Three months ago, another poor earnings report led to the resignation of Michael Bloom, the President and COO of Family Dollar. This produced much speculation that FDO might become a takeover target by one of the other discount retailers, or from Paulson & Company, which owns almost a 10% stake in FDO stock. In 2011, FDO had rejected a $7.75 billion offer from Trian Partners, the second-largest shareholder of FDO stock.
In the aftermath of the last bad earnings report, FDO stock was beaten down from $67 to $58 per share. As can be seen from the accompanying chart, the stock is well below both its 50- and 200-day moving averages.
The discounter, which owns and operates 8100 stores across 46 states, is struggling to retain market share in a competitive discount store environment. It’s possible that additional corporate heads could roll, and a takeover becomes even more likely with any further erosion in the value of FDO stock.
However, there are still some positives for FDO stock. The company repurchased 1.8 million shares of its common stock over the first half of fiscal 2014, and was authorized to purchase an additional $245 million of FDO stock going forward. During that time, FDO paid out $59.5 million in stock dividends. And right now, FDO yields a decent 2.1%.
FDO stock had previously demonstrated strong support around $58 per share, so this morning’s pre-market decline below that level could be an ominous sign. The next support level is not until $53.
Although it seems even more likely that FDO could be a takeover candidate, investors should remember that it’s unwise to buy shares of a poorly performing stock simply on takeover speculation. It’s also suspicious that FDO is shaking up its pricing, closing stores, and slashing expansion, given their assertion that the poor second quarter was largely a result of temporary factors such as a shorter calendar and bad weather. That logic just doesn’t add up.
Another interesting side note is that Richard Dreilling, the CEO of discount rival Dollar General recently sold $19 million worth of his company’s shares on the open market. Given the recent difficulties within this sector, investors might be wise to remain on the sidelines and avoid all of the discount retail stocks for the time being.
Ethan Roberts does not own shares of any of the companies mentioned in this article.