First is that Carl Icahn has further cemented his legacy in the Activist Investor Hall of Fame. According to filings, Icahn's 9.4-percent stake in Family Dollar that he disclosed on June 6 is valued at $174 million as of today. The second angle is a Dollar Tree led by its current CEO, not the failing leader of Family Dollar Howard Levine, will move quickly to shutter underperforming Family Dollar stores and those that operate alongside a Dollar Tree at strip centers.
Another point is that Walmart is in for BIG trouble for staying true to its insular corporate culture (one where it believes it's doing everything correctly) and failing to pay a premium to acquire instant square footage and name reorganization inherent to Family Dollar.
For Walmart, as soon as the Dollar Tree/Family Dollar deal closes in early 2015, it will immediately start the clock on a competitive firestorm. Here is what to look for:
1. A monster dollar store will have been formed that is closer to the economically-sensitive customers in rural and urban markets that view a trip to Walmart as expensive. That is, if said customer has an automobile to venture out to a Walmart.
2. A monster dollar store that will invest its deal synergies (estimated loosely at $300 million ... I expect more as the Dollar Tree cleans up the operational mess that is Family Dollar) to price its merchandise more competitively (especially doing the holidays), counteracting Walmart's ongoing efforts to reduce prices for food and consumable products. Here come the weekend circular price wars!
3. A monster dollar store dead set on continuing to gobble up new retail sites and open stores that boast improved interior layouts and expanded selections, notably in fresh and frozen foods. Such an inevitable outcome hints at below plan returns for Walmart's new, snazzy-looking smaller store formats called Neighborhood Markets and Express, which the company has pitched to its widow and orphan investor base as its next long-term sales and earnings growth drivers.
According to Bloomberg data, Walmart has 659 suppliers compared to Dollar Tree at 32 and Family Dollar at 54. However, as the unified buying teams at Dollar Tree/Family Dollar sit with the aforementioned suppliers, and others, they will boast a store base totaling in excess of 13,000 (Walmart U.S. 4,800 stores or so), and undeniably be an advantageous negotiating position for merchandise prices. Amid that improved pricing on purchased goods, Dollar Tree/Family Dollar could offer lower retail prices (mostly at Family Dollar given its multi-price point business model) that causes Walmart to become even more aggressive with its prices.
Considering that Walmart continues to invest billions of dollars in new store openings globally and online capabilities, increasingly pressured margins in its largest segment, the U.S., is indeed unwelcome.
If one is holding shares in the dividend-paying, household consumer staple stocks, be mildly concerned by discount retail consolidation that is unlikely to have concluded. Tellingly, shares of Pepsi, Kimberly-Clark, Hershey, and Clorox are lower on today's session.
Commentary by Brian Sozzi, CEO and chief equities strategist at Belus Capital Advisors. Follow him on Twitter @BrianSozzi.
Disclosure: Neither Brian Sozzi nor Belus Capital Advisors own shares of any of the stocks mentioned here. Belus upgraded shares of Family Dollar to "hold" following the June 6 news that Carl Icahn had amassed a stake in the retailer. Belus currently rates Walmart shares a "sell."
This article has been updated to reflect Carl Icahn's stake in FDO is valued at about $174 million.