Family Dollar Misses on Q3 Earnings in Slow-Moving Economy - Analyst Blog


Family Dollar Stores Inc. ( FDO ) posted third-quarter fiscal 2014 earnings of 85 cents a share that missed the Zacks Consensus Estimate of 90 cents, and plunged 19% from $1.05 earned in the prior-year quarter. Management blamed the quarter's debacle on economic headwinds and stiff competition. The disappointing results led to a 2.5% decline in the share price of this Zacks Rank #4 (Sell) stock during pre-market trading hours.

To bring itself back on the growth trajectory, this self-service retail discount store chain had announced a slew of measures last quarter to improve its operational and financial performances. Management reduced prices of approximately 1,000 basic items and disclosed plans to invest $50 million annually to add value-based products, optimize the cost structure by lowering headcount, close about 370 underperforming outlets and being more rationale on new store opening to reap higher return on investment. The company, in fiscal 2015, plans to extend its cooler facilities, roll out products such as wine and beer to draw traffic, and undertake initiatives to enhance store productivity.

Including restructuring charges, the earnings came in at 71 cents a share, down 32.4% year over year.

Let's Dig Further

Family Dollar, which competes with Dollar General Corp. ( DG ), posted a 3.3% increase in net sales to $2,659 million from the prior-year quarter, reflecting sales growth across Consumables (up 4.4%), Apparel and Accessories (up 2.1%) and Seasonal & Electronics (up 1.6%), offset by decline witnessed in Home Products (down 1.6%). Total revenue also came ahead of the Zacks Consensus Estimate of $2,363 million.

The strength witnessed in the Consumables category came on the back of robust growth across refrigerated and frozen food and tobacco. Strong focus on consumables helped Family Dollar to drive business from budget-constrained consumers.

The economic recovery is still patchy, and bargain hunters are choosing the best deal, with their primary focus being on consumables. The Consumables category accounted for 73.3% of third-quarter fiscal 2014 sales compared with 72.5% in the prior-year quarter.

However, comparable-store sales for this Matthews, NC-based company fell 1.8% due to a decline in customer transactions, partly offset by a rise in average consumer transaction value.

Adjusted gross profit increased 2.2% to $912.3 million, whereas gross margin contracted 40 basis points to 34.3%. The lower-margin carrying consumables, increased markdowns and lower markups, were partly offset by fall in inventory shrinkage. Management expects gross margin to decline in fiscal 2014.

Family Dollar stated that adjusted operating profit for the quarter came in at $145.3 million, down 22.9% year over year. Operating margin shrank about 180 basis points to 5.5%.

Other Financial Details

Family Dollar ended the quarter with cash and cash equivalents of $163.7 million, total long-term debt of $500.4 million, reflecting a total debt-to-capitalization ratio of 23.2%, and shareholders' equity of $1,656.6 million. Capital expenditures for the first-nine months of fiscal 2014 totaled $307.2 million. Management now projects capital expenditures between $450 million and $500 million for fiscal 2014.

During the first nine months, Family Dollar bought back approximately 1.8 million shares for an aggregate amount of $125 million and paid dividend of $94.8 million. As of May 31, 2014, the company still had $245.8 million at its disposal under its share repurchase authorization.

Stores Update

During the quarter, Family Dollar opened 111 new outlets and closed 3 stores taking the total store count to 8,246. The company also renovated, expanded, or relocated 266 stores. In fiscal 2014, the retailer plans to open about 525 new stores and close 400 stores. The company anticipates opening 350 to 400 outlets in fiscal 2015.

Guidance at a Glance

Family Dollar now projects earnings in the band of 75 cents to 85 cents for the fourth quarter and between $3.07 and $3.17 per share for fiscal 2014. Including restructuring charges, the company envisions earnings between 38 cents and 48 cents for the fourth quarter and in the range of $2.56 to $2.66 per share for the full fiscal.

The current Zacks Consensus Estimate for the fourth quarter and fiscal 2014 are 75 cents and $3.15 per share, respectively.

Management forecasts flat comparable-store sales for the fourth quarter. For fiscal 2014, the company expects a low single-digit jump in net sales, while a low single-digit decline in comparable-stores sales.

Closing Comment

The economy is still not completely 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 attracting shoppers. A price war would definitely eat away margins, which in turn would affect the company's results. In order to remain competitive, it would be better to try out innovative ways to win the heart of target consumers.

Other stocks worth considering in the retail industry, include Big Lots Inc. ( BIG ) and Burlington Stores, Inc. ( BURL ). Both hold a Zacks Rank #2 (Buy).

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DOLLAR GENERAL (DG): 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, Inc.

This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: FDO , BURL , DG , BIG

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