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.”1Levine 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.
