Discounter Dollar Tree, known for expanding its brick-and-mortar property for years, is now evaluating its Family Dollar chain to close underperforming stores in a strategy other retailers have pursued in tough economic times.

The Chesapeake, Virginia-based company said in a fiscal third-quarter earnings call Wednesday it has initiated a comprehensive review of its Family Dollar store fleet. The corporate parent has 16,622 stores total, with 8,272 namesake locations and 8,350 Family Dollar stores. The study to optimize Family Dollar’s physical footprint will take months to complete, Dollar Tree Chairman and CEO Rick Dreiling told Wall Street analysts.

“This will involve, among other things, identifying stores as candidates for closure, re-bannering [as Dollar Trees], or relocation, with the goal of assuring that each asset under the Family Dollar banner is delivering its full value for our shareholders on a sustainable basis,” Dreiling said. “Going forward, we need to ensure that the Family Dollar portfolio is well positioned for success and meets the financial and operating objectives of our organization and the expectations of our valued customers and associates.”

Taking into account “current market conditions, individual store performance and overall portfolio considerations … will fortify our base, strengthen our brand and allow Family Dollar to achieve its full growth potential,” Dreiling said. The company is weighing a proper mix between Dollar Tree and Family Dollar stores, according to officials.

Dollar Tree’s move is also notable because it has rolled out stores in recent years in a push only topped by its No. 1 direct competitor, Goodlettsville, Tennessee-based Dollar General. Year-to-date there have been 328 Family Dollar store openings announced and 308 Dollar Tree openings announced, according to Coresight Research. Those chains rank second and third behind Dollar General, which has 1,009 store openings this year, the most of any U.S. retailer, according to Coresight.

Dollar Tree said it is still on track to open 600 to 650 stores overall this year.

Dollar Tree purchased Family Dollar in July 2015 for $9 billion, but the acquisition has been underperforming the namesake chain despite the parent company’s efforts to turn that around. In 2019, for example, Dollar Tree announced it was closing 390 Family Dollar locations, renovating at least 1,000 of the chain’s stores and rebranding another 200 to Dollar Tree banners.

“Dollar Tree has been engaged in a process of refurbishing and remodeling many of its Family Dollar stores in a bid to improve performance,” Neil Saunders, a managing director at analytics firm GlobalData, told CoStar News in an email.

He added that “this has largely delivered results. However, the chain still contains a handful of shops that are in sub-optimal locations where sales numbers are not improving. The company is now reviewing this carefully with a view to either changing the format to Dollar Tree or closing shops entirely. This is part and parcel of the ongoing optimization of the chain to improve its productivity and profitability. Arguably, Dollar Tree bought a pretty poor business in Family Dollar and has been working to get the division on the right track ever since.”

Dollar Tree didn’t immediately respond to a CoStar News request for comment on Saunders’ take.

Dollar Tree and Family Dollar have different business models, and that partially explains Dollar Tree’s success and Family Dollar’s woes during these times, according to the parent company’s executives. They cater to two different customer segments, Dreiling said.

Family Dollar, with many locations in rural areas, is frequented by lower-income shoppers looking to buy “consumable” products rather than discretionary purchases, according to the CEO. Those shoppers have been squeezed financially by macroeconomic pressures, such as reductions in the national Supplemental Nutrition Assistance Program, or SNAP, company executives said.

By contrast, Dollar Tree has always attracted more middle-income customers seeking “the thrill of the treasure hunt” of finding nonfood items in its stores, Dreiling said. And higher-income shoppers have been trading down to save money during this period of high inflation by coming to Dollar Tree.

“Dollar Tree is attracting customers from a broader range of income levels,” Dreiling said. “Most of our new customers over the past year have household income over $125,000, and this income demographic was a significant contributor to Dollar Tree’s [third-quarter comparable store] growth.”

The company hasn’t lost faith in the Family Dollar brand, according to the CEO.

“There will be some stores [that] will relocate, maybe some stores will close, maybe some stores will rebanner,” Dreiling said. “But I do not have any of that information at this stage of the game. … I don’t want anyone to misconstrue that I’m not totally behind Family Dollar because I am and I don’t want anyone to think that that doesn’t mean we’re not going to grow Family Dollar, because I’m not saying that at all. It’s simply a matter of reallocating assets to where we think we can be more productive.”

In the quarter ended Oct. 28, Dollar Tree posted overall net sales of $7.31 billion, up 5.4% from the prior-year period. The Dollar Tree chain had a 5.4% gain in same-store sales, while Family Dollar saw a 2% increase.

The company is now expecting net sales for the fourth quarter in the range of $8.6 billion to $8.8 billion, based on low single-digit increase in comparable-store sales, with mid-single-digit increase at Dollar Tree and minus-one to plus-1% comparable sales at Family Dollar.

Dollar Tree stores have 71.9 million square feet of selling space, while Family Dollar has 63.4 million square feet.