Family Dollar Adopts Poison Pill, Shares Surge - Analyst Blog

Carl Icahn's move to acquire a 9.4% stake in Family Dollar Stores Inc. FDO pushed the discount store retailer to adopt a one-year shareholder right plan — better known as poison pill — to prevent activist investors from completely taking it over. The step taken by this Matthews, NC-based company to prevent any hostile takeovers triggered a momentum that led the stock to surge 13.4% yesterday to close at $68.62. 

The shareholder right plan will be exercisable only when a person or group acquires 10% of the company's common stock. The poison pill got the support of all the directors, except Edward Garden who did not favor the move.

After taking on bellwethers like Apple Inc. AAPL and eBay Inc. EBAY in the past couple of years, Icahn now targets Family Dollar and is likely to push the company's management to implement strategic changes. This billionaire activist investor is in favor of a merger between Family Dollar and Dollar General Corporation DG. Shares of Dollar General rose 7.4% to $62.25 yesterday.

Family Dollar has been in troubled waters for sometime now. The soft economic recovery and increasing competition from other big brick and mortar retailers along with online giants has affected sales and profitability. The company posted a 6.1% decline in sales and a 6.7% drop in gross margin for the second quarter of fiscal 2014.

Consequently, Family Dollar announced a number of measures to improve its operational and financial performances. Management intends to reduce prices of 1,000 basic items, optimize cost structure by reducing headcount and close 370 underperforming outlets. It also plans to be more rational on new store opening to reap higher return on investment.

Notably, the company's cautious stance on store openings is in stark contrast to Dollar General, which is on a store expansion drive. Dollar general intends to open about 700 new stores in fiscal 2014.

Currently, Family Dollar holds a Zacks Rank #5 (Strong Sell), while Dollar General carries Zacks Rank #3 (Hold).