Would A Price Change Improve Outlook for Dollar Tree?

On Monday, activist hedge fund Starboard Value LP requested that Dollar Tree Inc sell its property Family Dollar because of underperformance.  Also, the firm proposed replacing most of the board after revealing a 1.7 percent stake in the US discount retail chain.  While it makes Starboard only the ninth biggest shareholder, it said that Family Dollar is actually now worth much less than the $8.5 billion Dollar Tree paid for it back in 2015.

More specifically, Starboard is looking to capitalize on recent investor criticism, as well as commentary from analysts, that Dollar Tree should start to consider increasing the price of some of their products. Obviously, their business model is to sell everything for only $1, but profitability issues loom, particularly in light of United States’ developing trade war with China.

Accordingly, Starboard Chief Executive Officer Jeffrey Smith said, in a letter to the company, “We believe Dollar Tree should explore all strategic alternatives for Family Dollar, including a sale of the business.  The market is likely only ascribing approximately $1 billion $3 billion of value to Family Dollar based on the current stock price.”

But while Starboard has expressed interest in selling Family Dollar, the firm actually believes that its biggest chance for renewed success is to change the pricing strategy. 

Smith also notes that Dollar Tree has remained true to its $1.00 per item promise since the company was founded thirty years ago.  While that is certainly admirable, what was worth $1 in 1986 is now worth about $2.30 because of inflation.  More importantly, perhaps, the value offered in 1986 was also much higher because today’s products are not only smaller in size but also lower in quality.

Indeed, Smith comments that Dollar Tree actually has quite a committed customer base.  These loyal customers keep coming back, of course, because of the value the Dollar Tree business model provides.  However, Smith is apparently confident that it is not necessarily the consistent $1 price tag that has necessarily earned this loyalty.  

Either way, Smith now says that Starboard plans to nominate a new set of seven directors for the company’s next shareholder meeting. Smith hopes to be able to work directly with Dollar Tree’s present management team to find appropriate strategic changes that will appease disgruntled investors.  After all, the stock has fallen more than 15 percent in the past year alone. 

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