July 10--Family Dollar said Thursday that profits during its most recent quarter fell by a third, news that's unlikely to help the discount retailer's attempts to fend off an activist investor who wants to see the company sold.
During a conference call with investors Thursday morning, CEO Howard Levine talked about ways the company plans to improve its results, from closing under-performing stores to selling alcohol at Family Dollar locations.
But he and other executives wouldn't discuss the billionaire elephant in the room: Activist investor Carl Icahn, a longtime corporate brawler who has demanded the Matthews-based company be put up for sale.
Icahn owns 9.4 percent of Family Dollar's stock, making him the largest individual shareholder, and he has said he thinks new ownership could spur Family Dollar to catch up with competitors. If he doesn't get his way, Icahn threatens to take his demands to shareholders and ask them to replace the company's entire board of directors.
Family Dollar has lagged its rivals, especially the larger Tennessee-based Dollar General chain, for several quarters. Family Dollar has lower sales-per-square foot, and has struggled with slumping sales and profits.
That trend continued Thursday, as Family Dollar said profits fell 33 percent compared with the same quarter last year, to $81 million. Sales increased 3.3 percent, to just under $2.7 billion, driven by strong demand for frozen food and tobacco. But sales excluding stores open that recently opened or closed -- considered a key measure of a retailer's health -- fell 1.8 percent, and the company said it saw fewer customer transactions during the quarter.
Levine said the results weren't satisfactory, but told investors they will get better.
"We're still in the early stages of our turnaround," said Levine. "We're actively taking steps to improve our results and our trends are beginning to improve."
He attributed some of the company's problems to both the continuing struggles of the company's core low-income customers and an "intense competitive environment" with discount retailers fighting for a share of struggling customers' dollars.
"The low-end consumer has not benefited in this recovery at all. In fact, I think they've slipped back," said Levine, citing cuts to government benefits, volatile fuel prices and high unemployment among low-wage workers.
In a bid to increase sales, Family Dollar will expand its frozen and refrigerated food coolers and start stocking beer and wine in its stores next year, Levine said. Family Dollar will also start offering different assortments of goods in its stores by regional cluster, to tailor its offerings more closely to individual markets.
This year Family Dollar has laid off more than 100 people at its Matthews headquarters, changed its strategy to lessen the number of costly promotions, cut prices on 1,000 items and shaken up its executive ranks. Former president Mike Bloom departed in January.
Family Dollar has also announced plans to close 370 under-performing stores by the end of the fiscal year, including 30 in the Carolinas. During the company's third quarter, however, Family Dollar opened 111 new stores and closed only three.
The company's restructuring plans cost Family Dollar$23 million during the quarter, largely in severance benefit payments.
Last month, Dollar General reported that its quarterly profit inched up less than 1 percent, to $222 million, as sales climbed 6.8 percent, to $4.5 billion. Although analysts have pointed to Dollar General as a possible candidate to buy Family Dollar, Dollar General's CEO recently announced plans to retire next year. That lowers the chances of a deal, experts say.
Wayne Hood, an analyst with BMO Capital Markets, said in a note to investor Thursday morning that Family Dollar did better than he had expected in some categories. Its same-store sales fell less than forecast. Those results show the company could be improving, and "lessens the likelihood (Family Dollar) will be forced to effect a (merger and acquisition) transaction as quickly."
Still, many analysts consider change of some kind a possibility, whether it be a merger with another company, a takeover by private equity firms, or the replacement of Levine and other top executives.
Brian Yarbrough, an analyst with Edward Jones, said he doesn't think a merger or acquisition is likely, because no company has shown interest so far and Family Dollar's relatively high share price makes it an unattractive target for private equity firms. But he said Levine will have to show better results to keep his job.
"I think the board has given Howard probably a year," Yarbrough speculated. "He needs to keep showing signs of improvement to keep the board's support...(Ichan) could get management pushed out if the turnaround doesn't work."
Levine, son of Family Dollar founder Leon Levine, owns 8.2 percent of shares outstanding, and hasn't shown any willingness to put his father's company on the market. Family Dollar's board of directors adopted a " poison pill" provision last month that's designed to prevent any unsolicited attempt to take over the company.
About 22 percent of Family Dollar's stock is controlled by activist investors, including Icahn, John Paulson's hedge fund and Nelson Peltz -- who unsuccessfully tried to buy the company in 2011.
The company is one of Charlotte's most prominent homegrown firms, and operates more than 8,200 stores in 46 states. The Levines are also major charitable benefactors, having made tens of millions of dollars worth of contributions to various causes through the Levine Foundation.
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