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Summary

  • Icahn attacks Family Dollar again just one and a half week after this first attack.
  • This time Icahn urges a quick sale of the business, or else threatens to find shareholders to gain a majority.
  • After two painful public losses, Icahn sounds very determined. It will be a hot summer for Family Dollar.

Carl Icahn is making headlines again less than two weeks after attacking Family Dollar (NYSE:FDO) for the first time. In a new letter Icahn is urging the company to sell itself. If not, Icahn sounds eager to battle management and convince fellow shareholders to sell the business.

In all honesty, Carl Icahn has a point even as Family Dollar has shown impressive growth in recent years. The huge tailwinds in the industry made it relatively easy to report steady growth in its revenues over the past decade. Yet despite this growth, results do look disappointing versus the company's peer group.

That being said, an investment at current levels is a bet on Icahn which has lot already a few battles recently.

Icahn Urges Family Dollar To Sell Itself

Carl Icahn published a letter last week which was addressed to Howard Levine, Chairman and CEO of Family Dollar. Despite an apparent pleasant dinner, Icahn has different opinions on the future of Family Dollar.

According to Icahn, Family Dollar has underperformed on most if not all operating metrics compared to its peers. This includes same store sales, total revenue growth, sales per store, operating margins, among many others.

For these and other reasons, Icahn believes it is imperative that the company should be put up for sale immediately. Icahn believes there will be significant interest from strategic and financial buyers which stand to realize synergies of an acquisition.

Given the strong stock market and low interest rate environment, this would be a great time to exit. Icahn aims to furthermore add three representatives on the board of the company as per immediately. Icahn urges the formation of a new board committee to approach buyers of the company, as soon as possible.

Icahn Is Already Growing Impatient

Besides these demands made by Icahn, the pace at which he wishes to act is remarkable as well. A proxy war should be started to replace some of the board seats, and Icahn will put the proposal to sell the business to the shareholders if the company does not meet his demands.

If the board will not act immediately, a proposal to the other shareholders could be made in the next few weeks already.

Note that Icahn ¨approached¨ the company already earlier this month, announcing a 9.4% stake in the business. The revelation of the stake and Icahn's original intention to merge Family Dollar with Dollar General (NYSE:DG) send shares more than 13% higher on the 9th of June. Interestingly enough, he did not reiterate the desire for a merger in this latest attack.

In a response, Family Dollar said that it was confident that immediate and strategic actions to improve performance would deliver strong returns for the shareholders. Of course, such a standard response does not convince Icahn.

Disappointing Performance

So far the year for Family Dollar has been very disappointing. Recently it announced plans to close 370 stores due to increased competition and less traffic and fewer transactions. Based on a current store count of more than 8,000 stores the announced closures are quite significant.

These factors pushed the company into slowing the expansion plans for the future as well. For 2015, Family Dollar now plans to open between 350 and 400 new stores.

On the back of the strong market conditions, shares of Family Dollar have risen nearly a 137% over the past five years, in a time period in which the S&P 500 has risen by 113%. Still Icahn is not happy with the performance as competitors Dollar General and Dollar Tree (NASDAQ:DLTR) have seen its shares increase by 176% and 282%, respectively.

Between 2004 and 2013, Family Dollar increased its revenues by some 97%, at a rate of nearly 8% per annum. On a positive note, the company repurchased roughly a third of its shares outstanding while reporting net profit margins of 4.3% over the past year.

In comparison, Dollar General grew its revenues by 128% in total, or around 9.5% per annum. It kept its outstanding share base relatively unchanged while it reported better after-tax profit margins of 5.9% over the past year.

Dollar Tree is the smallest firm out of three in the peer group, but it managed to grow its revenues by 150%, at a rate close to 11% per annum. What is even more impressive is that it has retired about 40% of its shares over this time period as well. Its net profit margins of 7.6% are the best as well.

Valuing Family Dollar

Trading around $69 per share, Family Dollar's equity is now valued at $7.8 billion. The company operates with $172 million in cash and equivalents while it does have $796 million in total debt outstanding, resulting in a net debt position of about $624 million.

Based on trailing revenues of $10.29 billion and earnings of $392 million, equity is valued at 0.75 times revenues and nearly 20 times earnings. Notably based on revenue multiples, this is a significant discount compared to its other two competitors, which trade above 1 times revenues.

Family Dollar does pay its shareholders a $0.31 per share quarterly dividend, providing investors with a 1.8% dividend yield.

What's Next?

Carl Icahn does have a case with regards to Family Dollar even as revenue growth has been impressive. The company has been riding the positive momentum for dollar stores, but its performance versus competition has been relatively weak.

Revenue growth has been disappointing, but the main disappointment results from the relatively poor profit margins which combined has led to a disappointing performance on a relative basis.

Perhaps some of Icahn's aggression results from the fact that earlier ¨fights¨ with Apple (NASDAQ:AAPL) and eBay (NASDAQ:EBAY) have not been won by the company. In the case of Apple he probably won't mind given the huge run-up recently, while eBay has been struggling after Icahn announced his intentions for the company to spin-off eBay.

It will be interesting to see if Icahn can push for a sale, being in a huge battle with Family Dollar's current management. One thing is for sure, there is more firework to come. With Icahn already having lost two battles recently, he sounds very convinced to not lose this battle. Time will tell, but it could be a hot summer for Family Dollar.

Chasing the bandwagon at current elevated levels is a direct bet on Icahn. While he does sound determined to win this battle, I refrain from making an investment at current levels.

Source: Family Dollar - Icahn Making Headlines Again, Sounding More Determined Then Ever