Discount behemoth Dollar Tree has converted and reopened half the former 99 Cents Only stores it acquired, a process that’s proving more costly than anticipated and affecting the chain’s earnings outlook for the rest of the year.
Chesapeake, Virginia-based Dollar Tree, also the owner of troubled Family Dollar, on Wednesday reported lower fiscal second-quarter earnings than expected and lowered its guidance for fiscal 2024. Dollar Tree's weak results came roughly a week after its direct competitor, Dollar General, also delivered earnings Wall Street considered disappointing and revised its outlook.
On its earnings call, Dollar Tree offered an update on its effort to integrate the roughly 160 former 99 Cents Only stores with leases it acquired out of that retailer's bankruptcy and liquidation this year. The higher-than-expected cost of reopening those locations as Dollar Tree stores is one of the factors the chain said is causing it to revise its guidance, along with a pullback on consumer spending that Dollar General also cited last week.
A variety of retailers — ranging from Macy's to Kohl's to Lowe's — for the second quarter said their sales declined in part because of shoppers' belt-tightening amid high inflation and interest rates. Lower-income Americans are especially pinched financially, according to some chains, and Dollar Tree said it's seen an increasing effect of macro pressures on the purchasing behavior of its middle- and higher-income customers.
As of Wednesday, about 85 former 99 Cents Only stores have reopened as Dollar Tree locations, according to Mike Creedon, Dollar Tree's chief operating officer.
"In fact, another 20 stores are reopening tomorrow and the remaining 56 should reopen by the end of the year," he told Wall Street analysts. "Getting this done from scratch in less than 100 days required a massive effort across multiple teams. That's a real accomplishment. ... These 99 Cents Only locations are proven high-quality stores in strong markets with great growth potential. We are very excited about expanding our footprint across California and the Southwest and we couldn't be more pleased with the reception we've received from the communities who welcomed us."
The lease acquisition "was a rare opportunity to acquire a portfolio of assets under very favorable lease terms," according to Creedon.
'Unanticipated' costs
However, Dollar Tree has had "to absorb some unanticipated upfront costs" because of the deal, he said. The retailer's chief financial officer, Jeff Davis, discussed the impact.
"We are taking a more conservative view towards comp sales in the back half of the year, particularly in the Dollar Tree segment, as macro factors continue to weigh on customer sentiment and adversely affect discretionary demand and buying behavior," he said. "It also reflects one-time integration costs related to the 99 Cents Only lease acquisitions."
Because "time was of the essence in acquiring these leases" and there was a competitive bidding process, "the time between when we took physical possession of these properties and when they opened was longer than expected," according to Davis.
"As a result, we are incurring upfront occupancy costs like rent, insurance and for an extended period before the stores open," he said. "On a positive note, the initial sales performance of the converted and reopened stores is exceeding our initial expectations and we are increasingly bullish regarding the long-term prospect for this portfolio."
Dollar Tree is in the midst of determining how it can turn around Family Dollar, as well as the future of that chain. In March, the company said it planned to close about 1,000 underperforming Family Dollar stores. As of Aug. 3, it had shuttered roughly 655 Family Dollar stores and expects to close an additional 45 during the remainder of fiscal 2024.
In June, Dollar Tree announced it had initiated a formal review of strategic alternatives for Family Dollar, which could include a potential sale, a spin-off or other disposition of the business. There is no set deadline or definitive timetable for the completion of the strategic alternatives review process, Dollar Tree said Wednesday.
Concern over results
In the second quarter, Dollar Tree's consolidated net sales increased 0.7% to $7.37 billion. Dollar Tree same-store net sales increased 1.3%, while Family Dollar’s same-store net sales decreased 0.1%. Same-store net sales results for the Family Dollar segment don't include any locations that were closed during the second quarter as part of the previously announced portfolio optimization.
"Although Dollar Tree is lapping some tough prior year numbers, this is nevertheless an incredibly weak set of results," Neil Saunders, a retail analyst and managing director of analytics firm GlobalData, said in a note to clients.
He added that "sales growth of just 0.7% is anemic and one of the worst growth rates the company has posted since [the fourth quarter] of 2019, when it was lapping a 13-week trading period. On the bottom line, net income is down by a third. The overall impression is that Dollar Tree has quickly moved from a company that was advancing to one that is simply treading water. Though, to be fair, most of this is because of the troubles at Family Dollar."
Dollar Tree didn't respond to a email from CoStar News seeking a response to Saunders' remarks.
"Fortunately, the Dollar Tree business is performing much better with total sales growth of 5% supported by a 1.3% growth in comparable sales," Saunders said. "Store expansion, including the conversion of some former 99 Cents Only stores, helped with the total number."