We’re nearing the end of DLTR’s Director nomination window (Dec 4th through Jan 3rd) and we have yet to see anyone step-up with an activist campaign on this name. That’s surprising to me, particularly given that we saw 284 companies targeted this year – up from 252 in 2017. This definitely challenges our call that a change-agent can unlock another $6 in EPS and double the stock with the right strategic moves. But after stepping back and looking at the facts and the decision tree from here, the reality is that the absence of an activist campaign thus far does not change our call – nor does it delay it. The potential for value-creation at DLTR is unlike any opportunity we can otherwise find in public markets today. If management fails to unlock it, at this price someone else will. (Here’s our BlackBook/Activist Playbook… DLTR | TIME TO GET ACTIVE LINK)
Things to consider related to the nomination window…
- One thing to keep in mind is that the proxy access rule allows an investor or group of investors to nominate two directors. It has always been our belief that an activist campaign in Dollar Tree would seek more than two board seats. So an activist investor probably does not need to stick to the same deadlines. An activist investor is likely more sensitive to the entry point of the position rather than the proxy access deadline.
- Don’t forget that effective January 1, Tad Dickson is a new Board member. Not a household name, but Dickson is a Board journeyman, and his presence almost always has resulted in major strategic action – usually an outright sale of the company. Case in point… Dickson led Harris Teeter until it was sold to KR. At CST he was brought on by Engine Capital and JCP -- sold later that year. At the Pantry he was Chairman chosen by JCP – ultimately was sold. He joined CAG within a year of Jana taking a stake. Also one of JANA’s nominees at WFM which was quickly sold (and JANA just got into DLTR). He’s likely a great ally for anyone wanting change – and he has yet to even start his job.
- It is possible that management is being receptive at an early stage in their discussions with the investors that are inclined to wage a campaign. Based on how stubborn management has been as it relates to sticking with existing strategy despite sub-mediocre results, I find this extremely unlikely.
- Also seems unlikely that any investor looking to unlock value would bless management’s current store remodel program. If it moves forward aggressively with the remodel program I think Family Dollar will find out years later that hundreds of millions spent on store remodels is essentially delayed capex and its first focus should have been in fixing empowering store managers, fixing store operations, and improving distribution and systems. That’s why I think Dickson and shareholders will slow this initiative down.
- The real ‘line in the sand’ for an activist is Fall 2019 – as that’s when the headquarters for Dollar Tree and Family Dollar will be consolidated and the employee bases merged into the new facility in Chesapeake, VA. It’ll be difficult to separate the two entities after that event. Not impossible – but far more difficult than it is today.
The punchline here is that the nomination window will likely have come and gone without an activist stepping up and slapping a ‘for sale’ sign on Family Dollar, or a ‘Break the Buck’ tag on Dollar Tree – and I’m OK with that. Since the nomination window started, we saw a change-agent appointed to the Board – at the same time we saw a 12% decline in the market, which likely raised the bar for significant new positions for the activist community so close to year-end. Most importantly, someone who wants change at this company will likely look for more seats than the standard nomination process allows anyway. The real line in the sand is HQ consolidation in another nine months, not when a window closes in four days.
