Dollar Stores in Mega-Merger; The Hard Part's Ahead

CHESAPEAKE, VA—Shoppers at Dollar Tree stores may be able to find merchandise for $1 or less, but it cost Dollar Tree Inc. considerably more than that to acquire Family Dollar Stores Inc.: what Bloomberg Business on Wednesday described as a “yearlong trek” to closing the deal. Now that the $9.2-billion merger is complete, some analysts say the hard part is still ahead.

The first step will be integrating the two companies, which will continue to operate as standalone brands. “Bearish people are buying Dollar General”—the closest competitor to DLTR or FDO—“because they believe this is a going to be a sloppy integration,” FBR Capital Markets analyst Dutch Fox told TheStreet.com. “But I do believe that the next three or four data points out of the Dollar Tree-Family Dollar team are going to be fairly positive. Dollar Tree has a great management team that hopefully can fix Family Dollar quickly.”

A Zacks report Tuesday made it clear that FDO will require some fixing. “The company has been in troubled waters for some time now, which is evident from its average negative earnings surprise of nearly 9.8% over the past four quarters,” according to Zacks. “The tepid economic recovery and heightened competition from other big brick-and-mortar retailers along with online giants have affected its profitability.” The combination with DLTR, though, “could provide a much-needed breather to the company.” Zacks is maintaining a “hold” recommendation on the merged company.

Even with the Chesapeake, VA-based DLTR management team—now also including senior FDO executives—on the case, there could be both company-level and macroeconomic headwinds. TheStreet.com quotes a recent investor report from Deutsche Bank analyst Paul Trussell, who noted that “upside risks include greater and/or faster than expected synergy achievement; downside risks include challenges in executing the integration and a slowdown in low-end consumer spending.”

The integrated company will operate more than 13,000 stores across 48 states and five Canadian provinces, with combined annual sales of over $19 billion. Its store count will be slightly smaller than pre-merger: the Federal Trade Commission said last week that the merged company had agreed to sell 330 Family Dollar-branded stores to private equity firm Sycamore Partners, in order to settle FTC charges that the merger would likely be anticompetitive. The sale to Sycamore is required to close within 150 days of the merger's closing this past Monday.