Family Dollar (FDO, Financial) is the smallest Dividend Aristocrat discount retailer, behind giants Walmart (WMT, Financial) and Target (TGT, Financial). Family Dollar has a market cap of "just" $9 billion and operates relatively small (compared to supercenters) discount retail stores in the U.S. When I last wrote about Family Dollar, I analyzed the company’s pending acquisition by Dollar Tree (DLTR, Financial).
The Dollar Tree acquisition of Family Dollar is expected to occur in the first quarter of 2015. This article will be slightly different than previous Dividend Aristocrats In Focus articles due to the pending acquisition. I will still look into Family Dollar’s operations and competitive advantage. Instead of analyzing the company’s future growth prospects, I will analyze its fit with Dollar Tree.
Business overview
Unlike most Dividend Aristocrats, Family Dollar operates in only one main segment. The company does divide its operations into four sales categories. The percent of revenue each category generated for the company in its full fiscal 2014 is shown below:
- Consumables: 73% of total revenue
- Home Products: 10% of total revenue
- Apparel & Accessories: 7% of total revenue
- Seasonal & Electronics: 10% of total revenue
The Consumables category makes up the majority of Family Dollar’s sales. This is intuitive as shoppers tend to go to Family Dollar looking for low prices on every day goods.
Family Dollar operates 8,042 stores across the United States. The company has 58.11 million selling square feet and generated $10.49 billion in its fiscal 2015. The average family dollar is between 7,500 and 9,500 total square feet and has about 7,200 selling square feet.
Competitive advantage
Family Dollar’s competitive advantage comes from a mix of convenience, brand recognition, and low prices. With 8,042 stores across the United States many potential customers find themselves close to a Family Dollar store. Family Dollar targets consumers who live 3 to 5 miles from their stores. The average Family Dollar Store has 7,200 square feet of selling space. The Family Dollar convenience strategy is similar to corner stores. Walgreens' stores have 11,000 square feet of selling space on average. Family Dollar’s stores are just 65% as large as Walgreen’s. Family Dollar’s retail niche is shoppers looking for convenience and low prices close to home.
Family Dollar’s brand recognition and low prices go hand in hand. The company’s name brings to mind frugality. Family Dollar still sells about 25% of products in its stores at $1 or less. The company targets lower-middle income and low income consumers with its low prices and focus on $1 or less merchandise. Family Dollar’s brand reinforces the concept of low prices and savings in potential customers minds.
Fit with Dollar Tree
Family Dollar is being acquired by Dollar Tree. The acquisition is expected to close in the first quarter of 2015. Dollar Tree has committed to divest as many stores as necessary to pass antitrust laws and receive government approval for the acquisition. It is very likely the deal closes as planned.
Dollar Tree is not significantly larger than Family Dollar. Dollar Tree’s market cap is about $14 billion, versus $9 billion for Family Dollar. Dollar Tree benefits from acquiring Family Dollar because it will create the largest discount retailer in the U.S. by store count. Dollar Tree has about 5,000 stores and Family Dollar has about 8,000. The combined business will blanket the US and Canada with over 13,000 stores.
Dollar Tree focuses exclusively on products that are $1 or less. This is a significant differentiator for consumers. Family Dollar focuses on low prices, but sells a variety of merchandise, with the bulk of it costing over $1. The acquisition gives Dollar Tree more pricing flexibility through its Family Dollar stores.
Strategically, the move will create a business roughly the same size as the largest publicly traded dollar store, Dollar General (DG, Financial). Dollar General currently has a market cap of $20 billion and operates about 11,500 stores in the U.S. Dollar Tree will surpass Dollar General’s store count and market cap (at current prices) when the acquisition of Family Dollar is finalized. Dollar Tree will have the infrastructure and scale to compete directly with Dollar General.
Recession performance
Family Dollar’s underlying operations perform well through recessions. The company’s focus on low-priced consumer products appeals to economically distressed consumers who are looking for deals. As a result, the company sees EPS increase through recessions despite losses in the overall economy.
Family Dollar saw EPS rise each year through the Great Recession of 2007 to 2009. In addition, revenue per share and dividends per share increased each year as well. The company also realized a higher operating margin in 2009 at the height of the recession than it had in four years. Family Dollar’s EPS through the Great Recession of 2007 to 2009 are shown below to illustrate its growth through economic declines:
- 2007 EPS of $1.62
- 2008 EPS of $1.66 (2.5% increase)
- 2009 EPS of $2.07 (24.7% increase)
Final thoughts
Family Dollar is no longer a candidate for investment for long-term dividend growth investors due to eht Dollar Tree acquisition. Family Dollar’s recent price increase due to the acquisition ranks it outside the Top 50 stocks using The 8 Rules of Dividend Investing. The company was ranked in the Top 40 stocks out of 138 business with 25 or more years of dividend payments without a reduction prior to the acquisition announcement. Dividend investors seeking exposure to discount retail have better opportunities available.
