Starboard urges Dollar Tree to unload Family Dollar

Dive Brief:

Starboard Value LP, which owns about 1.7% of Dollar Tree's outstanding shares, on Monday said that it has delivered a letter to Dollar Tree President and CEO Gary Philbin, Executive Chairman Bob Sasser and the dollar store retailer's board of directors urging action on its Family Dollar unit, whose "underperformance … since the acquisition has persisted long enough."
The activist investor in its letter said Dollar Tree is "deeply undervalued" and must "explore all strategic alternatives" for its straggling banner, (which it acquired in 2015 for $8.5 billion), including possibly selling it outright. "Unfortunately, Dollar Tree significantly overpaid for Family Dollar, and this business is proving to be a meaningful distraction," according to the letter.
Starboard also challenged Dollar Tree's dedication to its everything-a-dollar pricing, which most dollar stores (including Dollar General and its own Family Dollar) have abandoned. "Dollar Tree has a great customer base, and we believe its loyalty stems from the fantastic value customers find at Dollar Tree, not merely because everything in the store is the same price," Starboard CEO Jeffrey C. Smith wrote. "Dollar Tree has kept its prices at $1.00 since its founding thirty years ago, despite the fact that $1.00 in 1986 is worth approximately $2.30 today, due to inflation."

Dive Insight:

Dollar Tree may have whiplash from activist pressures, considering that investor Carl Icahn pushed hard for a deal much like the Dollar Tree-Family Dollar merger once he had acquired a major stake in Family Dollar. Family Dollar had been struggling and has continued to drag down its new parent.

Dollar Tree is well aware of the need for progress. In its most recent quarter, store comps at Dollar Tree rose 2.3% on a constant currency basis and at the Family Dollar banner fell 0.4%. Executives also outlined plans to refurbish 1,000 of those stores this year and to turn 200 Family Dollar stores to Dollar Tree.

Starboard Value isn't alone in its impatience. Moody's Investors Service Vice President Mickey Chadha in a November email to Retail Dive noted, "The weakness in Family Dollar has persisted longer than we originally anticipated," and noted that Family Dollar will likely continue to "pressure results for the remainder of the fiscal year" with only "gradual improvement in the back half of next year" as the company took steps to renovate and shutter stores. And GlobalData Retail Managing Director Neil Saunders at the time also warned that Dollar Tree needs to take further action is in its Family Dollar segment, which he said is particularly vulnerable to Aldi's expansion in the United States.

On Monday, however, Saunders said that an outright sale of the banner may be premature and could backfire on the company overall. "While I agree that Dollar Tree has a lot of work to do in reviving Family Dollar, I do not see much merit in selling off the chain," he told Retail Dive in an email. "This may raise some cash that could, presumably, be returned to investors, but this is a very short-term vision that would leave Dollar Tree in a weaker position over the longer term as it would erode economies of scale, diminish the potential for future growth, and put the business in the hands of a rival."

That doesn't leave Dollar Tree off the hook, though, and the company may indeed need to reevaluate its rehabilitation approach, possibly at both banners, Saunders also said. "I agree that a more aggressive transformation of the Family Dollar Chain is required. I am also sympathetic to the view that Dollar Tree should test a multi-price point model, similar to that used by Dollar General," he said. "If rolled out, this would facilitate the rebranding of Family Dollar to the Dollar Tree fascia, which may be more efficient."