【mario vs donkey kong march of the minis rom】CVS-Aetna Judge, Airing Concerns, Cautions Against Quickly Combining Operations
Judge Richard Leon of the U.S. District Court for the District of Columbia. Official Investiture ceremony for new U.S. District judge for the District of Columbia Rudolph Contreras. June 20,mario vs donkey kong march of the minis rom 2012. Photo by Diego M. Radzinschi/THE NATIONAL LAW JOURNAL.
A federal judge on Monday agreed to appoint an outside lawyer to monitor CVS Health Corp.’s acquisition of Aetna Inc. but
raised continued concerns
about the two companies integrating their businesses while the $69 billion deal remains under his review.
U.S. District Judge Richard Leon in Washington suggested CVS’s management should be insulated from Aetna’s while he weighs approving the companies’ settlement with the Justice Department, which cleared the acquisition on the condition the insurance giant sell off its independent prescription drug plan business.
Leon said it would be “more than reasonable” for CVS and Aetna to keep their businesses separate while he reviews the acquisition. The two companies announced the completion of their deal last week.
The judge last week shared his concerns about the merger after initially declining to rule on the Justice Department’s request to have Julie Myers Wood, chief executive of the monitoring firm Guidepost Solutions, oversee the sale of Aetna’s individual prescription drug plan business to Wellcare Health Plans Inc. Leon on Monday approved Wood as the monitor and spoke for only a few minutes before setting a hearing for Dec. 18.
“See you on the 18th,” he said, before stepping off the bench without questioning the Justice Department lawyers and counsel for Aetna and CVS.
Makan Delrahim, the assistant attorney general in charge of the Justice Department's antitrust division, attended Monday’s hearing. Delrahim declined to comment after it. CNN reported last week that Delrahim is
among
the contenders for the U.S. attorney general nomination.
At last week’s hearing, which many had expected to be routine, Leon said he had been struck by the government’s request to appoint a compliance monitor, saying that it made him feel as though he was “being kept in the dark, kind of like a mushroom.”
Leon, who
approved
AT&T’s contested acquisition of Time Warner in June, pointed out that those two companies have closed their deal but refrained from integrating their operations while the Justice Department challenges his ruling in the U.S. Court of Appeals for the D.C. Circuit.
When Leon asked Justice Department lawyer Jay Owen last week whether he was familiar with that arrangement in the AT&T case, Owen replied, “No, your honor, I’m not.”
“You need to talk to your colleagues more frequently, Mr. Owen. CVS and Aetna know. The deal closed pending my ruling, but the parties agreed that the companies wouldn’t be integrated until after the appeal was resolved by the D.C. CIrcuit,” Leon said, referring to AT&T and TIme Warner. “Aetna and CVS know that, and I can’t believe you don’t.
“What are you, a mushroom yourself over in the antitrust division?” Leon asked during one exchange.
Leon accused the Justice Department and the two companies of treating his review of the acquisition as a “rubber stamp operation,” raising the specter that he would strike down the deal on antitrust grounds. Appearing irate at times, he noted the public comment period on the deal had not yet closed, pointed specifically to the American Medical Association’s opposition to the acquisition and expressed concern about how CVS and Aetna would be unwound in the event that he ruled against their merger.
“Let’s make it clear, Mr. Owen: This court’s not a rubber stamp,” Leon said.
“No, your honor, I don’t believe this court is a rubber stamp,” Owen responded.
“Yeah, I understand you don’t,” Leon replied. “God knows if the antitrust division has learned anything, they know that this court is not a rubber stamp. But these folks over here need to understand that too, because it’s their clients who think I am a rubber stamp, and that’s not going to be tolerated."
Ahead of Monday’s hearing, the Justice Department
defended
CVS and Aetna’s move to begin integrating their operations and said an earlier order—signed by Leon in October—had allowed the companies to consummate their merger.
Government lawyers argued that while federal law gives judges power to review merger settlements, it does not “prohibit companies from consummating their merger" and integrating operations while a court review is pending.
“Allowing companies to consummate a proposed merger before a settlement has received final approval is common in consent decrees with the United States and the Federal Trade Commission,” Justice Department lawyers wrote in a court filing Sunday.
The government said it was “particularly critical” for Aetna to complete the sale of its prescription drug plan business to Wellcare.
Insurers, the Justice Department said, “have already begun planning their bids for the 2020 plan year, so transferring the assets to WellCare as soon as possible was necessary to ensure that it could step into Aetna’s shoes and preserve the competition that would otherwise be lost as a result of the merger.”
Story continues
Read more:
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- 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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