Business: Dollar TreeRetail stores that sell discount products. The company operates in two distinct segments, Dollar Tree and Family Dollar. Dollar Tree sells merchandise with a price fixed at $1.00 This segment offers consumable goods, daily consumables and variety merchandise as well as seasonal and special-occasional merchandise. It operates 7805 Dollar Tree Canada-branded stores. Family Dollar is a general merchandise discount store that sells consumable, household, and accessory merchandise as well as electronics and seasonal merchandise. The Family Dollar brand is represented by this segment, which operates 7,880 stores.

Stock Market Value: $30.3B ($134.96 Per share

Hilal’s track record is of creating shareholder wealth by bringing in a superstar CEO. He was most notable at Canadian Pacific and CSX, where he worked with Hunter Harrison. In this case, we believe he has found the Hunter Harrison of consumer goods stores – someone who has grown up working every facet of the industry and has a proven record of creating value at the highest level. It has been reportedHe is currently working alongside Rick Dreiling (ex-CEO of Dollar General). Two reasons we believe this report to be true are: (i) Dreiling has been on the board of Aramark with HilalThey are very happy to work together and (ii). Dreiling is exactly the type of CEO Hilal seeks in such an investment.

Dreiling is a four-decade veteran with longstanding success stories at Longs Drugs and Safeway. Perhaps his greatest success came in 2008, when he won the Duane Reade Presidential Award. brought in by KKR to Dollar General. Dreiling took the company from $4.5 to $25 billion and made it worth $52 billion. Dreiling was a Lowe board member and strongly supported the selection of Marvin Ellison as Lowe’s CEO. Dreiling, as a coach/player, teamed up with Ellison who was the chairman/CEO for JC Penney. Ellison is also a former CEO of Home Depot and has 12 years of executive experience. Ellison’s vast retail knowledge and decades of experience gave Ellison an added advantage. Since then, Lowe’s has returned 192.9% versus 71.9% for the S&P 500.

DLTR’s player-coach system is just what it needs. Bob Sasser, the company’s former CEO (2004 to 2017), has been the executive chairman of the company since then. The company now has its second CEO in four years. It isn’t surprising, as it can be very hard for a new CEO and to make the necessary changes while having an old CEO watching over him. Bringing in Dreiling as chairman with a CEO he can partner with — like he did at Lowe’s —  should work great here. That CEO could even be current CEO Michael Witynski – it is too early to tell as he has only been CEO since July 2020 and working in Sasser’s shadow the whole time.

Two things are possible to increase shareholder value when there is a new team. Second, aggressively adopting a multiple pricing strategy. It has been proven successful elsewhere. Dollarama launched $1.25, $1.50, and $2.00 price points in early 2009. Same store sales increased more than twice due to an increase in average ticket and higher store traffic. Dollarama continues to increase the price point, adding a $4.00 ceiling. Average same-store sales increased by about 2% annually over the last ten years (prior 2009), to approximately 6%. EBITDA margins and gross margins have been increasing from approximately 14% up to 25%, while EBITDA margins have gone from around 14% to almost 33%. DLTR tried this strategy and found a 6% sales lift in the same stores. This was despite the fact that it only dedicated 10% of its floor space to other price ranges. These improvements can be even greater if you increase the mix of products and optimize merchandising to maximize sales. Dollarama proved this.

Family Dollar is the second place to create value, although Starboard advised against selling it immediately. Dreiling can help Family Dollar do what he did with Dollar General. And maybe even more quickly. Family Dollar had a value of $4.5 billion at the time Dreiling bought it. Today, its worth is $4.5 billion. Dreiling managed to dramatically improve Dollar General over seven years. However, Family Dollar should have the same success. Hunter Harrison, for example, took twelve years to transform Canadian National. He did the same in only four years at Canadian Pacific. It could be an ideal time to look at a possible sale after Family Dollar has been saved.

Mantle Ridge has a track record of success and a comprehensive business thesis that it provides should give them enough reasons to be elected. As they have done in the past, they will continue to work constructively with the board and be amicable. They should expect a committed, impartial board to reach an acceptable settlement. Hilal is open to proxy fighting, and if that fails, Hilal demonstrated previously that he will not hesitate to fight for his position. Mantle Ridge offers several benefits if the director nomination window is open on Nov. 24. Many shareholders know that fresh perspectives are needed at all levels of the company’s board. The company recently increased the number of board seats by adding new directors. However, Sasser and the other four most influential directors have served at the top for more than 13 years. Second, the company has been severely underperforming – on a 1-, 3- and 5-year basis, the company has underperformed the S&P 500 by 11.06%, 40.27% and 71.02%, respectively, and the recent earnings misses are still fresh in the minds of shareholders. According to rumors, Mantle Ridge has been involved with the company. The stock price has risen on high volumes and there has been significant turnover. This is likely due to activist-friendly, event-driven shareholders. Mantle Ridge has an excellent track record in working with incumbent boards. Hilal also has the skills and attributes that boards find attractive. If the DLTR board checks up on him, they will no doubt see this, but they really need to look no further than Rick Dreiling for proof of this — he was an incumbent at Aramark and definitely on the other side of the table from Hilal when Mantle Ridge showed up there. Both of them have worked together at Aramark and are currently working together for Mantle Ridge. A more positive endorsement is possible for activist investors.

We expect Mantle Ridge to be successful in securing board seats. They will apply their governance, financial and strategic activism skills, as well as use the unique role of a director for any social and environmental issues at the company. After Family Dollar bought DLTR, for example, distribution centers were never fully integrated. Only one of 26 distribution centers serves both brands. Family Dollar trucks will pass DLTR distribution center to receive deliveries, and vice versa. Integrating these distribution centers would not only be good for their bottom line but also help the environment reduce the emission from the trucks that make deliveries. Additionally, DLTR can offer many options to implement programs and policies for the benefit of many people in need. Active ESG or AESG investing has many benefits. Mantle Ridge as an AESG Investor will have the unique opportunity to realize societal benefits in a way that a passive ESG investment would not be able.  

Ken Squire founded 13D Monitor and is its president. The institutional research company focuses on shareholder activism. Squire also created and manages the 13D Activist Fund mutual fund, which invests in a variety of activist 13D investment strategies. Dollar Tree is part of the fund.