Family Dollar Stores Inc.
), the operator of self-service retail discount store chains,
recently posted fourth-quarter 2012 results. Street analysts have
had adequate time to contemplate 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
fourth quarter financial results on October 3, 2012. The quarterly
earnings of 75 cents a share came in line with the Zacks Consensus
Estimate but jumped 13.6% from 66 cents earned in the prior-year
quarter owing to healthy sales witnessed in the Consumables and
Seasonal & Electronics categories.
Family Dollar posted a 10.8% increase in revenue to $2,364.1
million from the prior-year quarter, and reflected sales growth
across Consumables (up 16.1%) and Seasonal & Electronics (up
4.8%) partially mitigated by Apparel and Accessories (down 6.7%)
and Home Products (down 1.4%). However, total revenue fell short of
the Zacks Consensus Estimate of $2,367 million.
The company hinted that comparable-stores sales are on the rise
due to improved traffic count and a boost in average consumer
transaction values. Comps jumped 5.4% in the quarter compared with
a growth of 5.6% in the prior-year quarter.
Strolling Through Guidance
Family Dollar now expects earnings between 69 cents and 78 cents
for the first quarter and in the band of $4.10 to $4.40 per share
for fiscal 2013.
Management predicts first quarter and fiscal 2013
comparable-store sales to increase between 4% and 6%. Family
Dollar, which faces stiff competition from
Wal-Mart Stores Inc.
), expects fiscal 2012 net sales to jump by 13% to 15%.
(Read our full coverage on this earnings report:
Family Dollar Meets, Profit Rises
Agreement of Estimate Revisions
In the last 7 days, 11 out of 21 analysts covering the stock
lowered their estimates, whereas only 1 analyst raised the same for
the first quarter of 2013. For the second quarter, 10 analysts made
upward revisions, whereas 2 analysts trimmed their estimates.
For fiscal 2013, 11 analysts revised their estimates upward,
with 5 analysts revising the same downward in the last 7 days. For
fiscal 2014, 2 analysts increased their estimates and 4 analysts
decreased the same.
What Drives Estimate Revision
Family Dollar's healthy results and an upbeat outlook impressed
the analysts, who went on to revise their estimates upwards to
better align with management's guidance range. Going forward,
analysts remain confident about the company's commitment towards
better price management, cost containment efforts, effective
inventory management, private label offering, store expansion and
renovation, and merchandise initiatives.
Family Dollar did register growth in the top and bottom lines,
but the increments were not enough to alleviate the concern about
intensifying gross margin pressure. It was apparent that the growth
in the top line was led by the lower-margin consumables category.
Lower-margin consumables category now accounts for 72.5% of
fourth-quarter 2012 sales compared with 69.1% in the prior-year
Consequently, the increase in sales of lower margin merchandises
weighed upon the company's gross margin that contracted about 20
basis points to 33.8%. Operating margin shriveled 140 basis points
to 6.1%. For fiscal 2012, gross margin dropped approximately 60
basis points to 34.9%.
It is obvious that given a dismal economy, consumers will focus
on basic necessities only, such as food that generally carries
lower margin. Management anticipates gross margin to remain under
pressure in fiscal 2013 due to increasing percentage of consumables
in sales mix.
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 Estimate for the first quarter of 2013
dropped by 4 cents to 74 cents a share in the last 7 days. The
Zacks Consensus Estimate for the second quarter moved up by 5 cents
to $1.40, in the same time frame.
For fiscal 2013, the Zacks Consensus Estimate jumped 3 cents to
$4.25 in the last 7 days. However, for fiscal 2014, the Zacks
Consensus Estimate plunged 12 cents to $4.83.
The economy is still not completely awakened from the state of
hibernation, and buyers remain prudent with respect to their
expenditures, purchasing only those items that cater to their basic
needs. Thus, we could witness more competitive pricing and new
offerings to lure consumers.
The onset of a price war will definitely eat away margins, and
in turn affect the company's results. In order to remain
competitive, it is better to experiment with innovative ways to win
the hearts of target consumers rather than lagging in an unhealthy
Currently, we maintain our long-term Neutral recommendation on
the stock. Moreover, Family Dollar shares maintain a Zacks #3 Rank
that translates into a short-term Hold rating.
About Earnings Estimate Scorecard
As a PhD from MIT, Len Zacks 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
DOLLAR GENERAL (DG): Free Stock Analysis Report
FAMILY DOLLAR (FDO): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis
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