Bill Ackman will do anything for charity. He spoke super fast at the Ira Sohn Conference
to finish his presentation on time. And he did it, with 2 minutes 25 seconds to spare. He took a jab at Dan Loeb's
surfing obsession (We love you Dan, even though I mispronounced your name when we met. It's the first time I regretted not having friends in high places to guide me). Here's Ackman's speech
...We make about 15% of our money in passive ideas. This is the passive
idea because somebody else is already doing the work. I don't have time for a disclaimer but we’ll send out all the slides. I thought I was going to talk about GDP again. It’s always fun to throw it up a little bit. It’s irrelevant to the speech, but I figured I’d put it up on the chart. Last year, I thought it was around 11. But now it’s combined at 23. But if you look at the chart and then if you look at the chart for next year’s idea, this is this year’s idea. I’m going to be right there in 1980 and 30 cents.
Above is rambling and we can’t get all the words
But actually, it’s our idea. Well it’s not really our idea, because I heard [Peter May] speak earlier. And they’re the activist here. But we think the situation is very interesting, and I actually had an even better idea we want to speak about, another GDP type idea, but it was not liquid enough to get here. So we may have a rain check. Meaning, if we finally get to build this position, I told Doug, to send an email out to people who are in the room, and you get a little bit extra for the Ira Sohn dollars. And if you like the idea, you can make an incremental contribution.
The idea is Family Dollar. It’s a $6.5 B market cap company. It trades at 14 PE. Let me tell you about the business. First of all, this is a company in retail that serves lower-income, middle income consumers. What I like about it is actually it serves them well. Unfortunately a lot of companies that serve this segment of the marketplace take advantage of this type of marketplace. But here we have a company that basically prices slightly above Walmart, offers more convenience, and as a result is good for low income community. They sell the kind of stuff WalMart, but in 7K square-foot stores. It’s more convenient, you take a few steps from the parking lot, walk in, spend less than 10 minutes in the store. It’s actually remarkably good business.
Let’s keep going. 15 minutes. Discount price versus competitors. Drug stores also sell the same kind of goods today. They charge 20% more, supermarkets about 15% more. And WalMart about 5% less, but you’ve got to drive to WalMart and spend a lot of money on gas. And that makes this much more attractive to your daily fill up type person. There’s a lot of customers living paycheck to paycheck and can’t go to WalMart and buy a few weeks of supplies. They have to buy for a few days.
It’s also a business that continues to take share even during difficult economic environments. If you look at same store sales, they actually do better during recessionary environments. If times are going to get as gloomy as Mr. Gloom and Doom says
, these stores are going to do exceptionally well. But they generally do well. I'll be shopping there soon based on what he had to say.
In terms of sales, they sell stuff you need, they sell it very cheaply. They’re not the most beautiful stores. But it’s a very profitable, high return on capital business, and they’re growing their way around the country, and competitive mix is Family Dollar, Dollar General, much smaller. They’ve got 20K units, and we think there’s still very meaningful room to grow across the country.
Keep going. Actually the slides aren’t turning as fast as I would like, but that’s not my fault. They got the time wrong.
So let’s talk about return on capital. It’s a high return on capital business. It’s a 20% return on capital business overall. They spent the money intelligently and they earn a very attractive return on new stores. We’ll talk about that. They earn a very attractive return on renovations. They take basically everything else they have other than maintenance, capex and buy back stock and dividends. They’re in the middle of $750M buy back, which is meaningful in the context of a $6.5 B company. They expect to complete the buy back by fall this year.
If you look at growth, they slowed growth way down. I think they were figuring things out, but they figured things out and reaccelerated growth recently. You’re going to see return of 5-7% annual unit growth. Terms of economics of the typical store, our estimates based on what we’ve been able to glean, they spend about $325K per store. Very quickly store ends up with peaked, stabilized revenues. Very attractive, we think something in the neighborhood at 37-50% return on investments.
This is a case where building new stories is a very attractive proposition, and we want all the stores they can build. Renovations are certainly very economically accreted. They’re spending about $115K per store and earning something in the mid-to high 30s or 40s on the incremental capital and investing in about 6K stores.
In spite of all that good stuff, their arch competitor is a very similar business, slightly bigger, slightly higher scale store, same size store, similar location, little more consumables, but remarkably comparable difference. Fascinatingly it does much better. If you look at the companies over back in time, really through 2005, the businesses are green is Dollar General, red is Family Dollar. It looks a little like a Christmas tree, but the Dollar General, Family Dollar neck in neck year after year.
In fact in 2006, with the inventory liquidation, Dollar General was doing worse than Family Dollar.
Then taking it by company Dollar General, and this is basically an advertisement for KKR, what they’ve done since they’ve taken over the business is they’ve massively out performed their competitor. If you look at EBIT per square foot, they’ve achieved much higher profitability and it really comes from running the business better and more efficiently. And it’s not just about cutting costs or profitability. It’s about higher sales per square foot, higher margins and it’s about higher growth.
Every metric, whether it’s same store sales, they’ve out performed, so higher sales per square foot, higher margins, faster profit growth and huge unit growth. What’s great is you’ve got history that were neck and neck. We had a change in ownership, where KKR
really put the pedal to the metal and did an excellent job with their competitor and now the underperformer, and what happens is our friends at Trian step in, buy a stake in the business and note the under performance, and put a little pressure on the company, and the company starts playing catch up.
And now they’re starting to catch up with their competitor. Number one, they’re focused on Increasing percentage of sales, to a higher margin. They’re at 14%, compared to 22, 20. They started actually globally sourcing things, as opposed to buying from different distributors. That of course gives them very meaningful improvements on margins, they get a little more sophisticated about pricing, they get a little more sophisticated on reducing fat and shrink in stores.
The gap is still very substantial, but they began to close the gap, improve their margins, improve their sources and so on, you start to see, you should see very meaningful outperformance of this company. And their costs are largely fixed costs. They make improvements in sourcing, they make improvements in the way they run their business it’s not going to meaningfully change what they’re spending on real estate, it’s not going to meaningfully change what they’re spending on their employees in their stores. But most of those improvements help the bottom line.
Other changes are to increase the hours when they are open. They are consolidating stores. They are refixturing the stores to make them more efficient. Actually if you go into a Family Dollar store and last time I was there I saw Dan Loeb
working his way up the shelves. And he was complaining to me that a lot of the stuff was sold out and he couldn’t find surfing wax. And the G650 logo wear was nowhere to be found. (Cheap shot. I don’t have time to waste on stuff like that.)
So what do you get? As is - you get a very stable business that grows over time, makes sense. A customer’s needs met. Long history of growth, historically and one that continues. And you buy for a little less than 15x earnings. And that seems like a reasonably capped proposition.
But then you say, what if they can close the gap with your competitor? What are you paying for that option? By the way, Dollar General is now a publicly traded company. If you look at comparable trades, it basically trades at the same multiple even though this business meaningfully under-earns its competitor.
So what’s the productivity gap worth? The answer is you take this business, Dollar General or what KKR has done with Dollar General and the management team there, and you keep the multiple the same for Dollar General, make 70% profit versus where the stock trades as of last night’s close. And you say, what if they don’t do as well and you get partially there. On that circumstance, you make nothing, but it’s a sound investment. If they make some progress you make a lot of money.
Now Nelson and Peter are banging down the door and here’s what it looks like. File 13d, get something in the high 30’s low 40’s. And [inaudible] management and then something goes wrong, and we've actually never spoken to them about this company and they decide they’re not happy with the progress, and they make a hostile bid. By the way, I never consider any bid on something I own hostile. You’re welcome to make an offer.
And then management says this is very low, poisoned pill at 9.9%, 10% per shares. And Trian
writes the letter. Fine, you don’t want to sell the company, that’s okay. But you’ve got to do as well as your competitor and tell us how you’re going to get there. And what’s going to motivate them. If you look at the shareholder base, you’ve got Trian in there for a big chunk of stock, today, and this is what we owned yesterday, but we’re buying all today, and we’re trying to get our position on.
What we’ll do for charity!
And what you’ll notice is that the shareholder base has become a little more optimistic. You've got Lone Pine. I see Mr. Paulson hanging out there. [inaudible] Shareholder base is changing and so the way we think about this is coming to an as-is situation, very reasonable price, good business, done well for a very long period of time. If they make the margin improvements, you're going to make 70% of the money. This is a business with net $100M net debt, profitable consistent business. You could sell it to a strategic buyer, and we think you could actually, from an anti-trust point of view, we think Dollar General
can buy the business.KKR or someone else would love to accomplish what KKR did. There are lots of different ways that you can win.
According to the Trian letter, they raised -they expressed an interest in $5B in debt in the take private transactions, so putting a $1.5B leverage in the company and buying back some stock at 10% [inaudible], to create some value. And if the slides aren’t moving fast enough, I’ll not be held accountable.
Strategic buyer, they could pay a lot more. And stock trades - and we'll take you through the math in terms of what the percentages are. Below transaction. We think it’s quite an attractive LBO. Fairly reasonable assumptions what the business looks like. We’re happy to share our model with you. And here’s our look there in the corner, that’s the Trian bid down there, and here’s what we think the business is worth. Making improvements, is worth a ton more. If they sell to a strategic buyer, it must be very well. The only thing they don’t do that well is [inaudible], which clearly we love them we just dont like the price. But we're very happy with what they're doing.
That’s the story. I have 2 minutes and 25 seconds left, so you owe me like $1M for finishing on time. I’ll do anything for charity. And that’s the story. Thank you.