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Discounter Sees Widespread Growth in Combined Dollar Tree and Family Dollar Stores

The discount retailer has identified 3,000 rural areas for a potential blend of the two models.

Photo Courtesy of wolterke.

Further widespread growth is on tap for Dollar Tree and Family Dollar as their parent company ramps up new in-store concepts coupled with plans to combine the two banners in potentially as many as 3,000 rural areas across the United States.

Dollar Tree Inc. said Wednesday it expects to open 600 new stores under both names while renovating 1,250 Family Dollar locations. Of the new stores, 400 Dollar Tree sites are on the agenda for this year and 200 are slated as Family Dollar. The Chesapeake, Virginia-based company ended the fiscal year with 15,288 stores in the United States and Canada.

Dollar Tree and Family Dollar stores offer deep discounts to consumers looking for everything from frozen pizzas and dish soap to party decorations. Though consumer spending is rising, these types of discount stores face tough competition from big-box retailers such as Walmart, Target and Costco with robust e-commerce channels that consumers have been flocking to since the arrival of the coronavirus last year.

Dollar Tree stores are known for $1 sticker prices on everything but have expanded the price points to as much as $5 through its Dollar Tree Plus program. Its product mix focuses more on discretionary needs such as seasonal items, greeting cards and toys.

Family Dollar has a broader range of products selling for under $5. The chain began its so-called H2 format renovations two years ago to add more freezers and coolers to its stores. The parent company differentiates Family Dollar’s value and assortment from Dollar Tree’s “thrill of the hunt” and fixed price points.

The expansion plans come amid better sales trends and growing customer satisfaction with the H2 design at Family Dollar stores and a combination of the Dollar Tree and Family Dollar formats — what the company simply refers to as “combo stores” — in rural areas.

The combo stores, which are marketed as “Two Great Stores. One Big Deal,” began as a small test that morphed into nearly 50 stores last year, 32 of which have opened since July.

Buoyed by the 20% jump in same-store sales — a key industry data point — higher profit margins and improved operating incomes, Dollar Tree is pushing ahead with new stores in rural areas with populations of 3,000 to 5,000. Typically, residents in such communities have to travel great distances for those types of products.

Noting that the concept is “working remarkably well in rural markets,” CEO Mike Witynski said on an earnings conference call that these are areas where “we typically do not open a Dollar Tree.” The company sees big growth opportunities with the combo stores and has identified 3,000 potential markets in which to expand.

“Our goal is to have formats that leverage the best of the Dollar Tree and Family Dollar brands,” Witynski said. “We believe we can continue to change, evolve and improve.”

At the same time, Dollar Tree has completed the rollout of the Crafter’s Square addition to all U.S. stores and is expanding Dollar Tree Plus to 500 stores this year. Crafter’s Square is dedicated space in Dollar Tree stores for do-it-yourself home projects and decor merchandise, leaning in on consumer interest in learn-from-home endeavors during the pandemic.

Dollar Tree’s per-share profit jumped 19% in the quarter ending in January, ahead of Wall Street’s forecasts, but the retailer missed total sales expectations. The company reported revenues 7.1% higher than the year-earlier period at $6.77 billion, shy of the $6.87 billion outlook.

Same-store sales tracking receipts at stores open longer than a year were cumulatively up at 4.9%, led by Family Dollar’s 8.1% leap. Dollar Tree’s 2.4% rise was considered disappointing and tied to a deeply contracted holiday season, hobbled by the spike in COVID-19 cases and the absence of holiday church and school gatherings as well as friends and family parties, Witynski said.

“It just didn’t happen because of COVID,” he said.

Last year, Dollar Tree opened two new distribution centers for a total of 26 as it works to improve supply chain logistics and efficiencies across both brands. The centers, one in Rosenberg, Texas, and the other in Ocala, Florida, are roughly 1.2 million square feet. The second phase of the Ocala location is expected to be completed in 2022.

It also opened 124 new stores, expanded or relocated 11, closed 45 and renovated 106 Family Dollar stores. When the quarter ended, the parent company was selling merchandise across 125.1 million square feet.

Dollar Tree paid off a $300 million loan, ending the quarter with $3.25 billion in outstanding debt. Strong cash flows led to $1.46 billion in cash and cash equivalents at the end of the year.

Dollar Tree has $1.2 billion earmarked for capital expenditures this year, much of which will go toward the share repurchase program that was extended this year to $2.4 billion. Witynski said those buybacks are likely to be made over the next two years.

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