The economic recovery is still patchy, and bargain hunters are
going from one shop to another to grab the best deal, with their
primary focus being on consumable items, and
Family Dollar Stores Inc.
), the operator of self-service retail discount store chains,
remains successful in luring cautious consumers amid a fragile
This was quite evident from the company's third-quarter 2012
results. The quarterly earnings of $1.06 per share jumped 16.5%
from 91 cents earned in the prior-year quarter on the heels of
healthy sales witnessed in the Consumables and Seasonal &
Electronics categories, and marked a 17
successive quarter of double-digit growth. However, earnings missed
the Zacks Consensus Estimate by a penny.
The company had earlier guided earnings in the range of $1.01 to
$1.11 per share for the quarter. Management now expects earnings
between 71 cents and 81 cents for the fourth quarter and in the
range of $3.60 to $3.70 per share for fiscal 2012.
The current Zacks Consensus Estimates for the fourth quarter and
fiscal 2012 are 77 cents and $3.67, respectively.
We observe that Family Dollar's strategic initiatives to improve
merchandising and store operations have aided top and bottom line
Let's Unveil the Picture
Family Dollar posted a 9.6% increase in revenue to $2,360
million from the prior-year quarter, and reflected sales growth
across Consumables (up 12.2%), Seasonal and Electronics (up 15.4%)
and Apparel and Accessories (up 1.1%), partially offset by Home
Products (down 1.8%). However, total revenue fell short of the
Zacks Consensus Estimate of $2,373 million.
Family Dollar, which faces stiff competition from
Wal-Mart Stores Inc.
), continues to expect fiscal 2012 net sales to jump by 9% to 10%.
We believe effective pricing and inventory management, private
label offering, expanded operating hours and merchandise
initiatives should drive sales.
The company's point-of-sale technology and store realignment
initiatives better position it to drive traffic, meet
customer-oriented demand and improve in-store shopping experience.
Consumers with lower disposable incomes are now prioritizing their
purchases and looking for low-priced options. The company trades in
merchandise generally priced under $10.
Based in Matthews, North Carolina, Family Dollar hinted that
comparable-stores sales are on the rise on improved traffic count
and increase in average consumer transaction value. Deeper focus on
consumables helped Family Dollar to drive business from
Comps jumped 5% in the quarter compared with a growth of 4.7% in
the prior-year quarter. Management reiterated fourth quarter
comparable-store sales growth of 5% to 7%, and projected an
increase of about 5% for fiscal 2012 comps.
The sales in the quarter were driven by the lower-margin
Consumables category that registered double-digit sales growth.
Given the dismal economy, consumers remain focused on basic
necessities, such as food, and with Family Dollar offering low cost
options, it remains the choice of shoppers.
The robust sales of lower margin merchandises, increase in
markdowns and rise in inventory shrinkage weighed upon the
company's gross margin that contracted 40 basis points to 35.8%.
Operating margin shriveled 20 basis points to 8.4%.
Other Financial Details
Family Dollar ended the quarter with cash and cash equivalents
of $120.9 million and total long-term debt of $532.5 million,
reflecting a total debt-to-capitalization ratio of 28.9%, and
shareholders' equity of $1,312.5 million. Capital expenditures for
the first nine months were $391.4 million. Management now
anticipates capital expenditures between $650 and $675 million for
During the first nine months of fiscal 2012, the company
repurchased 1.7 million shares, aggregating approximately $91.6
million. As of May 26, 2012, the company still had $245.7 million
at its disposal under its share repurchase program.
During first-nine months, Family Dollar opened 287 stores and
closed 43 taking the total store count to 7,267. The company also
renovated, expanded, or relocated 583 stores. Through fiscal 2012,
the retailer plans to open about 450 to 500 new stores and close 60
to 80 stores.
The economy is still not completely out of hibernation 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.
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
Currently, we maintain our long-term Neutral recommendation on
the stock. However, Family Dollar shares maintain a Zacks #2 Rank
that translates into a short-term Buy rating.
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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