By Aishwarya Venugopal
(Reuters) - Activist investor Starboard Value LP on Monday called on Dollar Tree Inc to sell its underperforming Family Dollar business and proposed replacing a majority of its board after revealing a stake in the company.
In a statement, Dollar Tree said its board had "the right balance" and did not comment on the fund's call for a change in pricing strategy or a sale of Family Dollar, which accounts for more than half of the retailer's 14,000 U.S. stores.
Starboard, one of the best-known funds specializing in forcing boards to make strategic moves to boost shareholder returns, said that Family Dollar was now worth far less than the $8.5 billion the discount store operator paid for it in 2015.
"We believe Dollar Tree should explore all strategic alternatives for Family Dollar, including a sale of the business," Starboard Chief Executive Officer Jeffrey Smith said in a letter to the company.
"The market is likely only ascribing approximately $1 billion - $3 billion of value to Family Dollar based on the current stock price," Smith said.
Despite re-modeling and sprucing several stores and expanding offerings, same-store sales growth at Family Dollar have been flat on average for the past two years, in contrast to Dollar Tree's 2.7 percent rise. This has pushed Dollar Tree's shares down 15 percent over the past year, in contrast Dollar General's stock has risen 14 percent.
"I personally think they should consider selling Family Dollar," Oppenheimer analyst Rupesh Parikh said as Dollar Tree drives the vast majority of profitability and would get a higher multiple being independent.
Starboard's intervention is Dollar Tree's second tryst with activist shareholders after billionaire investor Carl Icahn engineered the sale of Family Dollar to it in 2015.
At the time, Icahn was the largest shareholder in Family Dollar, exiting his stake just after the deal was formally signed.
Starboard on Monday said it had built a 1.7 percent stake in Dollar Tree making it the ninth biggest shareholder in a company controlled mainly by institutional investors.
The hedge fund also proposed to replace seven of the retailer's 12-member board and urged the company to move away from its strict $1 ceiling for Dollar Tree-branded stores.
"The value that Dollar Tree has offered its customers has deteriorated because of the need to fit everything into a $1 price point. Products today are smaller or of lower quality than they were five, ten, and certainly thirty years ago," Smith said.
Starboard said that if the company accepts its demands, Dollar Tree could be valued at $150 per share.
Dollar Tree shares were up 5 percent at $98.01 in morning trade.
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