Dollar Tree Is Selling Family Dollar. But What Does That Mean for Dollar General Investors?

Dollar Tree (NASDAQ: DLTR) bought competitor Family Dollar in 2015. Now, it's selling the chain to a pair of private equity firms at a steep loss. Weirdly, the sale could result in competitor Dollar General (NYSE: DG), still a standalone business, being the big winner from the transaction.

Dollar Tree's expensive mistake

One of the ways that a company can destroy shareholder value is by acquiring other businesses that turn out to be worth considerably less than their purchase prices. Some Wall Street insiders cynically call this process "di-worse-ification." Sometimes, this questionable strategy is driven by a CEO who is hell-bent on building an empire, no matter the cost. Other times, companies are simply trying to find new avenues for growth, and their hopeful efforts just don't pan out as well as they expected.

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When Dollar Tree bought peer Family Dollar for roughly $9 billion in 2015, management's idea was that it could find a way to synergistically operate two discount chains with different approaches: Dollar Tree, with its core concept of selling everything in the store for $1 or less, and Family Dollar, with its approach of basically being a low-cost local convenience store.

But last month, Dollar Tree agreed to sell the Family Dollar retail concept to Brigade Capital Management and Macellum Capital Management for just a touch over $1 billion. That fire-sale price suggests that Dollar Tree made a material mistake with its purchase.

Notably, over the decade that Dollar Tree owned Family Dollar, the core Dollar Tree concept expanded to include a wider range of prices and an increasing array of products, like frozen foods. Though their business models are not quite the same, Dollar Tree did begin to look more like Family Dollar. Meanwhile, the Family Dollar brand ended up being a distraction that simply wasn't performing as well as management had hoped it would. It was probably the right idea for Dollar Tree to salvage as much money as it could by selling it.

Dollar General could end up with less competition

Family Dollar and Dollar General are fairly similar retail concepts: Both are attempting to fill the local convenience store niche, like an old five-and-dime, particularly in smaller towns that aren't directly served by big-box stores.

That said, the next steps for Family Dollar are probably going to be dramatic. Managers of public companies have to justify every decision to investors, who can be more focused on near-term impacts to the business and its stock price. Once it goes private, it's possible Family Dollar's new owners will be able to make quicker and larger moves to get the business back into fighting shape. That effort will likely include speeding up the pace of store closures.

Dollar General is also closing some locations to fine-tune its footprint. However, it is opening more stores than it is closing. In 2025, it expects to increase its store count by 2%. That's modest, for sure, but it's still growth. The net result of the Family Dollar sale, meanwhile, could be that Dollar General will face less competition in some markets as Family Dollar stores get shuttered. Those store closures could also open up expansion opportunities in markets that Dollar General previously hadn't served.

Dollar General could have a new tailwind

To be fair, Dollar General isn't exactly hitting it out of the park today. Revenue rose 4.5% in 2024, but earnings fell materially thanks to the company's own strategic review. The stock has fallen dramatically, as well. However, the company's repositioning effort could actually have just gotten a little easier to achieve thanks to Dollar Tree's sale of its competitor concept, Family Dollar.

If you have been looking at Dollar General with its historically elevated 2.5% dividend yield and thinking there's a value play here, you may now have even more reason to like the stock than you did before.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.