Dollar Tree under pressure to divest Family Dollar

Dollar Tree is mulling the possibility of divesting its Family Dollar business under pressure from activist investor Starboard Equity LP, which owns 1.7% of Dollar Tree’s outstanding shares. Starboard urged Dollar Tree CEO Gary Philbin to not only sell off Family Dollar, but also raise prices above the $1 cap at its trademark stores.

“The underperformance at Family Dollar since the acquisition has persisted long enough,” according to a letter from Starboard CEO Jeffrey Smith on Monday (Jan. 7). “It is time to consider other choices, as hoping for improvement that continues to be elusive is no longer acceptable. We believe that Family Dollar is currently being ascribed very little value in the market and is a drag on Dollar Tree’s valuation multiple. Dollar Tree has gone from industry leader to industry laggard.”

Starboard said the $1 per item price at Dollar Tree has not kept up with inflation over the past 30 years, noting the true cost of $1 item today is about $2.30 on average with inflation. The investor group said products sold at Dollar Tree today are smaller or lower quality than they were five years ago in order to keep the $1 prices.

“Dollar Tree has been priced out of offering items that the company was able to sell in the past and that we believe customers still want today,” the letter said. “By introducing a few additional low price points, while keeping the majority of products priced at $1, we believe that Dollar Tree could dramatically improve its product assortment and offer far more value to its customers, ultimately driving increased customer loyalty.”

Wall Street analysts tend to agree the acquisition of Family Dollar has weighed negatively on Dollar Tree. Analysts with Jeffries also see a divestiture of Family Dollar as a valid strategy despite recent efforts to consolidate headquarters and management teams to shave operational costs.

Dollar Tree management has not responded regarding Family Dollar or price pressures at its flagship stores, but it did release the following statement regarding Starboard’s urging for a change in board control.

“While we appreciate Starboard’s investment and will evaluate any suggestions they may have as we would with any investor, we note that Starboard’s nominations for a majority of the board were made without seeking any engagement or making any communication to the company,” Dollar Tree wrote.

Dollar Tree shares (NASDAQ: DLTR) traded slightly higher on Tuesday at $98.11, up 15 cents in the morning session. Over the past 52 weeks, Dollar Tree shares have traded between $78.78 and $116.65. Despite weakness in the past year, Dollar Tree shares began to rally Monday with the possibility of “value creation” demanded by investors.

Gordan Haskett raised its rating from hold to accumulate and Loop Capital raised its target price to $105 saying there would likely be several interested parties should Dollar Tree try and sell Family Dollar.