If Dollar Tree Inc. were to sell Family Dollar, it would be “fortunate” to get two-thirds of the $9 billion paid for the rival chain, according to Raymond James analysts.
Activist investor Starboard Value LLP has taken a 1.7% stake in the company and is making demands for board seats and changes to the company, including a possible sale of Family Dollar. Dollar Tree
acquired Family Dollar in 2015 after a yearlong battle.
“For years, prior to the acquisition of Family Dollar Stores, Inc., Dollar Tree was considered to be well managed,” reads the Starboard letter. “Since then, however, the issues at Family Dollar and the unwillingness to consider price as a variable at Dollar Tree have resulted in meaningful underperformance.”
Starboard would also like to see a test of a “multi-price point strategy” at Dollar Tree stores.
“Dollar Tree has gone from industry leader to industry laggard,” the note says. “Unfortunately, Dollar Tree significantly overpaid for Family Dollar, and this business is proving to be a meaningful distraction.”
Raymond James analysts say they never supported the acquisition “as it distracted from the growth of the Dollar Tree banner.” But now that the deal is done, there are risks to making big changes.
Previously, when Dollar Tree tried to offer higher-priced items, customers were “confused” and the results “disappointing,” according to analysts.
Moreover, the company will not be able to off load Family Dollar easily.
“For better or worse, we do not see any easy solution for resolving the Family Dollar challenges and finding a buyer at an acceptable valuation will be difficult,” Raymond James wrote in a Tuesday note.
“We believe a more realistic solution for Family Dollar would include taking a large charge-off to close a significant number of poor-performing store locations, as well as taking a more aggressive pricing strategy that would bring Family Dollar prices in line with Dollar General and Walmart
Among the hurdles Raymond James identifies are competition, the fact that $450 million in synergies between Dollar Tree and Family Dollar have already been realized and finding a potential buyer, especially since Dollar General Corp.
isn’t a prospect.
“We do not see Dollar General as a buyer as the [Federal Trade Commission] would likely block such an acquisition — just as it did in 2015 by requiring an unacceptably large number of store divestitures,” analysts said. “It is our view the FTC remains protective of low-income families and is not supportive of large horizontal mergers that impact this segment of the market.”
Raymond James rates Dollar Tree shares outperform.
Dollar Tree shares have slumped 11.4% over the last 12 months, though the stock has rallied 17.3% over the past three months. The S&P 500 index
is down 6% for the last 12 months and down 10.3% for the past three.
UBS analysts attributed the stock shifts to the “inconsistent performance” at Family Dollar.
However, given Dollar Tree’s commitment to the core business and improvement at Family Dollar, along with Starboard’s intervention, analysts think the shares are “undervalued.”
UBS rates Dollar Tree shares buy with a $105 price target.
Dollar Tree stock closed Tuesday at $98.60.