Change likely at Family Dollar, but sale far from certain

A day after Family Dollar’s largest shareholder demanded the company put itself up for sale, analysts agreed that change is almost inevitable.

But they cautioned the Matthews-based retailer might not end up being sold, because the stock has risen over the past few years and a willing buyer could be hard to find. Sale or no sale, though, CEO Howard Levine could face serious challenges to remaining at the company’s helm.

The current round of Family Dollar sale speculation started earlier this month, when activist investor Carl Icahn disclosed that he has amassed a 9.4 percent share of the company’s stock. Icahn said he wants to see changes at Family Dollar, which has lagged its rivals in sales and profit growth.

Thursday, Icahn ratcheted up the pressure in a letter to Levine. He said the company is undervalued and he wants three seats on the board and Family Dollar put on the market.

“He’s good at ruffling feathers,” Edward Jones analyst Brian Yarbrough said of Icahn. “I just don’t know who the buyer is here.”

Although rival Dollar General has been named as a possible buyer, Yarbrough said he expects that chain to focus on organic growth. The Tennessee-based company has invested hundreds of millions of dollars into buying back its own stock, rather than amassing money for an acquisition.

Wal-Mart, which is developing its own small-store format to compete with Family Dollar and Dollar General, has also been mentioned as a possible buyer. Yarbrough called that a “pie in the sky” proposition.

Joan Storms of Wedbush Securities doubts Dollar General or Wal-Mart would acquire the company. “I don’t see that at all,” she said. “I do not think there are strategic buyers at this point.”

That would leave private equity buyers. Such firms have swooped in on struggling companies, cut poor locations, changed management and taken the firms public again for a big profit. That’s exactly what private equity firm KKR did with Dollar General when it bought the company in 2007 and took it public again two years later.

Speculation about an acquisition has propped up Family Dollar’s stock, Yarbrough said, pushing it above $74 within the past year. Much of the speculation is driven by the gap between Family Dollar and Dollar General’s performance. While Family Dollar has remained profitable, it has been less so than its larger rival.

In fiscal 2013, Dollar General’s profits rose almost 8 percent, to $1 billion. Family Dollar’s profits rose 5 percent, to $444 million.

The companies have a gap in sales-per-square-foot as well – $220 at Dollar General and $189 at Family Dollar last year. That means Dollar General is selling 16 percent more than Family Dollar in every square foot of its stores, making it more efficient and profitable. Shareholders hope a buyer could come in and close the gap.

But Yarbrough pointed to activist investor Nelson Peltz’s unsolicited attempt to buy the company in 2011 at $55 to $60 a share. No private equity firms stepped up to make the deal happen, and now the stock is trading near $70.

“Why would private equity be interested today when the stock is five points off basically an all-time high?” he said.

Family Dollar has been trying to fix its problems while remaining a stand-alone company – shuffling its executive ranks, announcing plans to close 370 under-performing stores and laying off more than 100 workers at its Matthews headquarters.

Family Dollar spokeswoman Kiley Rawlins declined to comment Friday on takeover speculation.

Turning up heat on board

Increased scrutiny is likely to focus on the company’s 11-member board of directors, nine of whom have strong North Carolina ties. Icahn is threatening to oust them if he doesn’t get his way.

“The management is not doing a good job,” said Storms. “There should be more pressure on the board.”

The board’s chairman is Howard Levine, the company’s 55-year-old CEO, whose father Leon Levine founded Family Dollar in 1959 and is now one of Charlotte’s most prominent philanthropists.

N.C. Secretary of Commerce Sharon Decker – whose job includes attracting and retaining businesses – is also a member of Family Dollar’s board. That could put her in the potentially awkward situation of being asked to vote on a business deal that could result in North Carolina losing a major employer, if Family Dollar were to be sold.

Decker, who was appointed commerce secretary by Gov. Pat McCrory, owns 6,050 shares of Family Dollar, according to a securities filing. That would be worth $423,500 at $70 a share.

Perry Newson, executive director of the N.C. Ethics Commission, did not return a call Friday. Neither did Decker, whose spokeswoman referred questions to Family Dollar. Rawlins, of Family Dollar, said in a statement: “All of our board members take their fiduciary responsibilities seriously.”

The state’s ethics law does not appear to prohibit a Cabinet appointee from serving on the board of a public company. But it does require disclosure of such positions, which Decker has done. Decker is also a member of the board of directors for Charlotte-based Coca-Cola Bottling Co. Consolidated.

Other prominent Family Dollar board members include the company’s former general counsel George Mahoney, former N.C. Gov. Jim Martin and Queens University of Charlotte President Pamela Davies.

“I don’t want to call them cronies, but they’re definitely on Howard’s side,” said Yarbrough. Still, he said he thinks the board will have to name a new CEO if Levine’s plans to turn the company around don’t show results fast.

“I think they’re going to be forced to bring in a new manager,” said Yarbrough.

Storms agreed. “They haven’t executed it right,” she said. “So it’s a management problem.”