We visited Family Dollar, the store that analysts say is becoming Dollar Tree's biggest problem. Here's what we found. (DLTR)

Family Dollar

  • Dollar Tree acquired Family Dollar in 2015.
  • Analysts say Family Dollar has been a drag on Dollar Tree’s earnings. In its most recent quarterly results, reported on Thursday, same-store sales at Dollar Tree stores alone were up 2.3%, while Family Dollar’s sales were down 0.4%.
  • Family Dollar “remains the weaker part of the business,” Neil Saunders, managing director at GlobalData Retail, said in a note to clients on Thursday. “A high proportion of Family Dollar’s shopper base goes there out of necessity rather than because they particularly want to.”
  • We visited one of its stores to find out what it is like to shop there.

It has been three years since Dollar Tree bought Family Dollar, and so far, it’s been a disappointing run. 

The discount chain, which has more than 8,000 stores in the United States, has pulled down its parent company’s earnings. In its most recent quarterly results, same-store sales at Dollar Tree were up by a modest 1%, but breaking that number down, it becomes clear that there is a weak link in the mix. While Dollar Tree same-store sales were up by 2.3% in the quarter, Family Dollar sales were down 0.4%.

Family Dollar “remains the weaker part of the business,” Neil Saunders, managing director at GlobalData Retail, said in a note to clients on Thursday. 

He continued: “From our data, a high proportion of Family Dollar’s shopper base goes there out of necessity rather than because they particularly want to. There is nothing wrong with this position, but it does mean that as financial conditions improve, or people feel they can afford something better, they are more likely to migrate away.”

Dollar Tree acquired Family Dollar in 2015, after undergoing a bidding war with Dollar General, its main US rival. Dollar Tree and Dollar General are almost neck-and-neck in terms of store count and annual sales. Both dollar chains have about 14,000 to 15,000 locations. Dollar Tree generated $22 billion in sales in 2017 compared with $23.5 billion at Dollar General.

The bidding war may have distracted Dollar Tree and led them to “gloss over some of the glaring problems at [Family Dollar],” Credit Suisse analysts wrote in June. 

“Family Dollar clearly preferred Dollar Tree as the acquirer (since the Family Dollar name was more likely to survive), and Dollar Tree likely wanted to prevent Dollar General from nearly doubling its size overnight,” the analysts wrote.

We decided to check out what it was like to shop at Family Dollar:

The Family Dollar store we visited was located in Brooklyn, New York. On average, its stores are around 7,000 square feet in size.

At the entrance of the store was a selection of seasonal products. This tactic is also used by its sister store, Dollar Tree, to grab the attention of the shopper and make sure items with a shorter shelf life don’t go unnoticed.

The layout of the store and assortment felt a lot more similar to a Dollar General store than a Dollar Tree.

In fact, Credit Suisse analysts say it would likely have made more sense for Dollar General to acquire Family Dollar. The offering is more in line, and there is a limited overlap in terms of where stores are located.

Family Dollar stores are generally found in urban areas while Dollar General stores are typically located in rural places.

See the rest of the story at Business Insider

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