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Takeaway: DG will ‘win’ FDO. But at much higher price. Good for FDO. Bad for DG. Neutral for DLTR. Horrible sign for quality of growth in US retail.

EVENTS TO WATCH

Monday (8/18)

  • URBN - Earnings Call: 5:00pm

Tuesday (8/19)

  • HD - Earnings Call: 9:00am
  • DKS - Earnings Call: 10:00am
  • TJX - Earnings Call: 11:00am

Wednesday (8/20)

  • SPLS - Earnings Call: 8:00am
  • LOW - Earnings Call: 9:00am
  • PETM - Earnings Call: 10:00am
  • TGT - Earnings Call: 10:30am
  • AEO - Earnings Call: 11:00am

Thursday (8/21)

  • DLTR - Earnings Call: 9:00am
  • BONT - Earnings Call: 10:00am
  • GPS - Earnings Call: 4:00pm
  • GME - Earnings Call: 9:00am

Friday (8/22)

  • ANN - Earnings Call: 8:30am
  • FL - Earnings Call: 9:00am
  • HIBB - Earnings Call: 10:00am

  

COMPANY HIGHLIGHTS

DG, FDO, DLTR - Dollar General Makes Proposal to Acquire Family Dollar for $78.50 Per Share

(http://investor.shareholder.com/dollar/releasedetail.cfm?ReleaseID=866625)

  • "Dollar General today announced it has made a proposal to acquire Family Dollar Stores, Inc. for $78.50 per share in cash, in a transaction valued at $9.7 billion. The proposal was conveyed this morning in a letter to Family Dollar's Board of Directors. This transaction would deliver increased consideration and immediate liquidity to Family Dollar's shareholders and represents a compelling opportunity to create value for Dollar General shareholders."

Takeaway: First, before even considering which two companies are a better fit, we think that the most glaring observation is that we're talking about STARTING a bidding war for a company as poor quality as FDO in between 11x-12x EBITDA. Again, let's let this one digest…11.6x EBITDA for a dollar store.  Whether FDO is looking to aggressively sell itself, or DLTR and DG are finding it critical to chase after poor quality growth, it does not send a great signal about the their collective view of the US economy.

Second, this is far from over. You (DG) don't go into a bidding process only 5.5% above the prevailing bid -- even if the deal is all cash vs 80% cash/20% stock for DLTR -- expecting to win the deal outright, especially when you're going hostile against an otherwise friendly merger.

 

Third, this deal probably makes more strategic sense for DG even at a slightly higher multiple. The $78.50 price per share implies a 11.6x EV/EBITDA forward multiple. Given the assumed synergies  for a combined DG/FDO at $550mm-$600mm on an annualized basis compared to DLTR/FDO at $300mm. That takes the 2016 multiple down to 6.1x for FDO and 7.5x for DLTR.

 

Our Prediction: DG walks away with this one. But it's going to be expensive. Our bet is that FDO is bought for $85, or nearly 13x EBITDA. That's great for FDO shareholders. Bad for DG. And an even worse sign about how hard it is to find quality growth in US retail today.

 

OTHER NEWS

TGT - Target to Keep Some Stores Open to Midnight in Push for Traffic

(http://online.wsj.com/articles/target-to-keep-some-stores-open-to-midnight-in-push-for-traffic-1408136702)

  • "Target Corp. TGT is keeping its doors open later at more than half of its U.S. stores, hoping to snag guests who are putting off shopping until well after dark and might have gone elsewhere."
  • "The chain's nearly 1,800 U.S. stores had typically opened at 8 a.m. and closed at 10 p.m. on weekdays and Saturdays and at 9 p.m. on Sundays. The new hours will keep stores open until 10 p.m. or 11 p.m. on Sundays and until 11 p.m. or midnight on other days."

WMT - Wal-Mart makes holiday ‘checkout promise,’ pledges to staff every register

(http://www.chainstoreage.com/article/wal-mart-makes-holiday-%E2%80%98checkout-promise%E2%80%99-pledges-staff-every-register)

  • "A day after announcing a disappointing second quarter, Wal-Mart Stores has made an aggressive holiday promise to its customers: the world’s largest retailer says it will staff every cash register from the day after Thanksgiving through the days just before Christmas during peak shopping times."
  • "Wal-Mart’s 'checkout promise' is aimed at addressing lengthy waits in checkout lines."

GME - NCAA Legal Controversy Leads to a Slow Summer for Video Games

(http://www.businessweek.com/articles/2014-08-15/video-game-sales-down-after-cancelation-of-ncaa-game)

  • "... industrywide revenue from new video game software was down 15 percent in July, to $178 million, compared with a year earlier. Sales of newly launched games were down almost 70 percent, which was almost entirely the result of the lack of a new version of NCAA Football, according to NPD."

Jones Group - Exclusive: Shoe retailer Stuart Weitzman to go on auction block - sources

(http://www.reuters.com/article/2014/08/15/us-stuart-weitzman-sale-exclusive-idUSKBN0GF21R20140815)

  • "Women's shoe retailer Stuart Weitzman is preparing to launch a sale process and has tapped investment banks Goldman Sachs Group Inc and Citigroup Inc to assist with the effort, people familiar with the matter said."
  • "The New York-based retailer could fetch a price well below $1 billion, two of the people said this week. Others said the ultimate sale price could be around $800 million."
  • "Sycamore Partners, the New York-based private equity owner of Stuart Weitzman, acquired the brand as part of its $2.2 billion purchase of Jones Group Inc earlier this year."
  • ansion into Canada are shoe stores, auto parts stores, and lingerie, swim and bridal stores."

JD.com Quarterly Revenue Rises 64%

(http://www.wwd.com/business-news/financial/jdcom-quarterly-revenue-rises-64-7839901?module=Business-latest)

  • "JD.com Inc, China's second-largest e-commerce company, reported a 64 percent rise in quarterly revenue as the number of its active customers nearly doubled."
  • "However, net loss widened to 582.5 million yuan ($93.9 million)"

AdiBok - Adidas unveils Bayern Munich 2014-15 third official jersey

(http://www.fibre2fashion.com/news/garment-company-news/newsdetails.aspx?news_id=166935)

  • "adidas and Bayern Munich are excited to announce the launch of the new official third jersey for the 2014/2015 season, a kit that seeks both to celebrate the club´s extraordinary legacy in the UEFA Champions League and also its unique team spirit."

Austria’s Signa buys Karstadt department store chain for just €1

(http://www.ft.com/intl/cms/s/0/c3a248ae-245c-11e4-be8e-00144feabdc0.html?siteedition=intl#axzz3AjuHnKnR)

  • "Karstadt, the struggling German department store chain, is being taken over by Austria’s Signa Group, ending weeks of speculation over the company’s future after the shock departure of its chief executive in July.
  • Signa, founded by Austrian investor René Benko, will pay just €1 for the lossmaking chain, whose 83 stores across Germany employ 17,000 people. The Austrian group will also take over the remainder of Karstadt Premium department stores and KarstadtSports, after buying a 75.1 per cent stake in the groups last year."