Dollar Tree (DLTR) is marking down its footprint since it continues to struggle with its Family Dollar acquisition.
The dollar store chain announced on Wednesday plans to shut 600 Family Dollar stores in the first half of fiscal 2024. It’ll shutter one other 370 Family Dollar and 30 Dollar Tree locations once their current leases expire, bringing all the closure to 1,000 stores.
“We consider rationalizing these unprofitable locations will help to unlock meaningful value on the enterprise level,” CEO Richard Dreiling said on an earnings call. He added that the company could lose $730 million in annual sales because of this of the shop closures, but boost its earnings by $0.30 EPS with cost savings.
The announcement came after one other disappointing quarter for Dollar Tree. In Q4, the company posted revenue and earnings that missed Wall Street’s expectations, running a net lack of $1.7 billion, as compared with net earnings of $452 million from a 12 months ago. For fiscal 2023, the company lost $998 million, versus a profit of $1.6 billion in 2022.
The essential thing reason for its loss is a $594.4 million charge for portfolio review, a $1.07 billion goodwill impairment charge, and a $950 million trade name impairment charge. Same-store sales beat estimates at Dollar Tree, but came in lower than the Street anticipated for Family Dollar, down 1.20%.
As of Q4, Dollar Tree had 16,774 total stores, with 8,415 Dollar Tree and eight,359 Family Dollar locations.
Probably the most recent development is the culmination of nearly a decade-long struggle for the discount retailer to integrate Family Dollar into its portfolio. Dollar Tree fought hard to win the chain, competing with Dollar General (DG), which offered $9.7 billion for Family Dollar in 2014.
But Dollar Tree won the bid with $8.5 billion because of this of fewer anti-competition concerns amongst lawmakers and closed the deal in July 2015. Originally of 2016, the chain had 5,954 Dollar Tree and 7,897 Family Dollar stores, per Bloomberg data.
Nonetheless, its newest prize was a “suboptimal” business in need of a turnaround, with a “weak brand image” and “quite weak brand loyalty,” Neil Saunders, GlobalData’s managing director of retail, told Yahoo Finance.
Family Dollar also didn’t lead the category in pricing and had a multitude of supply chain issues with its warehouses. Efforts since to indicate across the brand’s identity have been “piecemeal,” when the business needed fundamental changes.
“They’ve rebranded just a few of the stores to Dollar Tree … done slightly little bit of work on private label, they’ve tried to purchase price points,” said Saunders. “All of these things are sensible, but they’re type of drops inside the ocean, they’re type of papering over the cracks.”
The closures are a tell that for the first time the company is recognizing that its Family Dollar business is just not working. Dollar General, which is about to report its Q4 earnings on Thursday, Mar. 14, might be going thanking “its lucky stars” that it didn’t win, Saunders added.
Dollar Tree’s share price dropped 14% on Wednesday after the announcement. Its stock is down 10% over the past 12 months, far lower than its rival Dollar General’s 28% drop. Each underperform the S&P 500 (^GSPC), which is up 34% from a 12 months ago.
Inside the near term, the closures will probably be “painful” for Dollar Tree, nevertheless the business can now improve revenue and earnings without being weighed down by its worst stores, said Saunders.
The continuing issue of Family Dollar is just not the one potential risk to Dollar Tree though, per Citi analyst Paul Lejuez.
In a note to clients, he said other risks which may impede it from reaching its price goal of $163 include “weakness with the low-end consumer” along with “overall macro uncertainty” which may negatively impact Dollar Tree’s sales and margins and higher labor inflation and overall costs.
How Dollar Tree moves forward will probably be a major test for Dreiling, a former Dollar General CEO who took over his current role in January 2023.
“This management team is doing their best with the cards they’ve been dealt,” said Telsey Advisory Group’s managing director Joe Feldman.
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.