Bill Ackman reported on Thursday that he bought about 5.7 million shares of discount retailer Family Dollar (FDO, Financial) in the first quarter of 2011 in a $295 million transaction. The manager of Pershing Square Capital Management disclosed the holding in an amended 13-F today because he had to after talking about it publicly at the Ira Sohn Conference.
Family Dollar is a fast-growing discount store chain which sells basic home and family merchandise, most of which is priced under $10. Total net sales for second quarter 2011 peaked to their highest since 2007 totaling $2.2 billion, as did earnings per share, which at $0.98 had nearly doubled since the same quarter last year.
At the conference, Ackman said that if the store made margin improvements, an investor could see 70% returns, and that the stock, which was trading at $45, could be worth up to $92.
Ackman said the company had many things going for it, including a 37% return on investment, 20,000 units that are smaller than Walmart (WMT, Financial), room to grow, and all capex is used for share buybacks. The stores also continue to do well even during bad times. He sees the company as a potential buyout opportunity for Dollar General, KKR or a large private equity firm.
Billionaire Nelson Peltz’s Trian Group placed a takeover bid in February for $7.6 billion, but Family Dollar’s board of directors rejected it. The company sent a letter stating that the offer undervalued its shares and that continuing with its current expansion plans would serve shareholders better. Trian Group countered with a letter saying that even if it achieves its goals it “would still be materially underperforming the operating metrics that Dollar General [its biggest rival] achieves today.”
Family Dollar earns $168 in sales per square foot, compared to Dollar General’s $199. Dollar General will also open 600 new stores in 2011, while Family Dollar plans to open 300. Family Dollar has the lowest net profit margin of any of its competitors at 4.58%. Dollar General has a net profit margin of 4.8%, and Dollar Tree has the highest at 6.8%.
Ackman noted that Dollar General was bought by KKR Financial Holdings and since then has “massively outperformed Family Dollar.”
“Family Dollar is still playing catch up with Dollar General,” he said. “Their costs are mostly fixed; variable costs are a small percentage of costs. The business is stable and grows over time.”
Family Dollar is a fast-growing discount store chain which sells basic home and family merchandise, most of which is priced under $10. Total net sales for second quarter 2011 peaked to their highest since 2007 totaling $2.2 billion, as did earnings per share, which at $0.98 had nearly doubled since the same quarter last year.
At the conference, Ackman said that if the store made margin improvements, an investor could see 70% returns, and that the stock, which was trading at $45, could be worth up to $92.
Ackman said the company had many things going for it, including a 37% return on investment, 20,000 units that are smaller than Walmart (WMT, Financial), room to grow, and all capex is used for share buybacks. The stores also continue to do well even during bad times. He sees the company as a potential buyout opportunity for Dollar General, KKR or a large private equity firm.
Billionaire Nelson Peltz’s Trian Group placed a takeover bid in February for $7.6 billion, but Family Dollar’s board of directors rejected it. The company sent a letter stating that the offer undervalued its shares and that continuing with its current expansion plans would serve shareholders better. Trian Group countered with a letter saying that even if it achieves its goals it “would still be materially underperforming the operating metrics that Dollar General [its biggest rival] achieves today.”
Family Dollar earns $168 in sales per square foot, compared to Dollar General’s $199. Dollar General will also open 600 new stores in 2011, while Family Dollar plans to open 300. Family Dollar has the lowest net profit margin of any of its competitors at 4.58%. Dollar General has a net profit margin of 4.8%, and Dollar Tree has the highest at 6.8%.
Ackman noted that Dollar General was bought by KKR Financial Holdings and since then has “massively outperformed Family Dollar.”
“Family Dollar is still playing catch up with Dollar General,” he said. “Their costs are mostly fixed; variable costs are a small percentage of costs. The business is stable and grows over time.”
