Activist investors like Carl Icahn and Bill Ackman don't take to calling out companies on Twitter or in public without wielding a thorough case for doing so.
In the case of Family Dollar, Icahn has a strong, strong case against a long-tenured, value-destroying Family Dollar executive team and board of directors.
Assets (stores) that were viewed as great investments just a short while ago are being impaired by Family Dollar as to cushion an income statement that is under siege from competitive industry pressures and in-store merchandising failures. For every one of the 370 stores that Family Dollar announced in early April that will close as part of a new restructuring plan, that is a direct reflection of blinded management not having shareholders interests at heart.
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In addition to significant underperformance of Family Dollar's business relative to peers Dollar General and Dollar Tree in four years time, Icahn has an even stronger hand given the absurd composition of the company's board of directions. Filled with retired and active consultants, a former North Carolina governor, and the president of Queens University Charlotte, Family Dollar's board lacks the critical retail and operational expertise to provide checks on a management team that has added well north of 1,000 stores to the business model in the past five years. The lone person likely generating beneficial ideas for shareholders on the board: Edward P. Garden, chief investment officer from Trian, who won a seat in 2011 thanks to the agitating of large shareholder Nelson Peltz.
Here are five financial facts on Family Dollar that will help you jump into the opportunistic brain of Carl Icahn:
1. Family Dollar's return on equity has fallen 800 basis points since the fiscal year ended Aug. 27, 2011.
2. Capital expenditures have increased some five times from the fiscal year ended Aug. 29, 2009 as Family Dollar has added in excess of 1,000 stores and remodeled existing locations. Yet, Family Dollar's operating margin peaked in the fiscal year ended Aug. 27, 2011.
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3. Family Dollar's operating margin is more than half that of Dollar Tree, and roughly 40 percent of Dollar General.
4. Family Dollar has the worst sales-per-square-foot in the publicly-traded dollar-store industry, despite remodeling stores into new layouts and exterior banners that gleam from the highway.
5. Family Dollar's current real-estate strategy is to not own stores. Since the end of fiscal 2012, Family Dollar has sold 532 stores in leaseback transactions for $694 million in proceeds, or $256.3 million after-tax. These funds have been plowed back into new store openings. Given the execution of Family Dollar's management, Icahn is basically saying that shareholders should not trust the executive team to reinvest proceeds from asset sales due to mounting impairment charges in the present.
The raw footage that says it ALL on the state of Family Dollar
In January of this year, I packed up my car for an entire Saturday and visited a good number of Family Dollar stores in New York. It was as if Family Dollar's weak fundamental state literally came to life as I entered the parking lot. Oddly enough, comparing notes from that expedition to those gained by re-tracing steps this past weekend, this much became clear: The state of Family Dollar is getting WORSE, not better, after management's attempt to soothe investors in April.
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Here are the problems front and center.
Inventory BULGE
When a company grows at the torrid pace of Family Dollar, inefficiencies are bound to arise as people and systems simply are unable to handle all of the new demands. At Family Dollar, massive over-ordering of inventory continues, and is a major anchor to profits.
It has gotten so bad that on nice weather days, Family Dollar has to move its inventory outside to free up space in the store.
Unfortunately, the value-destroying inventory-bulge issue at the company extends to inside the store, impacting the shopping experience and limiting sales potential. From blocked aisles that a mom with a stroller can't navigate, to hastily arranged shelves, the stress on Family Dollar's business model orchestrated by the management team, and not properly checked by the board, is freakishly apparent.
In its latest 10-Q filing, Family Dollar noted it's trying to become "relevant" to its customers. Whenever a retailer mentions that it's a red flag, suggesting the company is losing weekly circular wars and daily social media battles. Basically, Family Dollar is telling its shareholders Dollar General, Dollar Tree, and Walmart are more relevant.
One example showing why Family Dollar is not as relevant as it was can be seen in pricing. In a bid to boost same-store sales, Family Dollar has introduced pricey national brands that are displayed at eye level to the customer. The customer gets turned off by the sticker shock, and searches for a better deal at Dollar General or Dollar Tree. The dollar stuff at the company is often now found placed near the floor.
Save this sinking ship, Mr. Icahn.
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 has had a "sell" rating on Family Dollar since August 2013. They initiated coverage of Walmart last week with a "sell" rating and $71 price target.