By Pete Gallo
In a bold bid that may suggest a takeover down the line, activist investor Bill Ackman’s Pershing Square Capital Management has nearly doubled its position in Family Dollar Stores recently.
Filings with the Securities and Exchange Commission made on June 9 by Pershing Square show that the fund owns a 10.9 million–share stake in the Matthews, N.C.–based discount retailer. That’s up from 5.7 million shares held by Pershing at the end of March, according to filings.
This latest round of investment in Family Dollar Stores makes Pershing Square the single-largest investor in the retailer, holding just below a 9% stake of all outstanding shares of the company’s common stock. (Exposure might tilt slightly higher, given that Pershing Square is sitting on another 225,000 options.)
Will this big bet on Family Dollar Stores prove a winner for Ackman’s investment team? That would have been the case if Pershing Square had moved into position a little sooner. Family Dollar Stores proved a performer in 2010, as investors flocked to the stock with the correct assumption that discount retailers would continue to capture revenues from increasingly cost-conscious American consumers. This helped lift the stock from $27.39 at the start of 2010 to $49.71 as of the start of 2011. However, the stock has seen little decisive market momentum in either direction recently, minus a brief dip in the first quarter, when a $7 billion buyout bid from Trian Fund Management was ultimately rejected by the retailer.
Presumably, Ackman thinks his shop will fare better than Nelson Peltz’s Trian as Pershing Square used that period, when the stock declined slightly, to buy big into the retailer. As of mid-June, shares were trading at $52.25, which put the value of Pershing Square’s investment at just below $570 million.
Other big hedge funds also have exposure to Family Dollar Stores. Regulatory filings show that at the end of the first quarter, Lone Pine Capital had a 4.6% stake and Paulson & Co. held just under 3% of the retailer’s stock.
All of this makes sense, given that discount stores tend to fare well in down economies and the company has what none of its mom-and-pop-operated competitors do: national reach with close to 7,000 stores that blanket 44 states. But perhaps that success itself made Family Dollar Stores a difficult takeout target for Peltz’s Trian and now possibly for Ackman’s shop.
Instead of revenues leveling off, the discounter’s coffers continue to overflow as bargain hunters flock to its stores—revenues were up a higher-than-expected 15% for the first quarter. Over the past four quarters, pretax earnings have been close to 30%, while net revenues have risen to a level in excess of 65%. On both counts, that’s roughly double the results seen for 2009, so it’s easy to understand why management and shareholders thought Trian’s $7 billion buyout bid was just too low.
Will Pershing Square do better? Mind you, Pershing Square has not actually floated any bid of its own thus far, which may be good news for its investors. Surely, Ackman sees an opportunity to grow with the stock for a bit. While times have been good for Family Dollar Stores, the retailer will inevitably need capital for growth if it wants to keep up with demand. So far this year, the company has announced plans for in excess of 600 new store openings.
This growth trajectory may offer activist investor Ackman a chance to shine in influencing and structuring sound expansion. Pershing Square is familiar with the current environment for retailers. Another big position in its highly concentrated portfolio is J.C. Penney. Filings show Pershing Square owns a 15.2% stake in that retailer, with its 35.9 million shares worth $1.2 billion as of mid-June.
J.C. Penney stock hasn’t moved much of late, though it recently climbed off its recent low of $30 earlier in June, hitting $34.12 at midmonth. Helping was that the stock recently grabbed attention when J.C. Penney announced that it had poached Apple retail store chief Ron Johnson to come aboard as CEO later this year.
Ackman surely is hoping Johnson can deliver Apple-like results for J.C. Penney in the important areas of inventory and cost control, critical in periods when general retail sales are soft. (In fact, June’s announcement of a new CEO may have helped soften the blow that sales dipped about 3% in May for the retailer.)
Ackman has chosen interesting times to bet on retail and seems to have the sector covered from two distinct angles—the retrenching middle market with J.C. Penney that may be poised for a turnaround and the low-end discount sector, through Family Dollar Stores, which is struggling to expand quickly enough to meet demand. Either, or both, may prove a home run.
