billion.
Enterprise same-store sales rose 1%, according to a company press release. By banner in the quarter, store comps at Dollar Tree rose 2.3% on a constant currency basis (2.2% adjusted for Canadian currency fluctuations) and the Family Dollar banner fell 0.4%.
Gross profit in the quarter rose 0.4% year over year to $1.67 billion, including $6.1 million of hurricane-related expenses, the company said. Gross margin decreased 110 basis points to 30.2% of sales compared to 31.3% in the prior year, driven primarily by higher domestic freight, shrink, markdowns, distribution and occupancy costs, partially offset by lower merchandise costs.

Dive Insight:

Family Dollar, which the dollar retailer acquired four years ago for $8.5 billion, is still giving the company fits despite changes to stores and the debut of private labels.

"The weakness in Family Dollar has persisted longer than we originally anticipated and we expect the Family Dollar banner to pressure results for the remainder of the fiscal year with gradual improvement in the back half of next year as the company optimizes Family Dollar’s real estate portfolio through renovating stores, re-bannering stores under the Dollar Tree brand, or closing stores," Moody’s Investors Service Vice President Mickey Chadha said in comments emailed to Retail Dive.

The retailer is also suffering from rising costs — higher wages and freight costs, plus hurricane-related expenses — with little room to maneuver because of its low-margin business, according to GlobalData Retail Managing Director Neil Saunders. "Although some of this has been mitigated by higher volume we remain concerned about future profitability as other negative headwinds, especially increasing tariffs, start to bite," he said in comments emailed to Retail Dive.

Saunders warns that Dollar Tree needs to take further action is in its Family Dollar segment, which is particularly vulnerable to Aldi’s expansion in the United States. Many of Family Dollar's core customers shop there out of necessity, according to GlobalData survey data, leaving it open to competition. That trend has been evident all year and shows no signs of abating, according to Saunders.

"The whole customer experience needs to be elevated so that Family Dollar becomes a destination of choice rather than a retailer people visit by default," he added. "Inventory discipline is also needed to reduce the number of out-of-stocks which has been an issue in some stores and is an annoyance to customers relying on the chain for essential purchases.”

The company appears to be aware of Family Dollar’s requirements, in light of next year’s goal for 1,000 store refurbishments, plans to turn 200 Family Dollar stores to Dollar Tree and a strategy to appeal to rural and urban customers, he also said. A refocus will be a tight pivot, and it will take time, he added.

The company does have a competitive advantage as a brick-and-mortar retailer, according to Moody's. "We continue to believe the combination of low prices, broad assortment and convenience will allow the company to continue to grow top line and profitability and the treasure hunt shopping that these stores offer can't be replicated by e-commerce, which is a distinct advantage," Chadha said.