Dollar Tree: Family Dollar integration is on track

Dollar Tree, which completed its acquisition of Matthews-based Family Dollar in July, said Tuesday that its third-quarter profit was down more than 38 percent from the same quarter last year as it worked to blend the two discount chains.

Though total sales were better than expected, margins sank because of the less-profitable product selection of Family Dollar stores as well as markdown costs related to clearing some Family Dollar stores of their inventory.

“We’re making meaningful progress on integrating the Family Dollar banner,” Dollar Tree Chief Executive Officer Bob Sasser said in a call with investors Tuesday, adding that stores have been cleaned up, shelves are better stocked and inventory has been reduced.

The combined company is on track to achieve its synergy goals on schedule, Sasser said.

Virginia-based Dollar Tree, now the largest dollar-store chain in the U.S. by store count, has said it plans to reduce the combined company’s annual expenses by $300 million over three years. Dollar Tree has said re-bannering Family Dollar stores into Dollar Tree stores is a top priority in making the combined company more efficient.

As part of its re-banner initiative, Dollar Tree closed 167 Family Dollar stores and opened 143 Dollar Tree stores during the quarter. Sasser said the company is targeting 200 conversions in this fiscal year.

Another priority, Dollar Tree has said, is improving the product selection at Family Dollar stores or eliminating products that don’t meet its sales and profitability requirements. Family Dollar’s profit margins have sagged as the company added more low-margin consumable goods, such as food, and sold fewer high-margin discretionary goods, like clothes.

The company said gross margin fell to 28.3 percent from 34.6 percent in the same quarter a year ago. The company cited the impact of an overall lower-margin product mix for the Family Dollar business as well as markdowns related to inventory liquidation at Family Dollar stores.

The combined company had sales of $4.95 billion for the quarter, above the $4.84 billion consensus estimate from Bloomberg-surveyed analysts. Sales from Family Dollar stores comprised $2.67 billion for the quarter, the company said.

Net income for the quarter was $81.9 million, down from $133 million in the third quarter of 2014. Adjusted for nonrecurring acquisition-related costs, earnings were 49 cents a share, below the Wall Street consensus estimate of 54 cents.

Dollar Tree said its same-store sales, an industry term for sales at stores open at least a year, rose 2.1 percent for the quarter, in line with Wall Street expectations. Though they were not included in the same-store sales calculation, the company said Family Dollar delivered positive same-store sales of “low to mid-single-digits,” each month during the quarter.

As of Oct. 31, Dollar Tree operated 14,038 stores in 48 states and five Canadian provinces. Stores operate under the brands Dollar Tree, Family Dollar, Dollar Tree Canada and Deals.

This story was originally published November 24, 2015 at 9:30 AM with the headline "Dollar Tree: Family Dollar integration is on track."