By Granth Vanaik and Ananya Mariam Rajesh
(Reuters) -Dollar Tree said on Wednesday it was exploring options, including a potential sale or spinoff of its Family Dollar banner, as it looks to restructure business amid still-high inflation that continues to strain consumer spending.
The retailer, like its peer Dollar General (NYSE:DG), has been grappling with weak discretionary demand as shoppers focus more on less-profitable consumables. It is facing stiff competition from rivals Walmart (NYSE:WMT), Target and Chinese e-commerce platform Temu, which are also offering lower-priced products to attract budget-stretched Americans.
Family Dollar, which Dollar Tree (NASDAQ:DLTR) bought in 2015, has been its main underperformer. Earlier this year, it had outlined plans to shutter 970 Family Dollar stores.
The company operates 8,359 Family Dollar stores, as of Feb. 3. It will close an additional 150 stores by fiscal 2024-end.
"Many of these stores had been under-invested for years, and the capital investment required to fix them could not deliver an acceptable rate of return," said CEO Richard Dreiling.
This comes as a surprise considering the great efforts the company made in purchasing Family Dollar several years ago, said Telsey Advisory Group's Joe Feldman.
The company has not set a deadline or definitive timetable for the completion of the review process and noted there can be no assurance it will result in any transaction.
"Dollar Tree would get nowhere near the $8.5 billion it originally paid (for Family Dollar acquisition)," said GlobalData Managing Director Neil Saunders.
"It is clear to all in the market that Family Dollar is a chain that needs a lot of work and investment, a fact which will also thin out the number of interested parties," Saunders said.
J.P. Morgan Securities LLC is the financial adviser.
The Wall Street Journal first reported the news on Wednesday.
Dollar Tree shares were down 4.4%, after it also forecast annual profit below estimates. Rival Dollar General was down about 1%.
Dollar Tree expects adjusted profit for fiscal 2024 to be between $6.50 and $7 per share, the midpoint of which is below LSEG estimates of $6.89.
It said its outlook reflects increased transportation costs related to loss of a distribution center in Oklahoma due to a tornado.