Right now, Dollar Tree(NASDAQ: DLTR) shares are trading so low it feels like going to the $0.99 store and buying them off the shelf wouldn't be out of the question.
In all seriousness, its stock trades for much more than a dollar, but Dollar Tree has had a horrendous 2024. Shares are down 50% year-to-date, now trading in the low $70 per share range and 52% below their 52-week high. With the company saying it is currently "navigating through one of the most challenging macro environments" in its history, it's hard to see any light on the horizon.
However, a big announcement back in June gives hope that Dollar Tree could turn around its floundering business over the long term.
Dollar Tree is looking to break up the family
Dollar Tree has two segments, Dollar Tree and Family Dollar, two separately branded retail stores. In June, Dollar Tree said it had "initiated a formal review of strategic alternatives" for the Family Dollar segment. It went on to say this could include "a potential sale, spin off or other disposition of the business."
Some say private equity firms or a company like Five Below could be potential fits to buy the business, but no serious suitors have emerged yet.
In mid-2015, Dollar Tree bought Family Dollar for $8.5 billion. It hoped to revive the struggling retailer, and the potential to boost earnings excited some investors. However, nearly 10 years later, the company is finally trying to rid itself of the sluggish segment. The investment just hasn't paid off.
Despite their similarities, the two stores are fairly different. Dollar Tree sells novelty items and crafts for $1.25 in middle-class neighborhoods. The brand is expanding into different products in the $3 to $5 range, including frozen and refrigerated items.
On the other hand, Family Dollar is like a mini supermarket, focusing more on groceries. It has a wider range of prices and caters to lower-income areas. This difference caused a lack of synergies between the businesses, making a successful merger difficult.
Sales going stale at Family Dollar
The decision to explore a sale makes more sense when looking at the company's financial statements. Family Dollar appears to be much more cost-intensive. The net sales of the two segments for Q2 2024 were $4.1 billion and $3.3 billion for Dollar Tree and Family Dollar, respectively. However, Dollar Tree's operating income of $342 million was light-years better than Family Dollar's operating loss of $15 million.
The table below shows more stark differences between the segments.
| Q2 2024 Adjusted Operating Margin (%) | H1 2024 Same-Store Sales Growth (%) | |
|---|---|---|
| Dollar Tree | 8.4% | 1.5% |
| Family Dollar | (0.1%) | 0% |
Table by author. Data Source: Company filings. H1 2024 refers to February 3 to August 3.
Another point to consider is Dollar General's(NYSE: DG) outperformance since the July 6, 2015, acquisition. It's Dollar Tree's most direct competitor. Dollar General's total return of 16% from then to now outpaces Dollar Tree's 17% drop in total return.
This is ironic, considering that Dollar General wanted to buy Family Dollar all those years ago. It offered a price of $1.2 billion more than Dollar Tree's bid. These metrics show that Family Dollar is hurting same-store sales growth, profits, and potential returns. So, a sale could be very beneficial.
Family Dollar might have a broken model
Looking at this from another perspective, what Family Dollar puts on its shelves could also make a sale beneficial. Investment banker Aron Bohlig at ComCap says it doesn't make sense for dollar stores to carry groceries. Actual grocery stores have a massive advantage over dollar stores selling fresh food. The complex supply chain involved with those products creates an advantage.
Dollar Tree breaks down its sales for both stores into two product types: consumables and discretionary. Consumables include food and comprise a large percentage of Family Dollar's sales mix.
Last quarter, consumables accounted for 80% of sales at Family Dollar compared to just 50% for Dollar Tree. With grocery store margins already incredibly low, it makes sense that Family Dollar has difficulty turning a profit.
Dollar Tree has performed terribly this year. But it may be good that it's willing to cut its losses on a big bet it made almost a decade ago. The comparison of financial performance shows that Dollar Tree's fundamentals are far superior to Family Dollar's and that it would be better off on its own. The Dollar Tree segment's operating margin of 8.4% shows its core profitability is also superior to Dollar General's, whose operating margin was 5.4% last quarter.
The sale of Family Dollar should boost Dollar Tree's shares, but truly reigniting shares cannot rely solely on this. The company still needs to show it can fight against Walmart, which is taking market share in the middle-income household space that Dollar Tree caters to.
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The Motley Fool has positions in and recommends Walmart. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy. Leo Miller has no positions in any of the stocks mentioned.
