A large shareholder has demanded that 99 Cent Only Stores
(NYSE:NDN) institute a plan to buy back its own shares, halt any
expansion plans and close unprofitable divisions, according to a
Schedule 13D filing with the Securities and Exchange Commission on
Friday. Shareholders are hoping that the involvement of an activist
hedge fund will help turn around the company’s stock, which has been
underperforming as of recent times.
Akre Capital Management, which disclosed a 13.4% stake in the
discount retailer, sent a letter to the company’s board expressing
frustration with its current state. Akre noted that operating profits
have declined each year and the company is now nearing breakeven.
Meanwhile, management has also made several “misguided” decisions like
staying in Texas, accelerating store growth and retaining excess cash.
Combined, these decisions have resulted in a poorly performing stock.
“We believe that management is charged with two primary
responsibilities: 1)restoring the company to a healthy level of
profitability, and 2) making prudent capital investment decisions with
the company’s existing asset base, operating cash flow, and balance
sheet reserves,” said Akre in the letter. “So far, after nearly three
years of tenure, management’s record is poor on both of these accounts.”
Akre them proposed a “conventional turnaround plan”, which
prescribes halting all growth, exiting unprofitable products and
divisions, and focusing full attention on restoring profitability to
the remaining business. Balance sheet liquidity is deployed by
repurchasing depressed stock, and growth resumes when it can be funded
out of restored operating cash flow.
“This time-tested conventional plan seems ideal for the company, so
management should have a compelling argument for why they have chosen
an alternative and more speculative plan,” said Akre. “Despite repeated
requests from investors, management is unable or unwilling to explain
its reasoning in quantifiable terms.”
In the end, this is great news for shareholders as it means that
they could finally see change in the company. If the activist hedge
fund is successful in instituting this turnaround plan, we could see
the share price increase significantly over the next few months as the
company focuses in improving its margins while returning excess cash to
shareholders through a buyback. Combined, these factors make NDN a
stock worth watching!
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