Some Good News for Dollar Stores

On some days investors get to see good news hit a sector from multiple angles. That was the case for the dollar store and discount store sector on Monday, January 7, 2018.

Dollar Tree Inc. (NASDAQ: DLTR) has suffered some setbacks for investors, in part from its huge debt load after acquiring Family Dollar back in 2015. Now activist investment firm Starboard Value has acquired a 1.7% stake in Dollar Tree and has sent a letter to the company to outline changes that could help turn this ship back around.

Starboard has called Dollar Tree deeply undervalued. The group also sees a restructuring that could have it sell off half or more of its stories. Starboard has also nominated seven new independent directors that it would like to see added to the company’s board.

Dollar Tree already has responded, noting that it has added four independent directors since 2016 with the right balance of experience and perspectives. The company also pointed out that Starboard’s nominees were made without seeking any engagement and not having any communication with the company.

Starboard’s letter also pointed out that Dollar Tree has underperformed Dollar General Corp. (NYSE: DG) by over 20% since making the Family Dollar acquisition. As of last November, there were more than 15,000 store locations between the Dollar Tree and Family Dollar locations.

Starboard is saying it is time to explore strategic alternatives for Family Dollar, which may include a sale of the company now that same-store sales growth has turned into negative numbers while operating margins also have compressed. The activist firm also noted that there should be an evaluation and initiation of a widescale market test of a multi-price-point strategy at Dollar Tree bannered stores.

Monday’s slew of analyst upgrades and downgrades included a key upgrade for Dollar General. KeyBanc Capital Markets raised to Overweight from Sector Weight and assigned a $125 target price (versus a $108.77 prior close).

Dollar Tree shares were last seen trading up over 6% at $98.77 on Monday. Their 52-week range is $78.78 to $116.65, and the market cap is $23.5 billion. The Starboard letter addressed the Family Dollar acquisition as too expensive, but it sees a path to as much as $150 per share:

Unfortunately, Dollar Tree significantly overpaid for Family Dollar, and this business is proving to be a meaningful distraction. This appears relatively obvious and is evidenced in the Company’s financial and stock price performance since the acquisition closed in July 2015… Since closing the acquisition of Family Dollar on July 6, 2015, Dollar Tree has underperformed Dollar General by more than 20%. Over this same time period, the broader market has appreciated by more than 30%, significantly more than Dollar Tree, which is up only 16%.

Dollar General was last seen trading up 4.7% at $113.58 a share. It has a market cap of $29.8 billion and a 52-week trading range of $85.54 to $118.45. As of November 2018, Dollar General operated 15,227 stores in 44 states.

Would Dollar General rekindle some interest in the Family Dollar name?