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Family Dollar's Lost Way Leads Levine into Hands of Peltz, Icahn

There is one financial metric, analysts covering Family Dollar have long puzzled over, that points to something fundamentally wrong with the company. Family Dollar earned $46.70 per square foot among the company's 8,138 stores as of its most recent quarter. Dollar General, by contrast, earned $54.60 per square foot among its 11,132 stores, nearly 17% more than Family Dollar. That gap represents the fortune everyone sees in Family Dollar.

Brian Yarbrough, an Edward Jones analyst, told TheStreet that the operating disparity between Family Dollar and Dollar General would make a merger of the two companies unlikely.

Howard Levine has articulated his return-to-the roots plan, and Yarbrough gives him 12-months, at most, to show evidence of success. 

To turn things around, Family Dollar is pulling back on the promotions started by Bloom and the company is working to close underperforming stores, while also slowing new store openings.

In the second half of 2014, Family Dollar will close 370 stores, and the company now plans to open 525 new stores this year and just 340-to-400 new stores in 2015. Family Dollar also laid off 10% of its corporate overhead.

Levine recently said he has personally gone through Family Dollar's entire product assortment and decided the company will invest $50 million this year to improve price points on about 1,000 basic SKUs.

Family Dollar is also retrofitting its distribution centers with palletization capabilities that will allow the company to package like-items in bulk, easing the shelving process for store managers.

Analysts generally think it may cost more than Family Dollar expects to fix its stores, pricing and infrastructure. Some still believe in Levine's leadership, but they question whether time is on his side.

"I think this board gives Howard Levine a year for his turnaround play," Yarbrough said, in a July telephone interview. While Yarbrough believes Levine is making the right moves, he also said "I think the cards are stacked against Howard."

Bernard Sosnick, an analyst at Gilford Securities, notes that dollar stores have all gone through bad spells. "Dollar General is now the darling of the dollar stores but both of these companies have had their problems at times and have corrected them," he said in a July 8 telephone interview.

"They have been able to get through difficult times because they satisfy a need in retail," Sosnick concluded. He thinks Levine will pull through.

"In my many years with Family Dollar, I've been through difficult times before. Family Dollar has a long track record of success. We have experienced challenges, and we have always worked effectively to reposition the company for the next phase of growth," Levine said in January.

Family Dollar, Carl Icahn, Trian Management and KKR declined to comment.

-- Written by Antoine Gara in New York

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