Dollar Tree has closed nearly 700 of its poorly performing Family Dollar stores

According to Linda Moss at CoStar News, "Discount behemoth Dollar Tree has shuttered 670 of its underperforming Family Dollar stores so far, about two-thirds of the nearly 1,000 it plans to close, as it considers whether to sell or spin off the struggling chain.

The Chesapeake, Virginia-based retailer provided an update on its portfolio optimization efforts when it reported is fiscal third-quarter earnings Wednesday. Dollar Tree officials also said they were still reviewing options for Family Dollar, with no set deadline or timeline to complete that process.

Dollar Tree is one of several retailers, including department store chain Macy's, that is downsizing its store fleets for greater profitability. In some cases, as with Big Lots and Rite Aid, companies have slashed their physical footprints as part of Chapter 11 bankruptcy proceedings. These scenarios have played out as retailers face a challenging macro environment, with consumers dealing with inflation by pulling back spending.

The company originally announced these closure plans in March, in one of the biggest store-closing announcements this year. Dollar Tree expects to shut an additional 25 stores during the remainder of the 2024 fiscal year, according to the company.

Dollar Tree's original goal was to close around 600 Family Dollar stores in the first half of the year and another 370 stores at the end of each location's current lease.

Family Dollar falters

In June, Dollar Tree said it was exploring alternatives for Family Dollar, including a sale or spinoff of the chain that it purchased for $9 billion in July 2015.

Even as it closes stores, Dollar Tree continues to roll out more of its namesake locations and a handful of Family Dollars. In the third quarter, it opened 249 new Dollar Tree locations and six new Family Dollar stores. As of the end of the third quarter, Dollar Tree operated 16,590 stores across 48 states and five Canadian provinces under the brands Dollar Tree, Family Dollar and Dollar Tree Canada.

Dollar Tree's consolidated net sales rose 3.5% to $7.56 billion compared to the same quarter a year ago. However, Family Dollar's performance is still lagging and problematic, according to Neil Saunders, a retail analyst and managing director of analytics firm GlobalData.

"Although Family Dollar took some $3.2 billion in revenue for the quarter, it delivered an operating profit of $1.6 million," Saunders said in a note Wednesday. "This is a lamentable return which is nowhere near enough to cover the corporate and central costs associated with running the business. Admittedly, Family Dollar comparable sales — which exclude the impact of store closures — rose by 1.9%. Unfortunately, this is insufficient to offset the impact of cost inflation and isn’t an entirely convincing indicator that the proposition has been strengthened."

Progress on 99 Cents Only stores

Saunders suggested that Dollar Tree speed up and finish its Family Dollar review.

"This exploration has been going on for quite some time and, in our view, it likely reflects the fact Dollar Tree would like to sell off Family Dollar but has not been successful in finding any buyers who are willing to pay the premium it wants," he said. "Given the broken state of the business, this is hardly surprising."

Dollar Tree didn't respond to an email from CoStar News seeking comment on Saunders' remarks.

The retailer acquired about 160 of 99 Cents Only's store leases when that chain liquidated earlier this year. To date, Dollar Tree has reopened 158 of those locations in California and the Southwest as its namesake stores, with the remaining slated for conversion by the end of the month, Dollar Tree Interim CEO Mike Creedon said on the company earnings call.

"Stepping back and looking at our real estate efforts more broadly, we are well on our way towards meeting our full year goal of opening 600 to 650 new stores," he told Wall Street analysts.

Dollar Tree has experienced several recent changes in its C-suite. Rick Dreiling stepped down as chairman and CEO in November, replaced by Creedon. On Wednesday the company said that Jeff Davis was exiting as chief financial officer.

Dollar Tree's direct competitor, Dollar General, is scheduled to report its earnings on Thursday morning."

The closure of underperforming Family Dollar stores by Dollar Tree, as highlighted in Linda Moss's CoStar News report, could have a notable impact on property taxes, particularly in communities where these stores serve as key tenants. Here’s how:

1. Decreased Property Valuations

When Family Dollar stores close, the properties they occupy might lose value, especially if replacement tenants are hard to find or if the stores remain vacant for extended periods. Lower property values can reduce the taxable base for local governments, potentially leading to reduced property tax revenues.

2. Vacancy and Commercial Real Estate Trends

A wave of closures can lead to increased vacancy rates in retail spaces, especially in areas with limited demand for commercial properties. If property owners cannot fill these vacancies, they may appeal for lower property tax assessments, further reducing municipal revenue.

3. Economic Ripple Effects

Family Dollar closures might also impact surrounding businesses that benefit from foot traffic generated by the store. Reduced activity can lead to declining business revenues, prompting more vacancies and a potential downward spiral in the area's economic health. This, too, could indirectly depress property tax assessments.

4. Shifts in Tax Revenue Dependence

If a community was relying on Family Dollar as an anchor tenant in a shopping center, the closure might prompt a re-evaluation of the area's fiscal planning. Local governments may need to diversify their tax revenue sources or face budgetary shortfalls.

5. Potential Opportunities for Redevelopment

On the upside, some communities may seize these closures as opportunities to redevelop or repurpose the properties. If successful, this could eventually stabilize or even increase property tax revenues, albeit after an interim period of reduced revenue.

In conclusion, the closures could strain municipal budgets, especially in areas heavily dependent on property taxes from retail spaces. However, proactive redevelopment or re-tenanting strategies might mitigate long-term impacts. Local governments should closely monitor these closures and assess their fiscal implications to adjust budgets and plans accordingly.