Activist investor urges Dollar Tree to sell struggling chain Family Dollar and hike its prices

Business Insider/Mary Hanbury

Dollar Tree sells items exclusively for $1.

• Dollar Tree received a letter from one of its shareholders on Monday urging it to sell Family Dollar and hike up prices.
• Investor Starboard Value LP said that the dollar-store chain has gone from "industry leader to industry laggard."
• Analysts say Family Dollar has been a drag on Dollar Tree's earnings. In its most recent quarterly results, same-store sales at Dollar Tree stores alone were up 2.3%, while Family Dollar's sales were down 0.4%.

One of Dollar Tree's shareholders had a stern message for the chain on Monday: sell Family Dollar and hike up prices in order to drive growth.

Starboard Value LP, which owns a 1.7% stake in Dollar Tree, outlined its suggestions in a letter sent to the company on Monday morning.

"Dollar Tree has gone from industry leader to industry laggard," Starboard wrote.

It continued: "The underperformance at Family Dollar since the acquisition has persisted long enough. 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."

Starboard wrote that Dollar Tree had "significantly overpaid" for Family Dollar and that the business had become a "meaningful distraction."

Dollar Tree acquired Family Dollar in 2015, after undergoing a bidding war with Dollar General, its main US rival.

The bidding war may have distracted Dollar Tree and led them to "gloss over some of the glaring problems at [Family Dollar]," Credit Suisse analysts wrote in June.

"Family Dollar clearly preferred Dollar Tree as the acquirer (since the Family Dollar name was more likely to survive), and Dollar Tree likely wanted to prevent Dollar General from nearly doubling its size overnight," the analysts wrote.

While rival dollar chain Dollar General has seen explosive growth - it has had a 28-year-long sales-growth streak and opened new stores at a rate of three a day in 2018 - Dollar Tree has been pulled down somewhat by Family Dollar.

In its most recent quarterly results, same-store sales at Dollar Tree were up by a modest 1%. Breaking that number down reveals that there was a weak link in the mix - Dollar Tree same-store sales were up by 2.3% in the quarter while Family Dollar sales were down 0.4%.

Dollar Tree is taking steps to manage this by renovating stores and improving assortment. In 2019, it plans to renovate 1,000 Family Dollar locations and convert 200 others into Dollar Tree stores.

As a result, some analysts are now advising investors to buy up stock.

"After an up and down year, we think Dollar Tree is poised for a rebound in 2019. Its decision to speed up the pace of remodels should support comp growth at Family Dollar, while the company's proven merchandising strategy should help it stay ahead at Dollar Tree," a group of UBS analysts wrote in June.

Read more: We visited Family Dollar, the store that analysts say is becoming Dollar Tree's biggest problem. Here's what we found.

Business Insider/Mary Hanbury

A Family Dollar store in New York.

Starboard also suggested that Dollar Tree should bring in new price points above the $1 mark to drive growth.

"Dollar Tree has kept its prices at $1.00 since its founding thirty years ago, despite the fact that $1.00 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 $1.00 price point," the letter said.

It continued: "By introducing a few additional low price points, while keeping the majority of products priced at $1.00, we believe that Dollar Tree could dramatically improve its product assortment and offer far more value to its customers."

Dollar Tree responded to the letter in a statement to the press on Monday. In its statement, it did not address Starboard's suggestion to sell Family Dollar or to raise prices but reacted to Starboard's requests to nominate new directors for the board.

"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.