ackman family dollar

7/30/2019 Ackman Family Dollar

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Pershing Square Capital Management, L.P.


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The analyses and conclusions of Pershing Square Capital Management, L.P. ("Pershing Square") contained in

this presentation are based on publicly available information. Pershing Square recognizes that there may be

confidential information in the possession of the companies discussed in the presentation that could lead

these companies to disagree with Pershing Squares conclusions. This presentation and the information

contained herein is not a recommendation or solicitation to buy or sell any securities.

The analyses provided may include certain statements, estimates and projections prepared with respect to,

among other things, the historical and anticipated operating performance of the companies, access to capital

markets and the values of assets and liabilities. Such statements, estimates, and projections reflect variousassumptions by Pershing Square concerning anticipated results that are inherently subject to significant

economic, competitive, and other uncertainties and contingencies and have been included solely for

illustrative purposes. No representations, express or implied, are made as to the accuracy or completeness of

such statements, estimates or projections or with respect to any other materials herein. Actual results may

vary materially from the estimates and projected results contained herein.

Funds managed by Pershing Square and its affiliates have invested in common stock of Family Dollar Stores

Inc. (FDO). Pershing Square manages funds that are in the business of trading buying and selling

securities and financial instruments. It is possible that there will be developments in the future that causePershing Square to change its position regarding FDO. Pershing Square may buy, sell, cover or otherwise

change the form of its investment in FDO for any reason. Pershing Square hereby disclaims any duty to

provide any updates or changes to the analyses contained here including, without limitation, the manner or

type of any Pershing Square investment.


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Ticker:FDO

Stock Price:$54

Market Cap:~$6.6B

EV:~$6.7B

FY2012 P/E:14x

(August FY)

________________________________________________

Note: Pershing Square EPS esimtate of $3.88All stock prices and financials are as of May 24, 2011 close


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Dollar stores offer pricing comparable to Wal-Mart in a more convenient format.Lower income customers use dollar stores as weekly fill-in trips betweensupercenter destination shopping. The average FDO store visit is 8 minutes

Dollar stores offer pricing comparable to Wal-Mart in a more convenient format.Lower income customers use dollar stores as weekly fill-in trips betweensupercenter destination shopping. The average FDO store visit is 8 minutes

Wal-Mart and dollar stores can coexist. Management believes FDO has ~3%share of their core customers wallet compared to WMTs ~35% share

Wal-Mart and dollar stores can coexist. Management believes FDO has ~3%share of their core customers wallet compared to WMTs ~35% share

Concept Price Index Store Size ('000)Dollar Stores 100 7

Drug Stores ~120 40

Grocers ~115 40

Mass Merchants ~95 125


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High unit and same store sales growth have led to significant share gains forthe dollar store channel

High unit and same store sales growth have led to significant share gains forthe dollar store channel

____________________ __________________________ __

Source: Bernstein, 2009

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Bill Ackman has since doubled his position in Family Dollar (FDO). Click here for details
http://www.marketfolly.com/2011/06/bill-ackman-buys-more-family-dollar-fdo.htmlhttp://www.marketfolly.com/2011/06/bill-ackman-buys-more-family-dollar-fdo.htmlhttp://www.marketfolly.com/2011/06/bill-ackman-buys-more-family-dollar-fdo.htmlhttp://www.marketfolly.com/2011/06/bill-ackman-buys-more-family-dollar-fdo.htmlhttp://www.marketfolly.com/2011/06/bill-ackman-buys-more-family-dollar-fdo.htmlhttp://www.marketfolly.com/2011/06/bill-ackman-buys-more-family-dollar-fdo.htmlhttp://www.marketfolly.com/2011/06/bill-ackman-buys-more-family-dollar-fdo.htmlhttp://www.marketfolly.com/2011/06/bill-ackman-buys-more-family-dollar-fdo.htmlhttp://www.marketfolly.com/2011/06/bill-ackman-buys-more-family-dollar-fdo.htmlhttp://www.marketfolly.com/2011/06/bill-ackman-buys-more-family-dollar-fdo.html


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0.0%

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2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

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Consumables make up a growing percentage of Family Dollars sales volume.Growth in consumables is responsible for most of FDOs recent traffic andsame-store sales growth

Consumables make up a growing percentage of Family Dollars sales volume.Growth in consumables is responsible for most of FDOs recent traffic andsame-store sales growth

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57.0%

59.0%

61.0%

63.0%

65.0%

67.0%

2007 2008 2009 2010

Home Products,

13%

Apparel and

Accessories,

11%

Seasonal &

Electronics, 11% Consumables,

65%


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20.0%

25.0%

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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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Family Dollar has a strong track record of earning high returns on capitalFamily Dollar has a strong track record of earning high returns on capital

S.B'Q>4;

________________________________________________

Note: Years are Fiscal Year Ending August

ROIC Defined as: (Taxed EBIT)/Average (Assets Cash A/P Accrued Expenses)

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! New Store Growth (~$60mm Capex, ~$15mm SG&A):

! 300 new store openings and 80-100 store closings, 3% net growth

! Long-term, management expects to grow store count 5-7% annually

! Store Renovation Program (~$60mm Capex, ~$30mm SG&A):

! Over 800 stores in FY2011

! Going forward, management expects to renovate 1,000+ stores per year

!

Share Repurchases & Dividends:! Management has committed to buyback $750mm of shares by fall 2011

! FDO raised its dividend this year to $.72/share ($85mm)

In FY2011, Family Dollar plans to invest $300-$350mm of capex and repurchasenearly $750mm of stockIn FY2011, Family Dollar plans to invest $300-$350mm of capex and repurchasenearly $750mm of stock


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-

2,500

5,000

7,500

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E

#Units

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

%AnnualGrowth

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Management began an ambitious renovation program this year. While thecompany has not disclosed detailed data, it has revealed that renovated storesachieve at least a 10% sales lift

Management began an ambitious renovation program this year. While thecompany has not disclosed detailed data, it has revealed that renovated storesachieve at least a 10% sales lift

FDO plans to renovate 6,000 storesFDO plans to renovate 6,000 stores

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In many ways, Family Dollar and Dollar General are very similar companies:In many ways, Family Dollar and Dollar General are very similar companies:

! Number of Stores

! Sales per Store

! Size of Average Store

! Consumables Mix

!Properties

Despite these similarities, the two business performance has divergedDespite these similarities, the two business performance has diverged

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For many years, the two companies had very similar performance:For many years, the two companies had very similar performance:

________________________________________________

Note: Family Dollar results are calendarized to year end Feb.

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$-

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

2000 2001 2002 2003 2004 2005 2006

Dollar General

Family DollarDollar General Family Dollar


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$5.00

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$25.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Dollar General

Family Dollar

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In July 2007, KKR bought Dollar General. Less than four years later, letscompare the two companies:In July 2007, KKR bought Dollar General. Less than four years later, letscompare the two companies:

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________________________________________________


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Dollar General Family Dollar


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$5.00

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$15.00

$20.00

$25.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Dollar General

Family Dollar

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Family Dollars lower profitability is a result of both lower sales per square footgrowth and lower marginsFamily Dollars lower profitability is a result of both lower sales per square footgrowth and lower margins

________________________________________________

Note: 2003 Family Dollar results are calendarized year end Feb. 2004

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0.00%

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Dollar General

Family Dollar

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Under KKRs ownership, Dollar General has dramatically improved marginsUnder KKRs ownership, Dollar General has dramatically improved margins

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Dollar GeneralFamily Dollar

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After years of similar SSS results, since the KKR deal, Dollar General hasgrown at a much faster rate than Family DollarAfter years of similar SSS results, since the KKR deal, Dollar General hasgrown at a much faster rate than Family Dollar

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Despite similar sales mix, geography, unit count, and store size:Dollar General has -Despite similar sales mix, geography, unit count, and store size:Dollar General has -

! Higher sales per square foot

! Higher margins

! Faster profit growth


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FDO has launched gross margin enhancement initiatives that are similar to theones DG has successfully implementedFDO has launched gross margin enhancement initiatives that are similar to theones DG has successfully implemented

! Private Label Penetration

! Dollar Generals consumable private label penetration is ~22%

! Family Dollars consumable private label penetration is ~14%

! Family Dollars goal is to get to 20%

! Global Sourcing

! Bypassing a broker and directly sourcing unlabeled and private labeled goods can offer1,000bps to 1,500bps of margin improvement

! Currently, only 9% of FDOs goods are directly imported. We believe this number could

approach 15% in the future

! Improved Pricing

! FDO recently implemented sophisticated pricing software allowing management to bettermanage regional pricing zones and elasticity data

! Reduced Shrink


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We estimate FDO will benefit significantly from its gross margin initiativesWe estimate FDO will benefit significantly from its gross margin initiatives

FDOs substantial gross margin opportunity and high percentage of sales in low-priced necessities, provide a margin of safety against commodities inflation

Estimated Gap

2010 Potential

Global Sourcing 9% 15%

Private Label - Consumables 14% 20%

Estimated Margin Improvement

% of Sales Delta Total

Global Sourcing 6% 1250 bps 75 bps

Private Label - Consumables 4% 1250 bps 50 bps

Shrink, Pricing 100 bps

Offsets - Private label reinvestment, inflation, mix ?

Total


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Two thirds of Family Dollars SG&A expense is composed of occupancy andstore payroll costs, which are highly leverageable. Management believes coreSG&A costs, excluding growth initiatives, will grow modestly at 2 to 3% peryear

Two thirds of Family Dollars SG&A expense is composed of occupancy andstore payroll costs, which are highly leverageable. Management believes coreSG&A costs, excluding growth initiatives, will grow modestly at 2 to 3% peryear

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! Stable, secular salesgrowth

! The opportunity to invest in

an existing store base athigh rates of return

! 10+ years of high returnnew unit growth

What you get What you pay

! The option that FDO closesa large productivity gapwith its closest competitor,Dollar General

! A modest forward multipleon consensus numbers(7.6% EBIT margin)

! 14.7x FY2012 EPS(August)

! Nothing FDO trades at

nearly the same consensusforward EBIT multiple asDG (~9x), a company withsimilar growth prospects,excluding the productivitygap


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DG FDO % Diff '12 EPS

FY 2012 Sales/sqft 210$ 180$ 17% 0.65$FY 2012 EBIT Margin 10.5% 7.6% 38% 1.46

EBIT/sqft 22.05$ 13.65$ 62% 2.36$

FY 2012 EPS - Consensus 3.68$

FY 2012 EPS - Pro Forma 6.03$

Price at 15x EPS (Including 1.5yrs of dividends) 92$% Return 70%

32

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________________________________________________

Note: Estimates for DG are FY ending Jan. 2013, and for FDO FY ending Aug. 2012

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If Family Dollars square footage were as productive as Dollar Generals, thecompany would earn ~$6 of EPS and be worth ~$90 per share at a 15x P/EIf Family Dollars square footage were as productive as Dollar Generals, thecompany would earn ~$6 of EPS and be worth ~$90 per share at a 15x P/E


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% of DG Profit Gap Closed

FDO 2012 EBIT Build 0% 50% 100%

2012 Selling Sqft (mm) 51 51 51

Sales/sqft 180$ 195$ 210$

EBIT Margin 7.6% 9.1% 10.5%Pro Forma FY 2012 EBIT 692$ 893$ 1,118$

Pro Forma FY 2012 EPS 3.68$ 4.79$ 6.03$

2012 P/E 14.7x 11.3x 8.9x

Price @ 15x EPS 56$ 73$ 92$

% Return 4% 35% 70%

33

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________________________________________________

Note: Estimates for DG are FY ending Jan. 2013, and for FDO FY ending Aug. 2012Price includes 1.5yr of dividends


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JCP shares are down 75% since early 2007. At this point, cash on balance sheetDisappointing first quarter results and the rejection of Trians $55 - $60 pershare offer have raised shareholders performance expectationsDisappointing first quarter results and the rejection of Trians $55 - $60 pershare offer have raised shareholders performance expectations

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Since Trians February 15th bid, the shareholder base has changed to moreopportunistic investors:Since Trians February 15th bid, the shareholder base has changed to moreopportunistic investors:

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! Current management

! Operational Opportunity

" Margin improvement initiatives and renovation program

! Capital Structure Opportunity

"FDO remains under leveraged. A leveraged buy back wouldcreate meaningful value for shareholders

! Sale of the company

! Strategic Buyer

"

Another retailer would bring synergies to the combined companyand possibly accelerate the closing of the productivity gap

! Financial Buyer

" A private equity firm could optimize the capital structure and workwith management to improve the business


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Leveraged Buy Back Accretion Analysis:

Incremental Debt Raised ($mm) 1,000$ 1,500$ 2,000$

Base EPS: Consensus

FY2012 EPS 3.91$ 4.04$ 4.19$Accretion 0.23$ 0.37$ 0.51$

Value per share at 14x EPS 55$ 57$ 59$

Base EPS: Pro Forma Closing 50% of Productivity Gap

FY2012 EPS 5.22$ 5.47$ 5.76$

Accretion 0.42$ 0.68$ 0.96$

Value per share at 14x EPS 73$ 77$ 81$

Assumptions:

Incremental Debt Raised 1,000$ 1,500$ 2,000$

Total Net Debt (End FY2011) 1,385 1,885 2,385

Net Debt/EBITDAR 3.8x 4.2x 4.6x

Assumed Cost of Total Debt (Gross) 5.6% 5.9% 6.1%

38

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Low Mid High

Credit for Productivity Gap (% of total) 25% 50% 75%

$ Value per share @15x EPS 9$ 18$ 27$

Reduction in Overhead 20.0% 30.0% 40.0%% Shared with Seller 50.0% 50.0% 50.0%


Gross Margin Expansion 0.5% 1.0% 1.5%

% Shared with Seller 50.0% 50.0% 50.0%


Total $ Premium to Market 14$ 26$ 38$

% Premium to Market 26% 48% 71%

Implied Takeout Price 68$ 80$ 92$

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A strategic buyer could justifiably pay a ~50% premium to marketA strategic buyer could justifiably pay a ~50% premium to market

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A financial buyer could pay 40% to 55% above the current stock price and stillearn a high teens to low 20s% rate of return over four yearsA financial buyer could pay 40% to 55% above the current stock price and stillearn a high teens to low 20s% rate of return over four years

Returns assume a 10% terminal EBIT margin, $230 sales sqft in 2015, and$5bn of leverage (7x FY2011 EBITDAR) at 7.5%

Returns assume a 10% terminal EBIT margin, $230 sales sqft in 2015, and$5bn of leverage (7x FY2011 EBITDAR) at 7.5%

IRR Sensitivity (2015 Exit)

Exit EBITDA Multiple (FY2016)

40.3% 7.0x 7.5x 8.0x 8.5x67$ 9.5x 24% 27% 30% 33%70 10.0x 21% 24% 26% 29%74 10.5x 17% 20% 23% 26%78 11.0x 15% 17% 20% 23%81 11.5x 12% 15% 17% 20%

85 12.0x 10% 13% 15% 17%88 12.5x 8% 10% 13% 15%

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EBITDA

(FY2012)
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Even if were wrong on both the value of the standalone operating opportunity and thetransaction value, we believe shareholders will still make money owning FDO due to thecompanys attractive growth opportunities and modest forward earnings multiple

Even if were wrong on both the value of the standalone operating opportunity and thetransaction value, we believe shareholders will still make money owning FDO due to thecompanys attractive growth opportunities and modest forward earnings multiple

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ackman family dollar

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