Family Dollar Stores, Inc. Report

Introduction

Family Dollar Stores, Inc., is an American chain of discount stores offering inexpensive merchandise for both home and family need to the customer in various states in the United States majorly in the northeastern regions, southwestern, and northern western. In a brief description of the company, the first Family Dollar store was opened in 1959, in Charlotte, North Carolina. The company has tremendously evolved since then to approximately more than 8,000 units with an annual sale of about $4.75 billion (Bloomberg, 2019). However, this report will provide details concerning Family Dollar by addressing corporate governance analysis, stakeholder analysis, risk and return analysis, measuring investment returns, capital structure choices, and optimal capital structure. In a broader context of the report, I will focus on the capital structure of the company and later on address Family Dollar's dividend policy, valuation, and prospects for the company.

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Company Profile

Retail Stores Market

Family Dollar Stores, Inc, operated a chain store stocked with a variety of products ranging from food to house commodities and proved popular among many value shoppers as it set new policies. According to Bloomberg (2019), majorly, the company considers low- and middle-income customers in the United States. Within the description of Family Dollar, some of the critical dates surrounding the company include 1970 when the company went public concerning its operations. In 1979, Family Dollar acquired forty Top Dollar stores with a similar chain of services. Within 1982 and 1987, Family Dollar opened its 500th store in 1982 and launched a pricing policy delivering that they cannot be undersold in 1987 (Dollar Tree, 2019). Through the development of the years, Family Dollar develops whereby in 1992 sales surpass the $1 billion while it became a member of the Fortune 500 in 2002. On the other hand, the company's founder Leon Levine retired in 2003, leaving the company reigns to Howard Levine, his son and opened its 5,000th store in Jacksonville, Florida. Within the years, Family Dollar run operation before acquiring an acquisition bid from Dollar Tree in 2014 but was never absorbed until 22nd January 2015 when Family Dollar shareholders accepted and approved the acquisition bid from Dollar Tree (Dollar Tree, 2019). Today, there is a restructuring of Dollar Tree which entails closing and remodeling of the Family Dollar stores as delivered by Hanbury (2019).

Stakeholders Analysis

In every corporation, the ownership structure comprises of different stakeholders or shareholders who play a significant role in the company. In the case concerning Family Dollar Inc., its original owner is merged as Dollar Tree whereby its stakeholders are categorized as individual insiders, institutions, and the general public. Individual insiders or stakeholders are a critical group since they are directly involved in making the primary decisions concerning the utilization of capital. Majorly, the individual stakeholders are concerned with the alignment of shareholders' interests with the management of Family Dollar with a stake of 1.43% in the large-cap Dollar Tree signifying on the involvement of shareholders in aligning management activities (Dollar Tree, 2018).

Additionally, the general public shareholders are a significant group owning the Dollar Tree with a 4.20% ownership. Even though the size of the general public property may not be capable of swaying significant decisions, they can deliver a substantial impact on the company policies in alignment with more significant shareholders. On the other hand, the institutional ownership forms a broad category of Dollar Tree's shareholders with ownership of 94.37% which means that Dollar Tree could encounter various challenges such as volatile stock prices in case institutions execute block trades. Moreover, for Dollar Tree shareholders, this section maintains a significant control of the company in terms of ownership structure. Within the different shareholder owning Dollar Tree, they play a significant role in every step this terming each of the ownership shareholders relevant (Simply Wall St., 2019). I identified these groups in the bid to understand Dollar Tree's ownership structure. Dollar Tree's ownership structure sets a proper margin of safety which is fundamental considering that the different market trends that could impact profitability.

Figure 1: NasdaqGS: DLTR Ownership summary May 31st 18

Dollar Tree Inc. Capital Structure

Since Family Dollar was acquired by Dollar Tree, the capital structure provides details based on Dollar Tree. Dollar Tree leverages and assesses its financial capital structure based on its ability to fund strategic acquisitions and grow through cyclical pressures. For instance, the debt levels of Dollar Tree have fallen from approximately $6.32B to $5.68B over the last year consisting of both the current and long-term debt. As a result, with the repayment, Dollar Tree had $1.10B remaining in short-term investment and cash along with the production of US$1.51b in operating cash flow in the last year. The occurrence has resulted in a total debt of 26.6% indicating that Dollar Tree debt is appropriately covered with the use of operating cash. Additionally, in consideration to the ability of Dollar Tree's liquid assets to include the short-term commitments, the company has ensured a safe level of current assets to meet the obligations considering that its current liabilities levels at US$2.86B liabilities. Thus, this is a rational equation or ratio since there is sufficient cash cushion without leaving large capital idle or in other risky low-earning investments.

However, according to Dollar Tree Inc. (2019), the capital structure for Dollar Tree is 56% equity and 44% debts. Dollar Tree is a highly levered corporation as it comprises a 79.05% debt-to-equity. In most of the cases, debts tend to be less expensive than equity since interest payments are tax deductible. Since larger firms often have a lower cost of capital as a result of readily available finances, this provides an advantage over small companies. It means that if a company can generate Earnings Before Interest and Tax (EBIT) at least thrice its net interest payments, it is financially sound and can sustain its debt levels. Hence, in the case of Dollar Tree, it comprises a ratio of 6.87 times deriving that Dollar Tree can handle its debt load. Regardless of Dollar Tree's high debt levels, its cash flows are adequate to meet the obligations in maintaining that the debt is efficiently utilized to ensure debt recovery.

In other occurrences, Dollar Tree can reduce its leverage by considering the various sources of income along with a different capital structure that may push the company into more debt than reducing the debt burden. It is critical for Dollar Tree to maintain a proper view in terms of debt recovery and Earnings Before Income and Tax (EBIT). Thus, the occurrence supports that Dollar Tree has an optimal capital structure since it meets its short-term commitment. The optimal capital structure signifies an objectively best mix of preferred stock, common stock, and debt which maximize the company's market value while reducing the cost of capital on the other hand. Theoretically, debt financing offers the lowest cost of capital as a result of tax deductibility; however, too much debt increases the financial risk on the return on equity and stockholders. Thus, delivering on the need to find an optimal capital structure through which the marginal benefit of the debt is equal to the marginal cost.

Financial Statements

The capital structure of Dollar tree revolves around the involvement of financial statements such as the balance sheet and the income statement since it presents the Authorized Capital, Issued Capital and Equity Capital of the company over time. Income Statement provides a company's revenues and expenses through a particular period and indicates how the revenues can be converted into net profit or income. In the figure 2.0 below, it represents Dollar Tree's income stamen covering annual periods from 2016 through 2019. On the other hand, figure 3.0 below concerning Dollar Tree's balance sheet, it comprises of financial details by considering the years from 2016 to 2019. Through balance sheets, they deliver significant knowledge about the position of the company by balancing the assets and liability equitable to capital.

Figure 2: Dollar Tree, Inc. (DLTR) Income Statement

Figure 3: Dollar Tree, Inc. (DLTR) Balance Sheet

Corporate Governance Analysis

In consideration to Family Dollar's corporate governance, the company is governed by the board of directors and officers whereby, the Board of Directors of Family Dollar or present Dollar Tree, Inc. set high standards for the directors, officer, and associates involved with the company. Implicit in this dimension, Family Dollar's corporate governance delivers that the Board of Directors must serve as agents of the shareholders and overlook the management of the company's operations. On the other hand, Family Dollar's corporate governance delivers various guidelines set for each of the dedicated personnel to follow in the strive to achieve its goals which also derives the structure for the company.

Correspondingly, as of 2019, some individuals on the Board of Directors include Gregory M. Bridgeford, Arnold S. Barron, Conrad M. Hall, Thomas W. Dickson, Jeffrey G. Naylor, among other personalities categorized as compensation committee, Nominating, and Corporate Governance Committee, and the audit committee (Dollar Tree, 2019). Thus, it would be appropriate to include more individuals in the Board of Directors, particularly the women in an attempt to create a gender balance as well as increase the chances of new ideologies. Through such changes or development, it will deliver significant improvement considering that gender balance in the Board of Directors will ensure that all the factors are dealt especially in dealing with employee and practices within the workplace which deliver a direct impact to the productivity of the company.

Risk and Return Analysis

In the different risk and return analysis of firms, Dollar Tree seems to be balancing the rewards and risks. Today, Dollar Tree Inc. generates higher investment returns than it costs the corporation to raise the capital required for the given investment. For example, in consideration to the Dollar Tree's weighted average cost of capital of 6.05% deriving that Dollar Tree Inc is earning excess returns. In terms of Dollar Tree risks, the company may be exposed to volatility risks which may arise as a result of institutional stakeholder basis.

Dividend Policy

As a result of the longstanding value proposition offered to the customers, Family Dollar has managed to gather an exceptional record in terms of the dividend policy. For example, the company has not only paid out dividend but as delivered an increase for 37 years dated from 1976. In the view of the earning and price correlated F.A.S.T. Graph, the earnings are developing significantly. Furthermore, it is evident that Family Dollar earnings have increased at an average rate of over 11% annually in the past decade and a half while the dividends have been consistent as well (Guru focus, 2019). Through different perceptions, the growth of dividends in Dollar Tree has equally administered development in the earnings per share prices along with other performance results tied to capital appreciations and dividends. For example, in the figure below, it depicts a fifteen-year performance of Family Dollar Stores in terms of dividend cash flow. There are minimal cases where percentage dividend growth dropped.

Figure...