Business

More dollar-store drama as activist investor urges Dollar Tree to sell Family Dollar

Months after Dollar Tree announced it will close the Matthews headquarters of Family Dollar, a major shareholder in Dollar Tree is urging the company to consider selling Family Dollar.

A sale of the iconic local company that started on Central Avenue in 1959 would mark yet another twist in a long-running dollar-store drama that’s included hostile takeover attempts, spinoffs, layoffs and lawsuits.

In a letter to Dollar Tree CEO Gary Philbin Monday, Jeffrey Smith, CEO of activist hedge fund Starboard Value LP, said that Dollar Tree “significantly overpaid” for Family Dollar, and that it has been a major drag on Dollar Tree’s business ever since. Selling the company, Smith wrote, is one opportunity to unlock value for shareholders.

But Dollar Tree insists it remains “strongly committed to Family Dollar,” Dollar Tree spokesman Randy Guiler said in an email.

“In fact, in late November, we announced our plans to invest in more than 1,000 Family Dollar store renovations during 2019,” Guiler wrote. “Our Family Dollar leadership team is fully engaged in improving the productivity across the entire store base.”

Dollar Tree has been working to improve Family Dollar since buying the local discount chain for $9.1 billion in July 2015, including by closing underperforming stores, opening new locations and renovating others.

In September, Dollar Tree announced plans to close the Family Dollar offices in Matthews to consolidate corporate functions of the two banners at its headquarters in Chesapeake, Va. Roughly 900 local jobs are impacted by the decision, some of which are relocating to Dollar Tree’s expanded offices in Virginia.

A majority of the layoffs at Family Dollar are expected to take place by June.

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Completion of the expanded Virginia headquarters will mark “the most important phase of the integration” for Dollar Tree and Family Dollar, Dollar Tree CEO Philbin has said.

Still, the integration of the two companies has taken way too long, and it has not been successful, according to Starboard. The two companies “are largely run independently,” the firm added.

A turnaround of Family Dollar is still possible, but it’d be better executed in the private market, according to Starboard.

Since Dollar Tree bought Family Dollar, the combined company has underperformed its rival Dollar General by more than 20 percent, Starboard noted. Growth of same-store sales, a retail industry term for sales open at least one year, has been flat or negative at Family Dollar stores ever since.

“We believe Dollar Tree should explore all strategic alternatives for Family Dollar, including a sale of the business,” Smith wrote.

“The underperformance at Family Dollar since the acquisition has persisted long enough. It is time to consider other choices, as hoping for improvement that continues to be elusive is no longer acceptable.”

As another way to create shareholder value, Starboard said, Dollar Tree needs to consider selling products at multiple prices.

Dollar Tree has kept its prices at $1 since its founding three decades ago, despite the fact that $1 in 1986 is worth roughly $2.30 today because of inflation, Starboard noted.

The value of the products Dollar Tree has sold in recent years “has deteriorated” since Dollar Tree has to fit everything into the $1 price point, the firm said.

In a statement in response to the Starbord letter, Dollar Tree did not comment on the recommendations Starboard had regarding Family Dollar or product prices.

“Dollar Tree’s Board and management team welcome constructive input from shareholders about ways to further create value for all Dollar Tree shareholders,” the company wrote.

As the retail and sports business reporter for the Observer, Katie Peralta covers everything from grocery-store competition in Charlotte to tax breaks for pro sports teams. She is a Chicago native and graduate of the University of Notre Dame.
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