Dollar Tree (NASDAQ: DLTR) appears to do right by discarding Family Dollar

Dollar Tree (NASDAQ: DLTR) shares have soared 15% since the discount retailer announced Wednesday that it’s selling its underperforming Family Dollar chain for $1 billion.

Analysts say it’s a smart move, though the intense competition of discount retail limits Dollar Tree’s growth potential, and tariffs could cause problems. The company’s stock has tumbled 40% in the past year.

Dollar Tree is dumping Family Dollar, which it purchased for $9 billion in 2015, to private equity firms Brigade Capital Management and Macellum Capital Management. 

Family Dollar has faced a litany of problems — from stiff competition in its urban locations to rat infestation at a warehouse. Dollar Tree announced last year that it’s shuttering about 1,000 of Family Dollar’s 8,000 stores. 

The Dollar Tree brand has more desirable suburban locations, and it has expanded its product offerings to include ones priced up to $7, after breaking the $1 barrier in 2021. Dollar Tree attracts middle-income shoppers looking for accessories like party supplies. Family Dollar sells essentials, such as food, at bargain prices.

Analysts approve of sale

Dollar Tree did the right thing in shedding Family Dollar, even though it takes an $8 billion loss on the deal, analysts say. The subsidiary posted plenty of losses in recent years. “Family Dollar’s  lackluster scale and listless real estate footprint offered little turnaround potential,” wrote Morningstar analyst Noah Rohr. 

“Time and resources should be better spent improving Dollar Tree’s namesake business. [It] boasts a return on invested capital near 20% as opposed to that of Family Dollar in the low single digits.” The cash from offloading Family Dollar will come in hand for Dollar Tree, as it plans to open 300 new stores this year. 

But the sale isn’t a panacea for Dollar Tree, analysts say.  It could face increased competition from big box retailers cutting their prices, and it may be hard for the company to benefit from adding new stores, given the crowded retail landscape.

Dollar Tree as a whole reported a same-store sales increase of 2% in the quarter ended Feb. 1. It expects an increase of 3% to 5% in the year begun Feb. 2.

The tariff question

There’s also the issue of tariffs. Plenty of Dollar Tree’s inventory comes from abroad, and US tariffs are obviously on the rise. Among the company’s tactics to deal with them are negotiating cost concessions with suppliers, moving country of origin, dropping non-economical items and raising prices. 

“The expected impact of the 10% China tariff announced Feb. 4, prior to [our] mitigation efforts, would have been about $15 million to $20 million per month,” Dollar Tree CEO Michael Creedon said in the company’s earnings call Wednesday. The mitigation has offset more than 90% of that, he said.

But President Trump also proposed tariffs this month, including 10% on goods from China and 25% on goods from Canada and Mexico. That would be a $20 million monthly hit, Creedon said. The company is working to mitigate that possibility too.

Overall then, Dollar Tree appears to be taking positive steps. But it’s in a tough industry, and tariffs could hurt.