Activist Investor's Dollar Tree Proposals Earn Lukewarm Reception From Raymond James

Raymond James is unsure that an activist investor’s ideas for Dollar Tree, Inc. DLTR are going to work.

The Analyst 

Analyst Dan Wewer maintained an Outperform on Dollar Tree.

The Thesis 

Dollar Tree has prominent signs right on its store fronts proclaiming “Everything’s $1." 

But the investor, hedge fund Starboard Value LP, wants Dollar Tree to explore changing that pricing structure and consider selling items that are more than $1, according to a Monday in The Wall Street Journal. Starboard also wants Dollar Tree to sell off its Family Dollar-branded stores, which have seen weak sales since being acquired by Dollar Tree more than three years ago, the Journal reported.

Wewer questioned both of Starboard's ideas in a Monday note. 

Dollar Tree tested higher pricing about 12 years ago, trying out sales of items up to $5 in some stores. It didn’t work, the analyst said. 

“Dollar Tree quickly learned the multi-price strategy confused its customers and led to disappointing results." 

Wewer did say Dollar Tree could try pricing adjustments. 

“Although we are skeptical of higher price points leading to stronger same-store sales for Dollar Tree (already an industry leader), we could be wrong,” he said, adding that offering items up to about $3 might be worthwhile.

Selling Family Dollar is a more difficult prospect due to the challenge of finding a buyer, the analyst said. 

The company’s main competitor Family Dollar isn't a likely candidate, as government regulators would probably block such a deal, Wewer said.

That’s especially true because the sector is important to low-income customers, he said. 

Dollar General is the only viable strategic buyer, but if the government were to require it to divest a large number of stores, it wouldn’t make financial sense, the analyst said. 

Selling Family Dollar to a financier is more likely, but brings problems of its own, Wewer said.

“Although valuation is cheap enough to garner interest from private equity firms, we are concerned that potentially leveraging Family Dollar's balance sheet to five or six turns of debt while it is losing market share, suffering margin pressure and is in need of greater [capital expenditure] to rejuvenate its stores would exacerbate the business risk." 

The Price Action 

Dollar Tree was trading 0.22 percent higher at $98.82 at the time of publication Wednesday. 

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