Earnings Scorecard: Family Dollar - Analyst Blog


Family Dollar Stores Inc. ( FDO ), the operator of self-service retail discount store chains, recently posted first-quarter 2012 results. Street analysts have now had time to ponder the company's scores. In the paragraphs that follow, we cover the recent earnings announcement, subsequent estimate revisions by analysts, as well as the Zacks Rank and long-term recommendation for the stock.

Last Quarter Synopsis

Based in Matthews, North Carolina, Family Dollar unveiled its first quarter financial results on January 5, 2012. The quarterly earnings of 68 cents a share, which came in line with the Zacks Consensus Estimate, jumped 17.2% from 58 cents earned in the prior-year quarter. Healthy sales witnessed in the Consumables, and Seasonal and Electronics categories spurred the quarterly earnings.

Family Dollar posted a 7.6% increase in revenue to $2,148.3 million from the prior-year quarter, and reflected sales growth across Consumables (up 11.4%) and Seasonal and Electronics (up 5.6%), offset by Apparel and Accessories (down 3.4%) and Home Products (down 2.8%). However, total revenue fell short of the Zacks Consensus Estimate of $2,166 million.

The company hinted that comparable-stores sales are on the rise due to improved traffic count and increase in average consumer transaction values. Comps jumped to 4.1% in the quarter compared with 6.3% posted by its rival Dollar General Corporation ( DG ) in its last reported quarter. Family Dollar had delivered comps growth of 6.9% in the prior-year quarter.

Strolling Through Guidance

Family Dollar now expects second-quarter 2012 earnings between $1.10 and $1.18 per share. However, the company reiterated its fiscal 2012 earnings of $3.50 to $3.75.

Management predicts second quarter comps to rise by 5% and fiscal 2012 comps to climb between 4% and 6%. Family Dollar, which faces stiff competition from Wal-Mart Stores Inc. ( WMT ), continues to expect fiscal 2012 net sales to jump by 8% to 10%.

(Read our full coverage on this earnings report: Family Dollar's Profit Jumps )

Agreement of Estimate Revisions

In the last 7 days, 5 out of 20 analysts covering the stock lowered their estimates, whereas 2 analysts raised them for the second quarter of 2012. For the third quarter, 7 analysts trimmed their estimates, with only 1 analyst making an upward revision.

For fiscal 2012, 9 analysts revised their estimates down, with only 2 analysts revising the same upward in the last 7 days. For fiscal 2013, 6 analysts lowered their estimates and only 2 analysts increased them.

What Drives Estimate Revisions

Family Dollar did register growth in the top and bottom lines, but these were not enough to alleviate the concern about increasing gross margin pressure. It was apparent that the growth in the top line was led by lower-margin consumables category, which now accounts for 70.3% of total sales compared with 67.9% in the prior-year quarter.

Consequently, the increase in sales of lower margin merchandise weighed upon the company's gross margin that contracted 70 basis points to 35.3%.

It is obvious that given a dismal economy, consumers will focus on basic necessities only, such as food, that generally carries lower margins. Management now expects gross margin in the second quarter of 2012 to be somewhat in line with the first quarter. For the year, management expects gross margin to remain under pressure.

Moreover, the comparable-store sales for the quarter came in at 4.1%, which remained at the lower end of the company's previously-provided guidance range of 4% to 6%. Further, as mentioned already, total revenue did climb up, but it failed to impress the Street as it came in below expectations.

However, the company's commitment toward better price management, cost containment efforts, effective inventory management, private label offering, store expansion and renovation, and merchandise initiatives raise the hopes of some of the analysts, who revised their estimates upwards.

Magnitude of Estimate Revisions

The magnitude of estimate revisions by the analysts is clearly reflected through changes in the Zacks Consensus Estimates.      

The Zacks Consensus Estimates for the second and third quarters of 2012 moved down by a penny to $1.13 and $1.06, respectively, in the last 7 days.

For fiscal 2012, the Zacks Consensus Estimates dropped 3 cents to $3.63 in the last 7 days. For fiscal 2013, the Zacks Consensus Estimates slid 2 cents to $4.18.

Closing Comment

The economy is still not out of the woods, and consumers will remain cautious on their spending, buying only those things that fulfill their basic needs. Consequently, we could see more competitive pricing and new products to attract shoppers.

Price wars would definitely eat away at margins, which in turn would affect the company's results. In order to remain competitive, it is better to try out innovative ways to win the hearts of target consumers rather than continually dropping prices.

Currently, we maintain our long-term Neutral rating on the stock. Furthermore, Family Dollar shares maintain a Zacks #3 Rank that translates into a short-term Hold recommendation and correlates with our long-term view.

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These "Earnings Estimate Scorecard" articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/

DOLLAR GENERAL ( DG ): Free Stock Analysis Report
FAMILY DOLLAR ( FDO ): Free Stock Analysis Report

WAL-MART STORES ( WMT ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: DG , FDO , WMT



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