Family Dollar has around 8,000 US stores, catering to low-income customers predominantly in cities with prices typically ranging from $1 to $10. The chain has struggled in recent years. Last year, Family Dollar announced plans to close more than 900 stores.
Dollar Tree CEO Rick Dreiling said in a statement that the "unique needs" of the two different chains led the company to explore a split from Family Dollar. Dollar Tree typically has stores in suburban areas and focuses on middle-income consumers, unlike Family Dollar, which is located in more urban areas and caters to lower-income customers.
Messy stores, high prices and over-expansion have plagued Family Dollar, analysts say.
The chain has also faced steep competition from larger retailers, such as Walmart and Dollar General. And inflation in recent years has increased Family Dollar's operating costs and squeezed its lower-income customers.
"The saga of Family Dollar is a long and unhappy one," Neil Saunders, an analyst at GlobalData Retail, said in a note to clients Wednesday. "The harsh reality is that Family Dollar is a problematic business which is a millstone around Dollar Tree's neck, dragging down overall performance."
Family Dollar's sales at stores open at least one year ticked up 0.1% last quarter.
Dollar Tree's (DLTR) stock fell 3% in premarket trading.
Merger gone bad
Family Dollar has struggled since Dollar Tree bought it in 2015 for $8.5 billion.
Dollar Tree believed acquiring Family Dollar would help it compete against bigger rivals. But it misjudged the deal.
The combined company hoped that by joining forces it could grow its customer base, reduce costs and fend off Dollar General, which is located primarily in rural areas. Dollar General had also bid for Family Dollar.
But analysts say the match between the two different chains was a poor fit, and Dollar Tree has struggled to manage the larger Family Dollar store base.
Family Dollar stores were in worse condition than Dollar Tree management expected, and early strategies to improve sales, such as selling beer, fell short.
Many Family Dollar stores were located too close to each other and cannibalized each other's own sales.
"Family Dollar's sales have been sputtering, hurt by neglected stores, poor product selection and unhappy workers," The Wall Street Journal reported in 2018. Family Dollar "needs more work than the company originally thought."
A year later, an activist investor pushed for a sale of the "underperforming" Family Dollar business, and Family Dollar announced it would close hundreds of stores.
Even though Family Dollar has renovated thousands of stores in recent years, many are still poorly maintained, analysts say.
Family Dollar was hit with a record $41.6 million fine by the Justice Department this year for violating product safety standards after selling items that were stocked in a rat-infested warehouse in West Memphis filled with live, dead and decaying rodents.
This story has been updated with additional developments and context.
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