Thanks to billionaire investor Nelson Peltz’s big stock buy, shares of Family Dollar Stores Inc., a discount retailer chain, shot up by 11 percent Wednesday on the NASDAQ, reports Reuters. The investment by Peltz’s Trian Group underscores a current investment trend toward supporting retailers that appeal to low-income families, as rival chains like Dollar Tree Inc., Big Lots Inc. and BJ’s Wholesale Club Inc. have all experienced gains in stock price. The Trian Group’s buy was at least 25 percent over Family Dollar’s Tuesday closing price.
A big market for Family Dollar, et al
The Trian Group’s bid on Family Dollar Stores Inc. comes as no surprise to market analysts. Steady margins, relatively low operational costs and the ability to resist the swings of the U.S. economy are all factors that make discount stores an attractive investment. Even when a recession hits, discounts on overstock merchandise make it easier for families to buy essential items. Financially downtrodden families can go to Family Dollar and not have to worry about busting their budget. Maintaining a more expensive lifestyle can entail the use of payday loans when cutbacks in hours occur, but shopping at stores like Family Dollar can help keep such families and individuals out of the red.
What the analysts are saying
Family Dollar and similar stores are almost a can’t-miss prospect. Credit Suisse analyst Michael Exstein writes in a recent investment report that dollar and discount stores operate under a strong business model.
“It is a high returning, low capital intensive business with strong cash flow and low levels of debt on the balance sheet,” said Exstein.
Bringing discount chains to market
Family Dollar competitor Dollar General, which was bought by private equity firm Kohlberg Kravis & Roberts for $7.3 billion in 2007, went public by 2009. Currently, the company has a market value of more than $10 billion. Experts believe that Peltz’s investment in Family Dollar may have set wheels in motion that will lead to a Family Dollar-Dollar General merger. The result would be a discount store giant that would challenge Big Lots (who has hired Goldman Sachs to explore stock sale options) and BJ’s Wholesale to keep pace in the market.