The largest deep discount store in the U.S., Dollar General (NYSE:DG), has recently posted its second-quarter results on August 28 which were a mixed bag of numbers and mildly disappointed analysts. Also, in an acquisition spree the company had placed a bid of $9 billion for the No. 2 dollar-store, Family Dollar (NYSE:FDO), which got rejected by the latter’s management. In the face of intense competition from discount store giants; do the second quarter results reflect the requirement of Dollar General to win this bidding exercise? What are the management plans ahead? Let’s take a sneak peek to get to the real answers.
A quick quarter recap
Net revenue increased 7.5% to $4.72 billion in the quarter, from $4.39 billion, a year-ago. The comparable store sales rose 2.1% during the quarter, missing analysts’ estimate of 3.4%. This was affected by cautious consumer spending in the months of June and July as macro-environmental conditions deteriorated. However, the company has slashed its product prices to keep net sales at a decent level in the quarter.
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Net income improved 2.4% to $251 million or $0.83 per diluted share this quarter, compared to the net income of $245 million or $0.75 per diluted share in the similar quarter last year. Though the gross profit saw a nearly 6% jump, the gross margin decreased by 53 basis points due to increase in markdowns, primarily linked to promotional activities undertaken in the past two months (June and July) for luring price-conscious consumers to the dollar-store. This drop in margin was however partially offset by high margins on purchase of inventory.
Even during the second quarter earnings call, the management stated that they were committed to acquire Family Dollar as it could create immense value for its shareholders.
The bid backdrop
As the competitive ground in dollar-stores intensifies in the U.S., the No. 3 dollar-store, Dollar Tree (NASDAQ:DLTR), first placed a bid to acquire Family Dollar for $8.5 billion. This created some tension among the top brass of Dollar General who placed a counter-bid of $9 billion (excluding debt) for Family Dollar – knowing well that if Family Dollar accepted the bid, then it would become a giant with over 13,000 stores in North America with the revenue swelling to over $18 billion.
Dollar General placed the bid worth $78.50 per share which exceeded Dollar Tree’s initial offer of $74.50 a share. CEO Rick Dreiling shared – “For Family Dollar shareholders, our proposal is financially superior to the current transaction agreement with Dollar Tree and would provide Family Dollar shareholders with a substantial premium and immediate liquidity for their shares.”
But unfortunately Family Dollar rejected Dollar General’s bid and has favored the lower bid of Dollar Tree. Family Dollar has cited anti-trust issues for the rejection of the proposed deal.
The management reaction
Dollar General’s management still remains optimistic as they have remarked that the ‘anti-trust issues’ are manageable. Company sources have confirmed that on September 2, the management has sweetened the proposal and send it to the Board of Directors of Family Dollar Stores. Under the terms of the revised proposal, Dollar General is ready to increase the bid to $80 per share in an all-cash deal. To further pacify the Family Dollar top brass, Dollar General’s management has agreed to divest nearly 1500 outlets if ordered by the Federal Trade Commission (FTC), from the 700 store divestiture commitment given during the initial bid.
However while addressing the Board of Family Dollar, Dollar General’s CEO has emphasized that if the former still does not accept its proposal to start talks afresh, it might take the case directly to the former’s shareholders by turning hostile. Dreiling wrote in the letter –“In the event you refuse to engage with us regarding our revised proposal, we will consider taking our persuasive and superior proposal directly to your shareholders, as we are firmly committed in our belief that a combination of our companies is in their best interests.”
Truly, Dollar General’s future seems linked to this bid on Family Dollar, and the management wants to keep no stone unturned to push its dream into reality. If the No.1 and No.2 dollar store of U.S. converge, they can even be a potent danger to the largest discount store, Wal-Mart. Even the second quarter numbers of Dollar General reflect the necessity of this acquisition seeing the light of the day, if Dollar General wants to revive its business as consumers are growing penny pinchers. Let’s stay tuned and keep an eye on whether Family Dollar reviews the sweetened deal in the company’s favor or does Dollar General have to turn hostile for winning the bid.