July 11, 2014

Family Dollar plans changes, including adding beer and wine

During a conference call with investors, 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.

Family Dollar is adding beer and wine to its shelves, the retailer’s latest attempt to improve its bottom line after a series of moves such as adding tobacco, shaking up its executive ranks and announcing hundreds of store closures.

The Matthews-based discount retailer said Thursday that it will add beer and wine next year. The company also said that profits during its most recent quarter fell by a third and that expenses rose faster than expected, leading to disappointing third-quarter results.

During a conference call with investors, CEO Howard Levine detailed Family Dollar’s plans to add alcohol, sell more food and win back customers with lower prices on 1,000 items.

But Levine 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 that recently opened or closed 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, Levine said. A pilot program to sell beer and wine at 200 of the company’s 8,200 locations was successful recently, executives 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.

While analysts say the move to boost sales of food and alcohol could increase the company’s revenue, those are lower-profit margin goods than things such as apparel, which used to be a bigger part of Family Dollar’s business. That means Family Dollar’s profit margins are likely to stay squeezed even if sales go up.

Consumable goods, the category that includes food, made up 73 percent of Family Dollar’s sales this quarter. That’s up from 65 percent the same quarter five years ago.

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 and cut prices on 1,000 items. Former President Mike Bloom departed unexpectedly in January.

Family Dollar has also announced plans to close 370 underperforming 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.

Changes likely, but specifics unclear

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.

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.”

Joan Storms, an analyst with Wedbush Securities, said she thinks Levine will be replaced. “They are going to get a new management team – basically, removal of the CEO,” she said. She said a sale of the company remains a possibility.

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.

Family Dollar’s stock closed down 12 cents, less than 1 percent, at $64.12 a share Thursday. Staff writer Linly Lin contributed

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