Under its new ownership, discounter Family Dollar plans to pilot an extra-small-store format in urban areas in an effort to make its brick-and-mortar footprint bigger.
The Chesapeake, Virginia-based retailer, which was acquired by two private equity firms last year, unveiled its plans this week as part of its fiscal 2025 financial results.
Family Dollar's new-store-growth initiatives include the development of an extra-small-box, or XSB, store format "designed to expand its presence in dense urban markets," according to the chain. It expects to test the format this year "with the goal of supporting unit growth beginning in 2027 and beyond," Family Dollar said.
"The format is designed to complement the company's existing store base while enhancing its ability to serve customers in high-density neighborhoods," the retailer said.
For several years now, U.S. retailers — including Macy's, Bloomingdale's, Ikea, Ulta Beauty, Target and Kohl's — have rolled out small-format stores to expand their physical presence. In the case of Macy's, it is looking to move beyond malls to get out closer to its customers, typically in suburban neighborhoods.
But retailers are also using smaller stores to penetrate dense urban markets. Whole Foods Market, the supermarket chain owned by e-commerce giant Amazon, has opened a small-store format, called Whole Foods Market Daily Shop, tailored for cities where there is limited retail space and rents are high. Two years ago, Whole Foods launched the concept in Manhattan and last fall one debuted in Arlington, Virginia, in the metropolitan Washington area. The most recent Daily Shop opening was last month in Williamsburg in Brooklyn, New York.
Retail behemoth Target rolled out about 170 small-format stores a few years ago to get a toehold in urban neighborhoods, but later said it was slowing down that initiative to focus on larger stores.
Discount giant Dollar Tree sold Family Dollar at a steep discount, about $1 billion, to Brigade Capital Management and Macellum Capital Management, which took it private. Dollar Tree, after paying $9 billion for Family Dollar, had tried unsuccessfully for about a decade to turn the chain around. Family Dollar's stores were underperforming, poorly maintained and in need of updates.
When Family Dollar's acquisition was announced in March last year, it had 7,622 stores.
"The company took disciplined actions to optimize its store fleet, including closing underperforming locations as part of its broader transformation strategy which delivered downstream benefits across the entire business," Family Dollar said in its statement this week.
The retailer didn't immediately respond to an email from CoStar News on Thursday asking how many stores it has left or how big in terms of square feet its urban micro stores will be.
On its face, the "move to open smaller urban stores makes sense as many are underserved by value-focused essentials retailers — mostly because of the absence of Walmart, Aldi and the usual gang that offer low prices," Neil Saunders, a retail analyst and managing director at analytics firm GlobalData, said in an email to CoStar News.
"However, urban stores come with challenges, including higher rent costs (which is why Family Dollar wants to keep them small), accessibility for deliveries, and high sales volumes (which necessitates good in-stock positions), and higher shrink rates," Saunders said. "Sharp execution is key, and sharp execution is precisely what Family Dollar has lacked in the past."
Other retailers have struggled with smaller-store formats, according to Saunders.
"They can be hard to configure, and decisions must be made on what not to include," he said. "This can sometimes create underwhelming experiences for shoppers."
Family Dollar didn't respond to Saunders' comments.
In addition to shutting an undisclosed number of stores, Family Dollar is closing a 930,000-square-foot distribution center at 10401 Monroe Road in Matthews, North Carolina, and laying off 373 employees, according to a notice it filed with state labor officials.
Family Dollar this week reported that its fiscal 2025 results were ahead of internal expectations.
"Over the past year, we've taken disciplined actions to strengthen the foundation of Family Dollar, and the progress we're seeing reflects the focus and commitment of our teams across the organization," Chairman and CEO Duncan MacNaughton said in a statement. "We are focused on simplifying the business, improving execution in our stores, and ensuring we are positioned to serve our customers and communities for the long term."
It reported roughly $13 billion in revenue, comparable sales growth of 2.5% and EBITDA performance — earnings before interest, taxes, depreciation and amortization — of $495 million, exceeding internal budget by 24%.
Family Dollar also said it had improved its balance sheet and liquidity position last year, including over $300 million improvement in net debt since the sale and had total liquidity of about $1 billion at year-end, including cash and availability under its credit facility.
These improvements position Family Dollar to continue investing in operational improvements and long-term growth, the company said.
The company expects about 25% EBITDA growth in fiscal 2026 compared with fiscal 2025, driven by positive comparable store sales growth, continued working capital improvements and operational efficiencies.