Penny-pinching single moms are drawn to Family Dollar. The nation's #2 dollar store (behind Dollar General) targets forty-something women shopping for a family earning less than $40,000 a year. It operates about 8,000 stores across some 45 states and Washington, DC. Consumables (food, health and beauty aids, and household items) account for more than 70% of sales; stores also sell apparel, shoes, and linens. Family Dollar runs small neighborhood stores near its fixed-, low- and middle-income customers in rural and urban areas. Most merchandise costs less than $10. Family Dollar was founded in 1959 by the father of CEO Howard Levine. Family Dollar has agreed to be acquired by rival Dollar Tree.
Change in Company Type
After shunning a hostile advance in 2011, Family Dollar reaffirmed its own strategic growth plans. Since then, the company has struggled and was subject to pressure from activist investor Carl Icahn to sell itself. In July 2014, it agreed to be acquired by Dollar Tree in an $8.5 billion cash-and-stock deal that would create a company with more than 13,000 stores and some $18 billion in sales. (Shareholders of Family Dollar will receive $74.50 per share, a substantial premium to the closing price when the deal was announced, and will own about 13% to 15% of the combined company.) Together Dollar Tree and Family Dollar expect to realize annual savings of about $300 million per year. In September, after already being spurned twice, Dollar General topped Dollar Tree's offer with a $9.1 billion hostile bid for Family Dollar.
North Carolina-based Family Dollar Stores has shops in 46 states (it entered Montana in 2013), and the District of Columbia. Texas, home to more than 1,020 Family Dollar stores, is the chain's single largest market, followed by Florida with about 590 stores.
In 2014, Family Dollar implemented a number of restructuring initiatives, which included closing 377 underperforming stores and lowering prices on nearly 1,000 items. The company also reduced its workforce.
Sales and Marketing
Family Dollar spent $7.8 million on advertising in fiscal 2014, down from $18.9 million in 2013 and $19.6 million in 2012.
Manufacturers or distributors ship about 20% of the chain's merchandise directly to its stores. The balance is shipped from one of the company's 11 distribution centers.
Family Dollar has seen stable growth since fiscal 2009, but growth slowed down in 2014 (fiscal year ended August) when earnings rose less than 1% to $10.5 billion (versus 2013 when it earned $10.4 billion). The modest rise was attributed to sales from newly opened stores but partially offset by a decrease in comparable store sales. Additionally, comparisons between the years' performances were slightly skewed, as fiscal 2013 included an extra selling week for the company (accounting for an extra $189 million in net sales).
After seeing rising net income over a period of five years, Family Dollar's profits fell 36% to $284.5 million in 2014. The decline was primarily due to a recently announced series of restructuring initiatives as well as merger fees and higher interest expenses. Cash flow from operations remained relatively stable that year, falling 1% to $469.2 million versus $472 million in fiscal 2013; that decline was attributed to reduced net income and an increase of cash used for inventories and income taxes.
Dollar stores are a fast-growing, profitable business -- both during and after the deep recession -- as Family Dollar Stores' 10-year run of increasing sales demonstrates. Indeed, the chain's sales have doubled over the past decade. While Family Dollar Stores and its rivals have clearly benefited from the economic pain of many working families, the company has seen competition for those dollars increase.
Prior to its deal with Dollar Tree, Family Dollar believed that its shareholders were best served through new store openings and remodeling existing locations. To that end, in fiscal 2013, the company opened 500 new stores, including its first location in Montana, and doubled the number of stores it operates in California. However, the company in 2014 announced a turnaround of sorts with a restructuring plan that called for shuttering underperforming locations. (By comparison, rival Dollar General opened its 11,000th store in October 2013, the same month Family Dollar opened its 8,000th location.)
In order to grow, the company needs to both open profitable new stores and increase sales in existing stores. In the face of increased competition from mass discounters, such as Wal-Mart, the company has increased purchases of lower-margin consumables and avoided higher-priced merchandise. Its food assortment includes milk and other perishables, as well as more quick-prep and ready-to-eat products. Family Dollar has shifted to an "everyday low price" strategy, as opposed to short-lived promotional advertising, while increasing the number of brand-name goods it carries. Also, after learning that smokers make more shopping trips per year, the company added tobacco products to its offering in 2012 with the intent of capturing both tobacco sales and spillover to other merchandise categories. The company lures budget shoppers with an appetite for national brands by offering merchandise from leading manufacturers such as Procter & Gamble, Coca-Cola, Nestlé, and PepsiCo.
Dollar Tree became an EPA ENERGY STAR partner. It is dedicated to improving its sustainability and reducing greenhouse gas emissions through an energy management program for its operating buildings.