Why Dollar General Shareholders Should Welcome Rick Dreiling's Retirement

Dollar General shareholders should hope its CEO's recent retirement announcement takes attention off a possible merger with Family Dollar.

Jul 11, 2014 at 6:00PM

Dollar General (NYSE:DG) is at the top of the dollar store market. First quarter earnings, although disappointing in comparison to analyst expectations, compared favorably to its main competitors. While Dollar General has successfully navigated the retail marketplace in the past year, two new variables loom large in this retailer's future.

Most notably, CEO Rick Dreiling announced his impending retirement only one week ago, which kicked off a search for a new chief executive . Meanwhile, billionaire Carl Icahn is pushing for a sale of Dollar General's main competitor Family Dollar (NYSE:FDO) . The replacement of Dreiling and the possible sale of Family Dollar both have interesting implications for Dollar General's future viability.

Dollar General and Family Dollar: two different stories
Two weeks ago, Dollar General's stock recorded a yearly high of $65.07, which could be a signal of increased optimism in the company after a successful first quarter. Specifically, store traffic positively increased and same-store sales improved 1.5% during the first quarter of 2014. Furthermore, quarterly diluted EPS grew about 7% in the first quarter of 2014, compared to the same quarter last year.

Dollar General's encouraging improvement describes a company on the upswing, which is further illustrated by the fact that its net sales rose almost 55% in the past 5 years. In contrast, its main competitor has not fared as well.

Family Dollar recently saw same-store sales drop 3.8% and diluted EPS dropped about 30% compared to the same quarter a year ago. In April, the company announced it would close 317 stores this year due to underwhelming earnings . Conversely, Dollar General opened 214 stores during the first quarter of 2014, and recent success spurred the company to look to open 700 more stores by the end of the year .

The success of Dollar General and underperformance of Family Dollar has led some analysts to believe a merger between the two could occur in the near future.

Dollar General as the buyer
Some analysts see distinct advantages in a possible purchase of Family Dollar by Dollar General. For one, a merger of the two largest dollar stores could create a dominant convenience-based retailer, according to investment firm Credit Suisse .

Furthermore, a merger could push Dollar General into its next business phase as internal opportunities continue to diminish. For example, Dollar General's expansion necessitates more real estate, and a purchase of Family Dollar's 7,600 stores would help fulfill that need.

But while these advantages appear to be beneficial, looking closer at what Dollar General would receive from a merger raises some red flags.

What Dollar General is actually getting in return
A combination of Dollar General and Family Dollar would indeed create a dominant convenience-based retailer, in comparison to the only other remaining dollar store, Dollar Tree. However, Dollar General sees Wal-Mart (NYSE:WMT)

Consumers see dollar stores as "fill-in stores," which fall between supermarkets and large retailers like Wal-Mart . A merger with Family Dollar would do little to change this perception about Dollar General, unless the merger initiated a company-wide overhaul.

Additionally, real estate and inventory are two factors that would lead Dollar General to dismiss an opportunity to buy Family Dollar. Family Dollar and Dollar General stores usually appear in close vicinity to one another . If Dollar General was to utilize the real estate gained from a purchase of Family Dollar, then some store closures would be necessary. These closings would complicate the company's pre-existing plan of expansion.

Family Dollar's steady over-ordering of inventory is perhaps an even bigger issue pushing Dollar General away from a purchase Excess inventory could drag down profitability, especially with Dollar General's own decreasing margins .

Dollar General's shareholders should be wary of an attempted purchase of Family Dollar.

The silver lining in Dreiling's retirement
Of course Dollar General shareholders are concerned about losing Dreiling, as he has led the company to successful new heights. Fortunately for shareholders, Rick Dreiling's retirement announcement could nix a potential purchase of Family Dollar.

A period of transition is a dangerous time to make a landmark change such as a merger. A purchase of Family Dollar within the next year could severely complicate the process of initiating a new CEO. According to analysts from Sterne Agee, a purchase of Family Dollar is much less probable after Dreiling's retirement announcement .

Final Thoughts
Dollar General is succeeding in the current retail market. A merger with Family Dollar seems like a risky move as excess real estate and inventory could drag down Dollar General's profitability. As a result, shareholders could be dissatisfied as they see a once successful company lose its luster.

Although a CEO transition at a successful company isn't ideal, Dollar General shareholders should welcome Dreiling's retirement announcement for one reason: a merger with Family Dollar now seems like a longshot.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Jared Billings 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