Why Bill Ackman Thinks Family Dollar is the Next Walmart

Ackman Family Dollar and Walmart

Bill Ackman is having a big week because of JCPenney.

But one of his ideas, should he be correct, could be a REAL doozy.

Ackman thinks Family Dollar has the makings of a real winner should the right leveraged buyout team pick them up, fix them up and relaunch them into the world of finance.

If he gets investors to join in, it could turn into a major competitor to Walmart, and Ackman stands to make an outrageous fortune.

Ackman gave a presentation on Family Dollar (in which he doubled his personal stake to 8.9%) to potential investors that he titled “All in the Family.”

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Family Dollar (FDO)'s basic info

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Ackman sees beauty in FDO's simplicity...

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... it's a mostly suburban/rural-based retail chain with a clear revenue structure...

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... that can under-price competitors in multiple sectors like grocery, pharmacy and hardware, but can also co-exist with smaller, competitive businesses...

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... while growing its gain in retail sales consistently, a trend that appears recession-proof...

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... much like its same store sales growth rate...

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... both of which can be traced to FDO's strong sales of consumables (goods that need to be re-purchased)...

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... which generate more and revenue that Ackman believes that FDO can spend to increase its amount of stores nationally by about 50%.

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Ackman likes the current capital spending practices at FDO

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FDO's return on investment capital is consistently strong, an annualized average rate of 20% over the last decade...

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... returns that Ackman see as a direct result of Family Dollar's capital re-investment strategy...

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...like its new unit growth...

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... creating new revenue...

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... to pay for re-refurbishment of existing units.

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Ackman sees FDO as a potentially very strong retail competitor to larger chains

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It's especially similar to the structure of Dollar General, which is currently slightly larger

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... and factors in that Dollar General has more stores and more revenue after a leverage buyout by KKR in 2007

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Ackman's data shows that with KKR's intervention, Dollar General is now stronger than FDO

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But that productivity gap is easy to analyse

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And if KKR's guidance can improve the slightly more productive Dollar General...

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... Ackman sees a very real possible trend if FDO gained similar ownership...

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... and could experience the same growth.

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Ackman is high on FDO's current management

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... especially guidance from outside on managing its margins...

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... a reality that makes FDO an ideal leverage target...

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... especially when potential investors look at the ability of FDO to grow its sales revenue.

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Ackman also likes FDO's LBO potential for other reasons...

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... the primary one being that shares of FDO are, quite simply, cheap...

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... another being that the modelled value of FDO's growth potential is quite high...

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... which would be profitable even if the company doesn't realise all of Ackman's wildest dreams.

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Ackman is also selling the various ways that investors can profit from an LBO of FDO

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FDO's current need to perform better may make it more susceptible to selling majority shares...

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... and the signal is already out there as FDO's shareholder base is turning over...

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... bringing different voices to the debate of how to improve it...

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... creating a necessary role for a new player...

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... if the price is right...

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... and that investor is ready to spend capital...

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... on what Ackman is selling as a sure thing with phenomenon potential.

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