Family Dollar will close nearly 400 stores
New York(CNN Business) Family Dollar will close 390 stores this year — one of many big changes the discount retailer hopes will help reverse its fortunes.
The chain courts low-income shoppers with an array of items sold for under $10 at its more than 8,000 stores. It is owned by the Dollar Tree, which operates an eponymous chain of 7,000 other stores in suburban areas. Dollar Tree stores cater to customers who make more than Family Dollar customers do, but all of their products sell for only $1.
Dollar Tree bought Family Dollar in 2015 for $8.5 billion. The combined company hoped that by joining forces, it could grow its customer base, reduce costs and fend off bigger retailers like Dollar General (DG) and Walmart (WMT).
But Family Dollar has struggled and Dollar Tree's (DLTR)stock price has slipped since the deal. An activist investor heavily pressured the company earlier this year to dump the ailing Family Dollar line and start selling Dollar Tree merchandise for higher prices.
"Dollar Tree significantly overpaid for Family Dollar, and this business is proving to be a meaningful distraction," Jeffrey Smith, CEO of Starboard Value, wrote to the company in January. The firm, which is best known for revitalizing Olive Garden's parent company Darden (DRI), owns roughly 1% of Dollar Tree.
"The underperformance at Family Dollar since the acquisition has persisted long enough," Smith said.
Dollar Tree outlined an aggressive plan for Family Dollar on Wednesday after Family Dollar posted another quarter of sluggish growth during the holidays. Sales at Family Dollar stores open at least a year grew 1.4% during the holiday period compared a year earlier, trailing Dollar Tree's 3.2% growth.
Family Dollar will close nearly 400 stores this year on top of the more than 120 it closed in 2018. It will also re-brand around 200 stores as Dollar Tree this year.
Other Family Dollars will keep the name, but will be stacked with $1 Dollar Tree merchandise and alcohol sections. Family Dollar says the new store model will lift traffic and sales, especially in areas where they have slumped.
"We are confident we are taking the appropriate steps to reposition our Family Dollar brand," Dollar Tree CEO Gary Philbin said in a news release Wednesday. In the wake of Starboard's criticism, Dollar Tree also will begin testing higher-priced products at its stores.
The dollar and discount segments of retail have become hyper competitive in recent years as more Americans hunt for bargains on everything from groceries to electronics. Despite the growing economy, many Americans living paycheck to paycheck continue to struggle, creating more room for dollar stores to expand.
"The dollar store sector will remain one of the bright spots in retail," said Mickey Chadha, analyst at Moody's.
Discount competitor Dollar General has more than 15,000 stores across the country, and the company wants to expand even more in rural areas. Dollar General also has started to sell more groceries at its rural locations.
Meanwhile, eccentric chains like Ollie's Bargain Outlet (OLLI) and Five Below (FIVE) are booming. Discount grocers Aldi and Lidl also plan to open hundreds of stores in the United States to reach customers who are shopping for cheap groceries. Walmart and Target (TGT) have lowered prices on merchandise in recent years, too.
