Who Wins, Who Loses From Dollar Tree's Sale of Family Dollar?

After a decade's worth of frustration with the acquisition and months of toying with the idea of an exit, Dollar Tree (NASDAQ: DLTR) is finally dumping its entire Family Dollar unit. The discount retailer made the announcement in conjunction with its fourth-quarter results reported on Wednesday.

The decision has implications for the company, but not just for Dollar Tree and its shareholders. The entire discount sliver of the retail industry will feel the ripple effect, helping some but hurting others. Here's a rundown of the companies that will likely win and lose the most in the aftermath.

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But first things first.

The Family Dollar saga is finally coming to an end

It's been a long time coming. While 2015's merger of Dollar Tree and Family Dollar into a single company with two distinct businesses -- and brands -- was heralded with high hopes, the deal hasn't lived up to the hype.

Most of Family Dollar's 7,700 stores continue to have struggles that are seemingly unfixable. Whereas same-store sales (comps) at the company's nearly 8,900 Dollar Tree stores have grown in step with the rest of the retail industry of late, Family Dollar's comps have been suspiciously hit-and-miss.

Data source: Dollar Tree Inc. Chart by author.

Making Family Dollar's hot-and-cold results even more frustrating is the amount of time and money the organization has spent on remodels as well as closures of Family Dollar stores.

Now the company is moving on. On Wednesday, Dollar Tree announced it would be selling its entire Family Dollar division to a private equity consortium for $1 billion. That's about $7.5 billion less than what the company paid for the chain 10 years ago, underscoring Dollar Tree's desperation to simply be rid of the debacle. The buyer believes it can do something with Family Dollar that its current owner couldn't. And maybe it can.

With that as the backdrop, here's who wins and loses with Dollar Tree's impending sale of nearly half of its total stores.

Winners and losers

The overarching winners here are Dollar Tree and its shareholders.

Not everyone will immediately agree. Not only is the company booking a $7.5 billion loss on the sale; not directly reflected in the numbers is the amount of time, money, and other resources Dollar Tree has sunk into the business in an effort to bolster Family Dollar's draw.

All of this loss and opportunity cost is already reflected in the price of Dollar Tree's stock, though. Shares are down 60% from the 2022 peak and knocking on the door of 2017's low.

The adverse impact of everything related to Family Dollar's flop is already factored in. From where the company stands right now, things can only get better by shedding the distraction.

It's also worth adding that although Family Dollar's new owners intend to rebuild it into a rival, it's not going to become a head-to-head competitor with Dollar Tree. While 80% of Family Dollar's revenue stems from sales of consumables versus only 20% from discretionary goods, Dollar Tree's mix is closer to 50/50.

Then there's the more obvious differentiator. That's the extreme-low price of most of Dollar Tree's merchandise, at a price point of only $1.25. Consumers don't look at the two store chains the same way. Both can thrive side by side. For a similar reason, Family Dollar is in no position to pose a threat to a name like Five Below.

At the other end of the spectrum, while a new-and-improved Family Dollar doesn't pose much of a threat to Dollar Tree, that's not the case for Dollar General.

Although Dollar General's much larger physical footprint of 20,345 stores could in theory simply overwhelm Family Dollar with the benefits of its greater scale (the two chains' merchandise mix, target market, and pricing strategy are nearly identical), the company is not exactly in top fighting condition at this time. Dollar General's comps growth has been anemic for the better part of the past year, measurably trailing numbers reported by Dollar Tree.

Also note that while Dollar General CEO Todd Vasos has lamented the fact that its core less-affluent customer has simply shopped less due to lingering inflation, Dollar Tree -- like Walmart of late -- says it's now attracting a new crowd that Dollar General covets. As CEO Michael Creedon said during Wednesday's earnings call, "... [W]e are seeing stronger demand from higher-income customers who increasingly see Dollar Tree as a cost-effective source for an expanding range of products."

Ollie's Bargain Outlet's 571 stores are also threatened by an improved Family Dollar, although not quite as much as Dollar General is. The business model is markedly different, with less of a price war being waged. Much of Ollie's inventory is closeout and overstock goods purchased at a steep discount just to get it out of the way.

And which side of Family Dollar's divestiture fence is Walmart on? Neither, really. It's not much of a factor, good or bad -- at least not yet, and not anytime in the foreseeable future.

Yes, the two retailers sell similar goods at similar prices. They're not the same, though. Walmart is a go-to name when consumers wish to do some price-selective "pantry loading" at one of its 4,605 large-format U.S. stores. Family Dollar's chief draw, conversely, is a convenient quick trip, often for only a small handful of items. That's not apt to change with its new ownership. It's still occupying the same space, after all.

Just keep it in perspective

It's important to understand the prospective consequence of Dollar Tree's sale of its Family Dollar unit, but it's just as important to understand that not a whole lot is likely to change. That's because the issue isn't Family Dollar as much as it is the concept of a community dollar store itself.

With 90% of the U.S. population living within 10 miles of a Walmart store (in addition to consumers' growing willingness to spend time in one), the new-and-improved Family Dollar is still going to be challenged. Add Temu, the online marketplace operated by the Chinese e-commerce company PDD Holdings, into the mix, and consumers have even less reason to specifically seek out brick-and-mortar values like Family Dollar's. Even the smallest of competitive disruptions can wreck a business when the market is crowded and the business is a low-margin one, like retailing is.

Dollar Tree's dirt-cheap discretionary-delight experience, meanwhile, is more marketable now than it's ever been, particularly against an economic backdrop still marked by lingering inflation and tariff-prompted doubt.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walmart. The Motley Fool recommends Five Below and Ollie's Bargain Outlet. The Motley Fool has a disclosure policy.