The Family Dollar discount chain announced that it will close hundreds of stores, lay off workers and offer steep bargains for its shoppers in order to reinvigorate slumping sales.
The retailer’s financial results were grim across the board. For the first quarter ending March 1, profits plunged an astonishing 35 percent from last year, to $91 million. Sales dropped as well, 6.1% to $2.7 billion. Even more worrisome, sales at stores that have been open for at least one year–a key metric of retail success–fell 3.8%. Sales of consumable items–increasingly central to the Family Dollar’s retail strategy–dipped 3.9% while apparel and accessories plummeted 11.3%. The company’s stock dropped 3 percent, or $1.90, to close on April 10 at $57.17 per share.
In order to stop the hemorrhaging, the Family Dollar has gone into emergency mode, with intentions to close 370 out of 8,100 locations, approximately 5 percent. For the most part, the company will close older, underperforming locations, that average annual sales of $650,000 or less. In general, that’s about half what an average Family Dollar store hauls in annually. Chief Executive Howard Levine said, “It really did not make sense to continue to operate these stores.”
The Family Dollar closings will result in about 135 worker layoffs, a decision Levine called “difficult but necessary.” That number represents approximately 6 percent of the company’s total labor force. The company has no plans for further store closings or layoffs beyond the announced plan, according to company spokesperson Bryn Winburn.
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Overall, the Family Dollar’s aggressive cost-cutting program is forecast to save as much as $45 million annually. Still, the centerpiece of its turnaround strategy isn’t merely trimming fat but restoring its signature emphasis on competitive pricing. Levine said, “We felt we kind of lost our way there with our price perception,” Levine said. He promised the company would drive down more prices to the “magical $1 price point.”
To that end, the Family Dollar will lower prices on more than 1,000 products, many of them popular staples which, at least initially, will cost the chain about $50 million in revenue per year. The retailer also plans to expands its offerings of food items by 400 products. The difficulty with relying upon food as a driver of profit is they are typically low-margin goods and the Family Dollar has suffered from serious margin compression already. Low-margin food items now account for 71 percent of its annual revenue, while the chain’s margins fell 0.2% in the second quarter to 33.2%.
Analysts disagree over whether or not the Family Dollar’s strategy is likely to bear fruit. Wayne Hood, expert at BMO Capital Markets, said, “Slowing store growth, closing unproductive stores and better aligning its cost structure is the correct long-term strategic action to improve margin and productivity.” But Brian Yarbrough, an analyst with Edward Jones, expressed skepticism. He said, “Something is amiss here. I think it’s the merchandise, and the marketing, and the strategy.” He continued, “These rumors have floated around now for four or five years and no one has stepped up.” Yarbrough estimated that the chances of a successful turnaround for the discount retailer stood at about 25 percent.
Part of the challenge for the Family Dollar is the strength of its competition. The Dollar General and the Dollar tree, its primary rivals, have been surging. Yarbrough said, “Family Dollar’s sales-per-square-foot are about $180, compared with $210 at Dollar General. There’s a huge gap there.”