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 (UNKNOWN:FDO.DL). 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.
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.