Wal-Mart watchers weigh-in on Dollar Tree merger

The race to win the frugal, cash-strapped consumer got a little more heated on Monday (July 28) with Dollar Tree’s $8.5 billion blockbuster offer to acquire struggling discounter Family Dollar Stores.

The pro forma company will create a network of 13,000 stores with combined annual sales of $18 billion and present a bigger threat to Dollar General and Wal-Mart – a company in the midst of a small store expansion of its own.

Wal-Mart has planned to build 400 stores in fiscal 2015, giving it about 4,700 stores in various formats within its U.S. operations. Dollar General, the odd man out in the dollar area, has roughly 11,000 stores.

Jim Cramer, a contributor with CNBC, said Dollar Tree is the best operator in the small discount dollar channel and is buying the worst of the three. Though Dollar Tree’s business model is quite different from Family Dollar, Cramer believes the merger is a positive move

The company plans to maintain each brand. Dollar Tree CEO Bob Sasser, who will lead the combined entity, said the two chains have little overlap. Executives said they don't plan to close stores but may turn some Family Dollar stores into Dollar Trees, or vice versa, where the existing stores are underperforming.

"Industry trends and outlook are positive for the combined businesses with low and middle income customers continuing to look for ways to balance their budgets and stretch their dollars," Sasser said.

Brian Sozzi, CEO and chief equities strategist at Belus Capital Advisors, recently said: “Wal-Mart is in for big trouble for staying true to its insular corporate culture (one where it believes it's doing everything correctly) and failing to pay a premium to acquire instant square footage and name reorganization inherent to Family Dollar.”

Sozzi said as soon as the Dollar Tree/Family Dollar deal closes in early 2015, Wal-Mart will find the clock start for a competitive firestorm. He cautioned that a monster dollar store will have been formed that is closer to the economically-sensitive customers in rural and urban markets that view a trip to Walmart as expensive.

Sozzi also said a monster dollar store will also create synergies, an estimated $300 million to start.

“I expect more as the Dollar Tree cleans up the operational mess that is Family Dollar) to price its merchandise more competitively (especially doing the holidays), counteracting Walmart's ongoing efforts to reduce prices for food and consumable products. Here come the weekend circular price wars,” Sozzi said.

Gene Urcan, managing director of the Capello Group, said the dollar store merger could force Wal-Mart to be more aggressive in its rollout of small stores. For Dollar General he see the deal as a net negative.

Dollar General previously vetted the deal, but chose to grow its footprint organically, so the announcement that Dollar Tree made the offer was surprising to Jason Long, CEO of Shift Marketing Group.

“With 2,000 more stores than Dollar General suddenly there’s a new gorilla in the room. I don’t think any of this has much of an impact on Wal-Mart who has already put their own small store plan in motion,” Long said.

He believes the Wal-Mart could benefit from Dollar store closings that result from the deal, adding that there will likely be fewer closings than if Dollar General was the suitor.

Carol Spieckerman, CEO of NewMarketBuilders, was not surprised to hear that Dollar Tree made the offer.

“I can’t think of a better owner than Dollar Tree. Of the big three dollar stores, Dollar Tree stands out on a couple of important fronts. It operates multiple formats and understands how to flex format attributes for specific markets and customer segments and it’s the only dollar chain that is taking digital seriously,” Spieckerman said.

She adds that the multiple formats should make the assimilation of Family Dollar’s locations relatively seamless but it’s digital awareness that presents the most promise, and the biggest threat to Dollar General and Wal-Mart.

“For example, if Dollar Tree were to follow Walmart, Staples and others by building out an online marketplace filled with items from third-party sellers, its thousands of stores could potentially serve as pick-up locations for those items, greatly increasing the productivity of its fleet and generating additional income from its marketplace sellers,” Spieckerman said.

Walmart U.S. CEO BIll Simon was recently asked about the retailer’s appetite for acquiring a competitor in the dollar discount space. He said Wal-Mart Express with site-to-store, ship-to-store, full grocery, gas and pharmacy can drive the same sales as three to five Dollar Stores. He said the hybrid Neighborhood Market can drive the sales of 10 Dollar Stores, and both models make better use of capital given their reduced building costs.

Shares of Wal-Mart Stores and Dollar General dipped lower on the news. Wal-Mart stock (NYSE: WMT) closed at $75.71, down 26 cents rallying back from the $75.36 intraday low. For the past 52 weeks Wal-Mart share price has ranged from $81.37 to $71.51. Shares are down 3.73% since the first of the year.

Dollar General shares (NYSE: DG) closed at $55.56, down a nickel on the day. Shares rallied back from a intraday low of $53.78 following the Dollar Tree announcement. For the past the 52 weeks the share price of Dollar General stock has ranged from $65.99 to down to $52.40. Year-to-date shares are down 9.13%.

The biggest winners of the day were Family Dollar investors as shares rose nearly 25% to $75.74 per share. The deal made by Dollar Tree is $74.50 per share, a 23% premium over the Family Dollar’s share price on Friday (July 25).

Shares of Dollar Tree rose 1.2% on the news closing Monday at $54.87.