Dollar Tree's stock dips as retailer discloses that Family Dollar is up for sale less than a decade after it was acquired

By Ciara Linnane and James Rogers

Company says an Oklahoma-based distribution center was destroyed by a tornado

Dollar Tree Inc.'s stock fell 2% early Wednesday, after the retailer disclosed a strategic review of its Family Dollar business less than a decade after acquiring it, as well as losses stemming from tornado damage to a facility.

Chesapeake, Va.-based Dollar Tree (DLTR) announced the move as it posted net income of $300.1 million, or $1.38 a share, for the quarter to May 4, up from $299.0 million, or $1.35 a share, in the year-earlier period. Adjusted per-share earnings came to $1.43, matching the FactSet consensus.

Revenue rose to $7.633 billion from $7.324 billion a year ago, compared with a FactSet consensus of $7.634 billion.

"We are pleased to deliver first quarter adjusted EPS results that are towards the high end of our outlook range," Chief Executive Rick Dreiling said in prepared remarks.

"At Dollar Tree we remain focused on rapidly rolling out our next generation of multi-price stores and at Family Dollar we are taking the steps necessary to position the business for long-term success."

The company has launched a review of strategic options for Family Dollar, which could include a sale or spinoff of the business. It has no deadline or definitive timetable for the completion of the review. The company acquired Family Dollar in 2015 for $8 billion but has struggled to integrate the business and make it profitable.

In March, the company announced plans to shut 600 Family Dollar stores in the first half of 2024, and to shutter another 370 Family Dollar stores, and 30 Dollar Tree stores over the next several years as their leases run out.

As of Feb. 3, 2024, Dollar Tree had 16,774 stores, of which 8,539 are Family Dollar stores.

Speaking on the company's fourth-quarter earnings call Dreiling said that persistent inflation and reduced government benefits "continue to pressure" many Family Dollar consumers. "Lower income consumers continue to be very deliberate about their spending," he said.

On Wednesday, Dreiling told analysts he's aiming for the two banners to "have the right strategic, operational, and capital structures necessary to meet the evolving needs of their customers and to maximize value creation in each business," according to a FactSet transcript.

Dollar Tree also said it had incurred losses of $117 million as of May 4 after a tornado destroyed a distribution center in Marietta, Okla. Neither the facility nor the inventory it contained are salvageable, it said.

"Expected insurance recoveries for business interruption and redevelopment costs greater than the losses recognized cannot be estimated at this time," the company said.

The company's first-quarter gross margin expanded 30 basis points to 30.8%. Dollar Tree said this expansion was driven primarily by a decrease in freight costs, partially offset by a higher mix of lower-margin consumables sales, and higher shrink.

Dreiling also addressed shrink, which has been a key issue for retailers in recent years.

"Shrink is still a problem, but it's not deteriorating like it did last year," he said. The CEO described Dollar Tree's self-checkout exposure as "basically nothing" and also pointed to efforts implemented about a year ago to tackle shrink, such as eliminating high-stakes SKUs. "I am pleased - we are not out of the woods, but at least I can tell you that it has stabilized," he added.

For the second quarter, the company is expecting sales to range from $7.3 billion to $7.6 billion, while FactSet is expecting $7.6 billion. Adjusted EPS is expected to range from $1.00 to $1.10, while FactSet is expecting $1.19.

The stock has fallen 15% in the year to date, while the S&P 500 has gained 11%.

-Ciara Linnane -James Rogers

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06-05-24 1017ET

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