Dollar Tree investor pushes for sale of struggling Family Dollar, higher prices

In a sternly worded letter to the CEO of Dollar Tree stores, shareholder and investment management firm Starboard Value LP urged the retailer to sell its Family Dollar division as well as raise prices in order to drive growth.

Starboard, which owns a 1.7% stake in Dollar Tree, criticized the company’s performance, particularly since the 2015 acquisition of the Family Dollar chain.

“The underperformance at Family Dollar since the acquisition has persisted long enough,” according to Starboard. “It is time to consider other choices, as hoping for improvement that continues to be elusive is no longer acceptable. We believe that Family Dollar is currently being ascribed very little value in the market and is a drag on Dollar Tree's valuation multiple.”

Further, the letter stated, “Dollar Tree has gone from industry leader to industry laggard."

In addition to urging a selloff of Family Dollar, Starboard’s proposal includes “an evaluation and initiation of a wide-scale market test of a multi-price point strategy at Dollar Tree bannered stores.”

As Starboard points out, Dollar Tree has kept retail prices at $1 since its founding 30 years ago, despite the fact that $1 in 1986 is worth approximately $2.30 today, due to inflation. However, the value that Dollar Tree has offered its customers has deteriorated because of the need to fit everything into a $1 price point.

“Products today are smaller or of lower quality than they were five, 10 and certainly 30 years ago,” the letter continues. “In fact, Dollar Tree has been priced out of offering items that the company was able to sell in the past and that we believe customers still want today. By introducing a few additional low price points, while keeping the majority of products priced at $1, we believe that Dollar Tree could dramatically improve its product assortment and offer far more value to its customers, ultimately driving increased customer loyalty.”

Supporting the stance from Starboard, an analyst’s note from Jeffries today noted, “Family Dollar has weighed on Dollar Tree both financially and operationally, and we believe Starboard's request for the company to consider strategic alternatives for the banner, including an all-out sale, is valid despite current efforts to consolidate headquarters and management’s recent comments that renos have shown strong.”

In addition, Starboard also urged Dollar Tree to make changes to its board and noted that the investor had “selected candidates who have directly relevant experience and skill sets in areas that we believe would be of substantial value.”

In a statement, Dollar Tree did not address either of Starboard’s calls to sell Family Dollar or raise retail prices, but acknowledged the request to appoint new board members.

“While we appreciate Starboard's investment and will evaluate any suggestions they may have as we would with any investor, we note that Starboard's nominations for a majority of the board were made without seeking any engagement or making any communication to the Company,” Dollar Tree wrote.