Tuesday, April 22, 2014

Family Dollar: Holiday Woes or Something Deeper?

A Forbes article on April 10th of this year quoted Family Dollar chairman and CEO Howard Levine as saying that “our second quarter results did not meet our expectations. The 2013 holiday season was challenged by a more promotional competitive environment and a more financially constrained consumer. In addition, like many retailers, our second quarter results were significantly impacted by severe winter weather, which resulted in numerous store closings, disrupted merchandise deliveries and higher than expected utility and store maintenance expenses.”1

Levine went on to emphasize that the company is not satisfied with its performance, and as a result is implementing a number of initiatives to turn things around. Chief among his plans: lowering the prices on 1,000 items and closing 370 stores starting during the second half of its fiscal 2014.

Despite Levine’s explanation for the store closings, I thought it a bit rash to go to that extent based solely on a single quarterly performance. Even though the store closings represent only 5% of the total store count, 370 stores is still a lot of stores! So I took a look at Family Dollar’s chief competitors, Dollar Tree and Dollar General, and ran a five-year comparison on some of the financial numbers. It appears that Family Dollar’s “challenges” may have been brewing for a bit more than three months.

Based on sales and gross profit growth during that five-year period of 40.4% and 37.9% respectively, you’d never come to the conclusion that Family Dollar was in financial straits. But in just about every category that matters, Family Dollar has lagged behind both Dollar Tree and Dollar General. The five–year financial comparison among these prominent dollar store retailers in illustrated in Figure 1 below.

While Family Dollar’s sales and profit gains are impressive by most retail standards, they pale in comparison to its rivals. Dollar Tree experienced sales and profit growth of about 50% during the same period, while Dollar General was around 48% in both categories.

Family Dollar also trails in store growth and square footage growth. With regard to store count, Family Dollar increased the size of the chain by 19% while Dollar Tree and Dollar General store counts increased by 26% and 31%, respectively, demonstrating a more aggressive growth strategy. In addition, although the average square footage per unit over the five years has been trending larger for all chains, the increase in store size has been more substantial for the competition.

However, the real reason for Family Dollar’s dramatic store closing announcement may not lie in any of these numbers, but in the net income results. Family Dollar’s net income increased 52% since 2009 - not bad at all, right? But net income at Dollar Tree went up a much more impressive 86% while net income at Dollar General, the kingpin of the bunch, increased an eye-popping 202%!

As a result, profit margins at Family Dollar have remained relatively flat during that period and are substantially below that of the competition. The Family Dollar profit margin last year was only 4.3%, reflecting modest improvement since 2009. Profit margins at Dollar Tree and Dollar General were 7.6% and 5.9%, respectively, significantly higher than back in 2009.

While internal operations may have contributed somewhat to this wide deviation, it appears that Mr. Levine, after looking at net income and profit margins, is finally realizing the need to unload a substantial number of bad apples.

Bob Sheehan, Vice President of Research
BSheehan@KeyPointPartners.com

1. Family Dollar Closing 370 Stores And Lowering Prices After Revenue Falls 6%,  Maggie McGrath, Forbes.com, April 10, 2014.

Company News

New Business: Michael Branton negotiated a 5,976 SF lease renewal with a 1,397 SF expansion with Owen & Ollie's Restaurant & Pub at Beaver Brook Village,Dracut, MA...New Property Management assignment: Harbor Village, a Hannaford-anchored shopping center in Townsend, Massachusetts. New Employees: Kevin Langelier has joined the Burlington, MA office as a Property Accountant. Kevin has years of property accounting experience at Jones Lang LaSalle and Shawmut Design and Construction in Boston. Laura Delaney joined the Burlington office as a Property Accountant. Her accounting experience includes REIT Management & Research in Watertown, MA. Brian Dell'Erario has been promoted to Assistant Property Manager in the Burlington, MA office.

National Industry News

March comparable-store sales posted a year-over-year gain of 2.9% based on the ICSC’s final tally of 11 retail chains. According to the ICSC, a number of retailers commented on the impact that the later Easter had on monthly sales compared with last year. L Brands (Limited) was down 1.0%, Gap was down 6.0%, Rite Aid was up 0.7%, Walgreen’s fell 3.4%, and Costco gained 6.0%. See our sales report below... As many as 25,000 customer credit card numbers may have been exposed by hackers in a security breach at Sally Beauty Holdings Inc....Michaels Stores Inc. confirmed a security breach at certain systems that process payment cards at its US stores and its Aaron Brothers unit, which took place between May 2013 and January 2014, and may have affected about 2.6 million cards.

Accelerating Industry News

Ulta Beauty plans to add 100 net new stores and remodel 12 locations in its current fiscal year...J. Crew Group Inc. plans 60 new stores this year, in the US and internationally, including 20 J. Crew stores, 20 factory outlets and 20 Madewell stores...Five Below is on track to open 62 stores in 2014. Currently the company has 304 stores in 19 states....DSW Inc. sees a full build-out potential for 500 to 550 stores, including 35 new stores it expects to build in fiscal 2014...Bass Pro Shops expects to open seven new stores in 2014, giving the company a total of 84 retail stores and Tracker Marine Centers. In addition to the stores opening this year, 15 more locations have been formally announced...RadioShack opened its latest Manhattan concept store, one of more than 25 concept stores to open since the company's first concept store debuted in July 2013...Tiffany plans to open 13 new global stores, including five in the Americas, and close four...Destination XL Group, Inc. will open its first Manhattan store in June 2014. Located in the Chelsea section of Manhattan, the new DXL stores represent the company’s superstore format...Express Inc. opened its largest location in Times Square, NY last month. The 28,000 s/f location features imagery boxes, LED walls and screens, interactive iPads, mobile points-of-sale, and on-site charging stations...Mall of America has launched a $325 million expansion project which will include a 342-room hotel, office tower, high-end retailers, new dining options, a tourist welcome center and large event space. An extension of the mall on all three levels on the north side, it is the most significant construction project since the property opened in 1992. Construction has begun and anticipated completion is scheduled for fall 2015...Restoration Hardware will open 3 new stores and expand its New York store, adding two additional floors. As of Feb. 1, RH operated a total of 70 stores, consisting of 62 Galleries, five Full Line Design Galleries and three Baby & Child Galleries, as well as 17 outlet stores...Maurices, Inc. has surpassed 900 locations and plans to open 25 more by the time its fiscal year concludes in July...Bicycle retailer BikeStreet has opened 17 shops since the brand’s founding in 2012, and aims to acquire and/or open 1,000 shops across the nation...Urban Outfitters unveiled a new concept, Space Ninety 8, this month in Brooklyn, NY. The five-level space in a renovated warehouse has an industrial look, with exposed ceilings and brick walls. The basement will house a rotating series of pop-ups, the first floor will showcase independent designers and a vintage shop. The second and third floors will feature Urban Outfitters’ men’s and women’s collections and home goods, and an East Coast outpost of Los Angeles restaurant Gorbals...Coach has retained Studio Sofield to develop the company's next retail concept, which will be unveiled in fall 2014, at a 4,000 s/f flagship in Beverly Hills, CA followed by a 5,335 s/f store at the Time Warner Center in New York City. The concept will be implemented in subsequent locations in 2015...DSW has entered into an agreement with women’s footwear brand Yellow Box Corp. to operate stores under the Yellow Box banner, starting with 3-5 openings in 2014. DSW operates 403 stores.

Decelerating Industry News

Sears Holdings Corp. has approved the spinoff of its Lands’ End business, making Lands' End an independent company, and the latest unit to be shed by the retailer.  In 2012, Sears spun off Sears Hometown and Outlet and in 2011 it spun off Orchard Supply Hardware Stores...Quiznos filed for Chapter 11 bankruptcy protection, after reaching a deal to cut its debt by more than $400 million. Quiznos will continue operating while it implements a debt-restructuring plan. The sub chain has shut down thousands of locations in recent years, leaving it with nearly 2,100 locations around the world. All but 7 of those are owned and operated by franchisees...Walgreen Co. plans to close 76 unprofitable drugstores by August. The chain declined to specify locations. Including the closures, the company still plans a net increase in store count in 2014 of between 55 and 75 locations. It operates 8,210 drugstores nationwide...Brookstone has filed for Chapter 11 bankruptcy and completed a stock purchase agreement with an affiliate of Spencer Spirit Holdings for $147 million. The company will continue to operate its mall and airport stores, catalog, website, and wholesale channels. Brookstone operates approximately 240 stores nationwide...Family Dollar will cut jobs and close 370 underperforming stores. It will also cut prices on about 1,000 basic items, and will slow new store openings beginning in fiscal 2015. Family Dollar Stores Inc. currently has more than 8,100 stores in 46 states...Women's apparel chain Coldwater Creek filed for Chapter 11 bankruptcy to help smooth its pending closure after failing to find a buyer or a new source of capital to pay for a turnaround. The company has been struggling since 2007. Going-out-of-business sales are expected to begin early next month at the chain’s 365 locations.

New England Retail News

London-based sandwich shop chain Pret A Manger will fill the 2,000 s/f space vacated by Dunkin’ Donuts at 176 Federal St. in the Financial District. The company has 3 shops in Boston...After more than 50 years, Oriental Rug Galleries at 1050 Beacon St. in Brookline is closing...LEGOLAND Discovery Center Boston in Somerville will open on May 23, featuring attractions such as MINILAND, where iconic regional landmarks are recreated out of more than 1.5 million LEGO bricks...Dollar General celebrated the opening of its new store West Boylston, MA this month. Dollar General has nearly 10,900 stores in 40 states...ML-CFC Commercial Mortgage Trust has repurchased the ailing Walnut Hill Plaza shopping center in a foreclosure auction for $13 million.The group reclaimed the strip mall from a subsidiary of New York-based Acadia Realty Trust, which had purchased it for $23.5 million in 2006. There were no other offers on the shopping center during a public foreclosure auction...Target will open a 135,000 s/f store store at the new University Station development in Westwood, MA, opening in March 2015, the 26th Target store in the Boston area...Maximum Beverage opened a new liquor store branch on Route 10 in Farmington...Alex and Ani is closing its location at 159 Weybosset St. in Providence, RI to make room for about 15 Alex and Ani University employees who will move into that location from the jewelry company’s Cranston headquarters. The company has no plans to close any other retail locations, and plans to open additional stores around the country later this year...After two decades in Porter Square, Cambridge, the Gourmet Express is closing down to make way for a 27-unit residential building...16 Handles frozen yogurt held a grand opening of its new store at the Walpole Mall, Walpole, MA. This is the second 16 Handles store in MA...RadioShack opened its latest concept store at Downtown Crossing in Boston. The store features a custom contemporary design, and interactive areas that encourage shoppers to discover personalized solutions and connect with sales associates. The Boston store is the third custom-designed location since RadioShack debuted the concept in July 2013...Stacy Madison, the “Stacy” in Stacy’s Pita Chips, opened Stacy’s Juicebar on Highland Avenue in Needham, MA last month...A fire engulfed the Burlington, MA Kings Bowl, which was under construction and scheduled to open in just weeks in the new 3rd Ave development...The Container Store will open a 25,000 s/f store at Garden City Center, Cranston next month, the company’s 66th US store and first in RI.

March Retail Sales Report

























Notes: figures gathered from individual company websites, press releases, and Federal filings.  Not all companies report all figures; results not reported will be marked “n/r”. Quarterly results will be updated when available; quarterly figures are shown in italics. Figures from companies not calculated to one decimal point automatically received an ending digit of 0. 

Commerce Department Monthly Sales

US retail sales rose in March by 1.1%, the largest amount in 18 months, the Commerce Department reported. Sales had fallen in January and December. Auto sales climbed 3.1% while sales at general merchandise stores  increased 1.9% , the strongest one-month gain since March 2007.

Source: U.S. Department of Commerce - commerce.gov

Treasury Yields

















Treasury Yield Sources:  federalreserve.gov; ustreas.gov

Consumer Confidence Index

The Conference Board Consumer Confidence Index®, which had decreased in February, improved in March. The Index now stands at 82.3 (1985=100), up from 78.3 in February. The Present Situation Index edged down to 80.4 from 81.0, while the Expectations Index increased to 83.5 from 76.5.

Source: The Conference Board - www.conference-board.org

Purchasing Managers Index

Manufacturing expanded in March as the PMI® registered 53.7 percent, an increase of 0.5 percentage points when compared to February's reading of 53.2 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

Source: Institute for Supply Management - Manufacturing Report on Business - www.ism.ws