Updated to include new Vine videos below.

NEW YORK (TheStreet) -- An activist investor such as Carl Icahn doesn't magically appear on the doorsteps of publicly traded companies for no good reason. For an Icahn, a Nelson Peltz, and a Bill Ackman to get involved, a company's management team and board must really be failing shareholders via misguided operating tactics. In turn, those failures show up in the stock price, masking a business that may be worth more on a public market if new ideas are implemented from the outside.

Family Dollar (FDO) is in a state of operational disarray, which was created by a poorly situated board and a founder's son as CEO who has orchestrated the company's existing mess. Yet the company plays a critical role in the communities it serves in bringing low-priced food closer to consumers than a Walmart (WMT) or Target (TGT).

Here is what Icahn sees in Family Dollar, and why his case against the company is very strong.

The board is mostly made up of present or retired consultants with little retail experience. These board members are generally long-tenured. A retailer having a portfolio of more than 8,100 stores must have former retail executives on the board to hold the executive team, led by the founder's son, accountable. If Family Dollar has to pay more to attain that board talent, so be it.

Family Dollar is badly underperforming rivals Dollar General (DG) and Dollar Tree (DLTR) in most operating metrics, acutely operating margins, ROE, and sales per square foot. The reasons for that lagging nature are easily found in the stores (see the Vine below), which continue to be overstuffed with so much inventory as to serve as an anchor over the profit lines.

Family Dollar's retail strategy is to not own land. Since the end of fiscal 2012, Family Dollar has sold 532 stores in leaseback transactions for after-tax proceeds of $256.3 million, which it then has used to open new stores. Sold stores are usually inked for 15-year leases. Given Family Dollar's recent decision to shutter 370 poorly performing stores (I expect another restructuring plan to take place in an Icahn-led raid), Icahn has said in not so many words that Family Dollar's management shouldn't be in charge of stewarding newly raised capital from fixed assets. Remember, every one of these 370 store closures and the impact to the financial statements and employees' families falls on the head of the current CEO who has led the company for 16 years.

The Family Dollar Operational Tragedy Began Months Ago ...

Say hello to archive footage from January of my venture to 15 Family Dollar stores in the New York area.  As you can see, operational failures, from over-ordering inventory to general store disarray, began months in advance of Icahn's appearance on the scene.



-- By Brian Sozzi CEO of Belus Capital Advisors, analyst to TheStreet.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

At the time of publication, Sozzi had no positions in the stocks mentioned, although positions may change at any time.

Brian Sozzi is the CEO and Chief Equities Strategist of Belus Capital Advisors. He is responsible for developing and managing an equities portfolio of mid- and large-cap positions, in addition to leading the firm's digital content initiatives. He is also a personal finance columnist for Men's Health magazine.

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