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【can i borrow money from my esop】PE's lack of liquidity comes into focus as public, private markets converge

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简介US PE middle-market multiples barely budged in 2018. We didn't expect them to, and we don't expect t can i borrow money from my esop

US PE middle-market multiples barely budged in 2018. We didn't expect them to,can i borrow money from my esop and we don't expect them to come down much in the near-term either, barring some significant macro development. Last year marked the sixth consecutive year with double-digit purchase price multiples, clocking in at around 11.6x, versus nearly 12.0x in 2017, per our

2018 Annual US PE Middle Market Report

. A decline, but not much of one.

【can i borrow money from my esop】PE's lack of liquidity comes into focus as public, private markets converge

PE valuations and dry powder levels are the two most discussed aspects of the industry today, and they are not unrelated. They symbiotically feed off each other, driving investors to pay higher markups for deals and raise more capital to prepare themselves for more of the same going forward.

【can i borrow money from my esop】PE's lack of liquidity comes into focus as public, private markets converge

But PE valuations don't operate in a vacuum, and the LPs who ultimately finance them are free to look elsewhere to park their money. They don't particularly want to—alternatives are a staple in most portfolios and provide much-needed, uncorrelated returns to equities. But in exchange for the liquidity tie-up, PE's selling point is higher returns.

That becomes significant and much harder to achieve when entry prices are higher. If LPs are paying comparable prices for their private and public holdings, PE's lack of liquidity comes more clearly into focus.

An article from The Financial Times

pointed out the problem last year: "Industry observers also said that a narrowing of the gap would lead some to reassess their exposure to private equity."

That's true, though it would be an overstatement to etch it into stone ahead of time.

This column originally appeared in

The Lead Left

Read more about PE valuations in our

2018 Annual US PE Middle Market Report

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上一篇： How Bassett (BSET) Stock Stands Out in a Strong Industry

下一篇： 5%, led by a 17% increase in average ticket and a slight decline in traffic. Growth in the quarter reflected the impact of households stocking up on essentials like paper goods and cleaning supplies as the pandemic became a nationwide concern, along with strength in discretionary categories as the quarter came to a close and stimulus dollars and tax refunds were disbursed.

As shown below, the results in the quarter materially changed the trend in two-year stacked comps for each of the banners, along with a significant acceleration for consolidated comps.

The increase in consolidated comps was the primary driver of an 8% increase in revenues to $6.3 billion. The company ended the quarter with 15,370 locations, up less than 1% year-over-year. This reflects a 7% increase in Dollar Tree units, offset by a 4% decline in Family Dollar units.

The top-line results at each banner flowed through to their respective income statements, with Dollar Tree gross margins and operating margins declining year-over-year while Family Dollar gross margins and operating margins expanded year-over-year. On a consolidated basis, gross margins contracted by 120 basis points in the quarter to 28.5%, reflective of a shift to lower-margin consumables, tariff costs and the impact of markdowns from the Easter headwinds at the Dollar Tree banner. The company saw slight operating leverage on SG&A from higher comps, with the net result being an 80 basis point contraction in operating margins to 5.8%, with operating income declining 5% to $366 million. This is not adjusted for $73 million of pandemic-related costs, such as PPE supplies.

In the first quarter, the company opened 85 stores (net of closures) and completed 220 Family Dollar renovations to the H2 format. Importantly, comps at renovated Family Dollar stores continue to outpace the chain average by more than 10%. On the call, management indicated that they plan on reducing both the number of new store openings (from 550 to 500) and the number of H2 renovations (from 1,250 to 750) in 2020.

Personally, given the fact that Family Dollar is seeing material benefits to its business from the pandemic with new or lapsed customers coming into its stores, I think the company should try to get more aggressive with its renovation plans, not less. On the other hand, you could argue that renovations cause short-term disruptions and limit their ability to fully capitalize on the business momentum they are currently experiencing.

As a result of fewer new stores and remodels, management now expects 2020 capital expenditures to total $1.0 billion compared to previous guidance of $1.2 billion. In addition, the company has temporarily suspended share repurchases. At quarter's end, the company had $1.8 billion in cash on its balance sheet compared to $4.3 billion in total debt.

Conclusion

In recent years, Dollar Tree has been a tale of two cities. While its namesake banner has generally delivered impressive financial results, Family Dollar has been a persistent underperformer. This quarter, those results flipped, and given what we've seen in the weeks since quarter's end, there's a decent possibility that we will see something similar in the coming months. As the CEO noted, the second quarter is off to a very good start at Family Dollar.

Here's the important question: how useful is that information is in terms of making future predictions about the business? Will recent success at Family Dollar translate into long-term success for the banner? The optimistic take is that new or lapsed customers, especially those visiting the renovated stores, could become recurring business for the banner. The pessimistic take is that they have experienced short-term success out of necessity as people went to any store that was open to try and find essentials like toilet paper and hand sanitizer that were largely out of stock throughout the retail landscape. From that view, many of these customers could abandon the retailer when life returns to normal. As Philbin noted on the conference call, early on [during the pandemic], folks needed us. Will people still shop as much at Family Dollar when it's no longer a necessity?

Personally, I do not place too much weight on the recent results. I will need to see incremental data points that indicate that Family Dollar has truly won sustained business from these new customers. While I still believe that the Dollar Tree banner is a well-positioned retailer with attractive unit returns, I'm not yet willing to say the same thing for Family Dollar. For that reason, along with the recent run-up in the stock price, I plan on staying on the sidelines for now.

Disclosure: None

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