Company: Dollar Tree Inc. (DLTR)
Companies: Dollar Tree operates discount variety retail stores. It operates in two segments: Dollar Tree and Family Dollar. The Dollar Tree segment offers goods at a fixed price of USD 1.00. It offers consumer goods, daily consumer goods, assortment items and other items and seasonal items. This segment operates 7,805 stores under the Dollar Tree and Dollar Tree Canada brands. The Family Dollar segment operates general merchandise discount stores that offer consumables, housewares, clothing and accessories, as well as seasonal and electronic items. This segment operates 7,880 stores under the Family Dollar brand.
Market value: $ 30.3 billion ($ 134.96 per share)
Activist: Mantle Ridge
Percentage ownership: 5.66% plus cash settlement derivative for 4.19% for a total economic exposure of 9.85%
Average cost: $ 106.77
Comment from the activists: Mantle Ridge was started by Paul Hilal, a veteran activist who was a former senior partner in Pershing Square. Hilal is an incredibly skilled activist investor with a unique mix of analytical skills, communication skills, and sympathy rarely seen in the activist world. Mantle Ridge is very selective in its investments, and while many activists seek three to four good ideas a year, Mantle Ridge looks for a good idea every three to four years. Hilal’s approach has generally been to engage constructively with the company, mutually obtain the necessary board representation for the situation at hand, bring in the right senior management team, and then decide how best to optimize the portfolio of assets can be.
Mantle Ridge intends to hold discussions, meetings, and other communications with certain members of the Company’s board of directors and management teams, shareholders, and others. In any event, they intend to discuss the company’s affairs, operations, strategies, governance, the composition of the company’s senior management and board of directors, and opportunities for changes thereto.
This is Mantle Ridge’s third investment, the first two being CSX and Aramark. Hilal also played a leading role in several Pershing Square investments, including Air Products, Ceridian, and Canadian Pacific.
Previously, Starboard Value was involved in Dollar Tree. In January 2019, they outlined two opportunities they think the company should pursue – researching strategic alternatives for Family Dollar, which is owned by the company, and evaluating and testing an up-market strategy. Starboard eventually dropped its proxy battle for seats on the board after the company expressed its openness to testing multiple price points in its stores. However, it’s almost two years later and not much has changed.
DLTR stock traded as high as $ 120.37 on April 6, but fell to $ 84.26 on September 24 after the company reported poor results and forecasts for two consecutive quarters, partly due to headwinds in ocean freight were due. To stop the stock price slump and possibly fend off an alleged activist, the company announced it would implement the multi-price point strategy and conduct a $ 1 billion share buyback, despite still having a capacity of $ 1 billion , 5 billion dollars decreed to buy back.
Hilal has a track record of creating shareholder value by hiring a Rockstar CEO, particularly at Canadian Pacific and CSX with Hunter Harrison. We believe that in this case he has found the Hunter Harrison among the consumer goods businesses – someone who grew up with all facets of the industry and has a proven record of creating value at the highest level. He has been reported to work with Rick Dreiling, former CEO of Dollar General. We believe these reports are true for two reasons: (i) Dreiling is on the board of directors of Aramark with Hilal and the two of them work very well together there, and (ii) Dreiling is exactly the kind of CEO Hilal seeks when investing like that What.
Dreiling has had a successful four decades of success with successes at Longs Drugs, Safeway and Duane Reade. But perhaps his greatest success was in 2008 when he was brought to Dollar General by KKR. In just seven years, Dreiling grew the company’s value from $ 4.5 billion to $ 25 billion and is now worth around $ 52 billion. According to Dollar General, Dreiling, a board member of Lowe, strongly advocated that Lowe select Marvin Ellison for the CEO job. As a player / coach, Dreiling worked with a seasoned CEO in Ellison (former Chairman / CEO of JC Penney and Senior Executive at Home Depot for 12 years), giving him the added benefit of his decades of experience and knowledge in a range of retail formats. Since then, Lowe’s has returned 192.9% versus 71.9% for the S&P 500.
This player / coach structure is exactly what is needed at DLTR. Bob Sasser was CEO of the company from 2004 to 2017 and has been its Executive Chairman since then, while the company has served as its second CEO in the four years since Sasser. This is not surprising as it is very difficult for a new CEO to look over the shoulder with the old CEO and make any necessary changes. Getting Dreiling as chairman with a CEO to work with – like he did at Lowe – should work great here. That CEO might even be the current CEO Michael Witynski – it’s too early to say since he’s only been CEO since July 2020 and has been working in Sasser’s shadow all the time.
With a new team, two things can be done to create shareholder value. First, the aggressive implementation of a multiple price strategy that has proven itself elsewhere. In early 2009, Dollarama introduced price points of $ 1.25, $ 1.50, and $ 2.00, and revenue growth in the same store has more than doubled due to the increase in average ticket and store traffic. Dollarama added more price points with a cap of $ 4.00. Over the past decade, average sales for the same stores have increased from around 2% per year (prior to 2009) to around 6%. The gross margins rose from almost 33% to around 40% and the EBITDA margins from around 14% to around 25%. When DLTR tested this strategy, they also found that sales for the same stores increased 6%, from just 10% square feet for items in other price ranges. By increasing that mix and merchandising the stores for optimal sales, those improvements could be even greater, Dollarama found.
The second area of value creation is with Family Dollar, but not, as Starboard has advocated, at least not selling immediately. With Dreiling, he can do for Family Dollar what he did for Dollar General, and maybe even faster. At the time Dreiling Dollar General took over, Family Dollar was also worth roughly $ 4.5 billion and is worth $ 4.5 billion today. Dreiling made massive improvements to Dollar General in seven years, but with that experience he should be able to do that better with Family Dollar. For example, it took Hunter Harrison 12 years to flip Canadian National, and he did it in four years at Canadian Pacific. Now that you’ve flipped Family Dollar, this may be a good time to look into a possible sale.
Mantle Ridge’s track record and broad business thesis that always comes with it should be reason enough to grab board seats. As always, you work constructively and amicably with the board of directors. We would expect that a committed, objective board of directors should be able to reach an appropriate settlement with them. But if not, Hilal has shown in the past that he is not afraid to resort to a proxy fight if necessary. The director nomination window opens on November 24th, and when it comes to that, Mantle Ridge has several advantages. First, it is clear to many shareholders that the company needs fresh eyes on its top boards. While the company has recently refreshed many board seats with new directors, the four most influential directors, including Sasser, have all been there for at least 13 years. Second, the company has underperformed significantly – on a 1-, 3-, and 5-year basis, the company underperformed the S&P 500 by 11.06%, 40.27% and 71.02%, respectively, and recent loss of profits the minds of the shareholders are still fresh. Third, since Mantle Ridge was rumored to have owned the company, its stock has risen sharply and the shareholder base has seen significant sales, likely to more event-minded and activist-friendly shareholders. After all, not only does Mantle Ridge have a track record of working with established boards, but Hilal has skills and traits that are attractive to boards in general. If the DLTR Board of Directors reviews him they will no doubt see this, but really don’t have to look any further than Rick Dreiling to prove this – he was the incumbent at Aramark and definitely on the other side of the table from Hilal when Mantle Ridge popped up there on. In addition to being able to work together at Aramark when they met, they are now working together on that investment for Mantle Ridge. There is no higher approval rating for an activist investor.
If Mantle Ridge manages to get board seats here, we expect them not only to employ the governance, operational, financial and strategic activism for which they are known, but also to use their unique position as director to keep an eye out retain any ecological and social problems or opportunities in the company. For example, the distribution centers were never fully integrated after DLTR Family bought Dollar. In fact, only one of the 26 serves both brands. This means that Family Dollar trucks pass through DLTR distribution centers to make deliveries and vice versa. The integration of these distribution centers would be good not only for the bottom line but also for the environment as the emissions from these trucks are significantly reduced when they are delivered. Additionally, a company like DLTR, which serves our country’s lower economic populations, has many opportunities to implement programs and policies that benefit many of our citizens most needy. This is a key tenet of the benefits of Active ESG or AESG investing. As an AESG investor, Mantle Ridge will be in a unique position to realize societal benefits that a passive ESG investor could never achieve.
Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments. Dollar Tree is owned by the fund.