Billionaire Carl Icahn Tries to Join the Family Dollar Stores Family

An interesting development from Family Dollar Stores could mean higher fundamental value ahead.

Jun 12, 2014 at 5:30PM

Images
Source:  Family Dollar Stores

In a SEC filing on Friday, June 6, it was revealed that Carl Icahn and his funds took a 9.39% stake in Family Dollar Stores (NYSE:FDO). This seems to signify that Mr. Icahn has more faith in Family Dollar Stores' stock than he does in those of other "dollar stores." What does he see in this chain?

A note of confidence
The filing revealed the details of Icahn's purchases. He bought very few shares ahead of Family Dollar Stores' latest earnings report on April 10, but then he proceeded to load up heavily, all the way through and including on June 6.  Most of Ichan's position was accumulated in the higher-risk options market with an April 2016 expiration.  This screams confidence.

No doubt Family Dollar Stores' executives and shareholders were excited to see a billionaire activist with Icahn's status taking a strong positive interest in their company and stock. Who wouldn't, especially when Family Dollar Stores is less popular and not as much of a Wall Street darling as other dollar stores?

The filing explained that Icahn bought the stake because of "the belief that they were undervalued." Simple enough. It went on to say that Icahn and his crew see "great long-term potential" and listed a number of successes in Icahn's career with his involvement as an activist investor that "helped to generate tremendous returns for all shareholders." Icahn states that he intends to speak to management and possibly seek a seat on the board and is also open to help finance various strategies for the company.

Family Dollar Stores could use the help
It does seem like Family Dollar Stores could use all the help it can get. In its last reported quarter, calendar-adjusted sales were barely up at 0.4%. Same-store sales got clobbered 3.8% and calendar-adjusted earnings got sliced 31%.

Howard Levine, Chairman and CEO of Family Dollar Stores, blamed "a more promotional environment" as well as the weather, though only to a relatively minor degree. He also blamed a "more financially constrained consumer." Odd. That happens to be the very thing that Dollar Tree (NASDAQ:DLTR) credits for the boom in its business as budget-constrained consumers seek to stretch their budgets.

All in all, Levine did say that he his and his executive team hold themselves accountable for improving performance. Perhaps that's where Carl Icahn seeks to come to the rescue and turn things around.

Fldc
Source:  Family Dollar Stores

The Family Dollar response
Coinciding with Icahn's filing, Family Dollar Stores came out with a statement. In a cautionary tone that sounded as if it were written by lawyers (and may have been), it basically just said that the board of directors is open to dialogue with all shareholders that are interested in improving shareholder value. Family Dollar Stores reminded the public that it is taking steps to strengthen its value proposition, improve its costs, and ultimately improve its financial performance.

This references Family Dollar Stores' previous earnings release and conference call. The company said it was closing 370 underperforming stores, reducing its workforce, lowering prices on over 1,000 items with the "magical $1 price point" in mind, and slowing its rate of new store development.

On June 9, however, Family Dollar Stores moved to adopt a shareholders rights plan that basically keeps Icahn from increasing his position any further.  This type of move is referred to as a poison pill or a anti-hostile-takeover measure.  Icahn has remarked that it "puts a damper" on friendly talks.  Apparently Family Dollar Stores is treading cautiously and perhaps suspiciously.

What Icahn may see in Family Dollar Stores
The strongest area for Family Dollar Stores lately has been the consumable category, most notably refrigerated and frozen foods. This seems to be an ongoing theme among the dollar stores. Although these items tend to be lower margin than the other items in the stores, they bring in more traffic which leads to impulse purchases of other, higher-margin items.

Credit Suisse analyst Michael Exstein describes these as "fill-in" trips. Family Dollar Stores is becoming more of the place to go during the week in between larger weekend shopping trips to large retail stores. For instance, while nearly half of Wal-Mart (NYSE:WMT) stores are within a mile of Dollar Tree stores, only 19% of them are near Family Dollar stores. This positioning allows Family Dollar to capture more business from small trips by people who don't have the time during the week to make the full trip to Wal-Mart.

A number of analysts are suspecting that Icahn intends to push a merger with Dollar General (NYSE:DG).  The thinking here is that both companies have similar business models, both companies are seeing renewed growth in cold and frozen food, and both have a lot of duplicate overheard that could be eliminated in a marriage.  Those cost savings would flow to the bottom line as net income.

It will be interesting to see how the Ichan and Family Dollar Stores relationship develops.  I suspect we'll learn more with the next earnings report and conference call expected July 10. 

Will this stock be your next multi-bagger?
Give us five minutes and we'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers