(FDO) Family Dollar Stores Gets Buyout Offer

Family Dollar Stores Inc. (FDO), the operator of self-service retail discount store chains, recently acknowledged that it has received a voluntary offer from Trian Group, led by Nelson Peltz, to acquire the company.

Trian Group, the largest shareholder of the company with approximately 8.0% stake, has offered $55.0 to $60.0 per share or approximately $7.0 billion to Family Dollar.

Prior to it, Peltz’s Trian also made major investments in Wendy’s/Arby’s Group Inc. (WEN), a fast-food chain and Tiffany & Company (TIF), maker of high end jewelry.

The buzz is that Peltz has offered Mr. Levine, Chairman and Chief Executive of Family Dollar, to join as an investor in the buyout, next to the Trian Group and insisted to form a board of autonomous directors to think about the proposal.

Family Dollar has engaged Morgan Stanley and Cleary Gottlieb Steen & Hamilton LLP as its financial and legal advisors to guide the board of directors during the evaluation process.

A month before, the company posted its first-quarter 2011 earnings that missed the Zacks Consensus Estimate. Moreover, management expects gross margin to remain under pressure in the coming quarters.

Family Dollar operates in a highly competitive discount retail merchandise sector. The company faces stiff competition from Wal-Mart Stores Inc. (WMT) and Dollar General Corporation (DG), which will likely continue to weigh on its results. The competitors have larger number of stores, greater market presence, brand recognition, and financial resources.

Further, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn, the company’s growth and profitability.

However, Family Dollar’s strategic initiatives to enhance the merchandising, marketing, and store operations have resulted in persistent growth in the top and bottom lines. In order to enhance the market share, Family Dollar intends to focus on both consumable and discretionary categories

Further, the company has effective price and inventory management, cost control, private label offering, expanded operating hours to drive sales and margin trends.

Moreover, the company’s point-of-sale technology (credit card and food stamp acceptance) and store realignment initiatives better positions it to increase traffic, meet the customer’s demand and enrich its in-store shopping experience.

After a broad evaluation, we prefer to maintain a long-term ‘Neutral’ recommendation on the stock. Family Dollar also holds a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating.

DOLLAR GENERAL (DG): Free Stock Analysis Report

FAMILY DOLLAR (FDO): Free Stock Analysis Report

TIFFANY & CO (TIF): Free Stock Analysis Report

WENDYS/ARBYS GP (WEN): Free Stock Analysis Report

WAL-MART STORES (WMT): Free Stock Analysis Report

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