Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

The Strange Battle for Family Dollar

The all-out war for Family Dollar Stores Inc. (NYSE: FDO) between Dollar Tree Stores (NASDAQ: DLTR) and Dollar General Corp (NYSE: DG) is a classic example of market insanity.

Basically, Family Dollar is a poorly run chain of small-box discount or dollar stores that expanded way too fast over the past few years. During the recession, Family Dollar boomed, expanding to 7,600 locations and reporting growing revenues for several years in a row. The boom times came to a screeching halt earlier this year when revenues fell by six percent.

Overnight, Family Dollar was exposed as a basket case that was forced to shut down nearly 400 stores to stay in business. By July Family Dollar was in such sorry shape that the chain’s management team decided to sell itself to Dollar Tree, which operates low-end retail outlets, mostly in urban areas, that sell stuff (mostly junk) for $1.

Enter Dollar General, Family Dollar’s successful arch-rival, which made its own offer of $80 a share for Family Dollar. When Family Dollar’s managers said no to this, Dollar General began moving to make a hostile takeover of its rival.

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Why It Makes No Sense for Either Dollar General or Dollar Tree to Buy Family Dollar

The whole business is completely insane because owning Family Dollar wouldn’t do either Dollar General or Dollar Tree any good. Dollar General is a very successful chain with fast-growing revenues. It reported a TTM revenue figure of $16.8 billion in July 2013 that grew to $18.12 billion in July 2014. Not a bad rate of growth for a small retailer in a sector with a lot of brutal competition.

Dollar Tree is a modestly successful company that has reported some impressive revenue growth in recent years. Dollar Tree’s TTM revenue rose from $7.687 billion in July 2013 to $8.151 billion in July 2014. That’s a very impressive rate of increase in a stagnant economy and a competitive industry.
The truth is that neither Dollar Tree nor Dollar General needs Family Dollar. Both chains are doing well and making money without Family Dollar and its problems. A far better strategy for these two companies would be to let Family Dollar collapse and pick over its carcass.

Yet both suitors are continuing with their takeover maneuvers and driving Family Dollar’s share price to ridiculous levels. Family Dollar was trading at $78.51 a share on November 7, 2014—a price that is completely unjustified given its recent history or its revenue.

To make matters worse, both Dollar Tree and Dollar General could get into a lot of trouble with the Federal Trade Commission (FTC) over antitrust issues for the deal. Dollar General has admitted that it would have to divest itself of 1,500 stores to legally buy Family Dollar.

The situation is made worse by the fact that Family Dollar, like other dollar stores, is getting hammered hard by aggressive competitors, such as the drug store chain Walgreens. Walgreen (NYSE: WAG) reported that its same store sales increased by 7.5% in June 2014. Kroger (NYSE: KR), the nation’s largest grocer, reported that its TTM revenues grew by $5.37 billion between July 2013 and July 2014.


As I’ve pointed out elsewhere, drug stores and grocers are dollar stores’ direct competitors. They’re growing faster and displaying an impressive ability to match dollar stores’ prices. Kroger and Walgreen can also offer customers a lot of things that dollar stores cannot, including gas and pharmacies.

Kroger’s TTM revenues are now $103.88 billion, or five times those of the largest dollar store operator, Dollar General. Walgreen’s TTM revenue was $76.38 billion on Aug. 31, 2014, or nearly four times that of Dollar General. It’s hard to see how dollar stores can compete with such giants or with Walmart, which is entering the small box sector.

The truth is that the dollar store operators seem to have gone insane. The battle for Family Dollar will benefit only one group: shareholders that might be able to sell a stock for a much higher price than it is worth.

Smart investors should stay away from the dollar store sector right now. Despite the revenue growth, the fight over Family Dollar proves that this sector is completely insane.