16 March 2011

US discount stores: three to watch

Private equity houses are circling discount chain operators Big Lots, Family Dollar and 99 Cents Only Stores in the hope of snapping up a sector bargain after the worst US recession in recent memory drove cash-strapped consumers to shop for lower-priced goods.

Of the three aforementioned companies, Big Lots was first to hit the headlines when Bloomberg reported at the beginning of February that the Ohio-based retailer of closeout and overstocked brand-name goods hired investment bank Goldman Sachs to review options after receiving interest from the private equity firms Thomas H Lee Partners and Bain Capital. While news of the possible takeover has gone quiet, the company returned to the media spotlight earlier this month after it posted larger-than-expected fourth quarter profits, of USD 1,520 million, and forecast strong 2011 earnings. Big Lots was worth USD 2,562 million in the markets before the news affected its share price; it is now valued at USD 3,145 million based on the closing price of USD 41.96 on 15th March.

Eight days after Bloomberg published its article about Big Lots, shares in Family Dollar jumped by a fifth after the self-service retail discount store chain operator announced activist investor Nelson Peltz, through his hedge fund manager Trian Group, indicated he wished to launch a takeover bid worth up to USD 7,580 million. However, the proposal failed to find favour with Family Dollar’s board, which rejected the unsolicited approach two weeks later as substantially undervaluing the business, and announced it had adopted a poison pill strategy. Earlier this week Family Dollar upped its earnings outlook for the second quarter of 2011 after sales for the period rose 8 per cent year-on-year to USD 2,260 million. It is to formally report Q2 financial results on 30th March.

99 Cents Only Stores is the most recent discount store takeover target after private equity house Leonard Green & Partners and the Schiffer Gold founding family teamed up on 11th March to pin a price tag of USD 1,337 million on the Californian name-brand consumable general merchandise retailer. The group operates a portfolio of 283 stores across the US, comprising 210 outlets in its home state, 34 in Texas, 27 in Arizona and 12 in Nevada. Over half of its 2010 USD 1.36 billion-worth of sales came from its food, grocery and beverage business which ranges from produce and dairy to deli and frozen foods, along with organic and gourmet foods.

News of these possible deals over the past two and half months comes as the US commerce department revealed that total US retail and food services sales rose by almost 1 per cent to USD 387,123 million in February 2011 from USD 383,398 million in January 2011. Sales of electronics, clothing and sporting goods were up over the four weeks at USD 8,474 million, USD 18,615 million and USD 7,523 million, respectively. Meanwhile consumer demand for health-related products and home furnishing weakened over the period.

Despite this encouraging growth, it remains to be seen whether consumers will continue to spend more on a variety of products in the face of rising food and energy prices. The US’s Labor Department revealed today that wholesale finished consumer food prices rose 3.9 per cent in February, the largest gain since November 1974, while wholesale energy costs increased 3.3 per cent on the back of a 3.7 per cent increase in petrol prices.

© Zephyr