NEW YORK, March 26 (Reuters Breakingviews) – Dollar Tree’s (DLTR.O)
, opens new tab latest bargain is its own operations. The discount retail chain is handing its down-market Family Dollar brand to a group of private equity firms for the meager price of $1 billion. As the economy weakens, stores that cater to price-sensitive customers might seem like a safe haven. Looming tariffs and cuts to government subsidies turn that logic on its head.
On Tuesday, Dollar Tree announced the sale
, opens new tab to Brigade Capital Management and Macellum Capital Management, wrapping up a decade-long failed experiment. In 2015, it acquired Family Dollar for $9 billion, calling it a “transformational opportunity” to reach a “broader array of customers.” Dollar Tree skews to middle-income consumers, who make up about half of its base, especially when they’re searching for oddball seasonal items like Halloween decorations. Like retail giant Walmart, it’s even drawing in higher-income shoppers, a sign that wallets are stretching. Family Dollar, meanwhile, caters to those on lower incomes buying staples like groceries.
The rationale for combining went sideways
, opens new tab. Family Dollar’s down-at-heel stores located in urban centers required more investment to spruce up than could be justified. Neglect invites trouble in retail: Family Dollar’s net sales for the year ending February fell 2% from the prior year, compared to Dollar Tree’s increase of 5%. It is less profitable, too, notching a gross margin of 25% versus the more-upscale brand’s 36%.
This sagging business has dragged down Dollar Tree’s valuation. Its enterprise trades at under 15 times trailing-twelve-month operating income, according to Visible Alpha, versus 18 times for rival Dollar General (DG.N)
, opens new tab. With shares down 45% over the past year, that made the company an eager seller. Brigade and Macellum paid only 9 times Family Dollar’s operating income of $108 million during its last fiscal year, after stripping out various write-downs and the cost of running a sale process.
valuations of Dollar General and Dollar Tree
Buying a down-market chain on the cheap might seem well-timed. Consumer confidence
, opens new tab dropped to its lowest level in four years in March. Analysts see recession risks rising. Yet President Donald Trump’s constant tariff threats add dire uncertainty. After all, Dollar Tree sources 40% of its inventory from China, according to Jefferies. Furthermore, the Republican hunt for government spending to cut could hit programs that subsidize food purchases for those on low incomes.
Even small deviations can hurt. In September, Dollar Tree trimmed its annual forecast, sending its share price down by more than a fifth. Income from continuing operations fell 18% last year. The margin of error, always razor-thin in retail, is narrowing even further.
CONTEXT NEWS
Dollar Tree said on March 26 that it had agreed to sell its Family Dollar chain of stores for $1 billion to Brigade Capital Management and Macellum Capital Management. Dollar Tree bought the discount retailer for about $9 billion in 2015.
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Editing by Jonathan Guilford and Maya Nandhini
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Jennifer Saba is a columnist covering media, Silicon Valley and Wall Street based in New York. She joined Breakingviews in 2015 from Reuters where she was a correspondent reporting on companies like Fox, News Corp and the New York Times. Jennifer has covered media for more than 15 years in San Francisco and New York. She began her career in advertising. She has a graduate degree in journalism from Stanford University and an undergraduate degree in English from The University of Texas.
