The economy is witnessing an uneven recovery, and amidst such a
scenario, bargain hunters have no alternative but to hop several
shops in search of the best deal, with their main focus on
essential items, such as food.
Family Dollar Stores Inc.
), with its low cost options, remains successful in enticing
budget-constrained consumers. Margins, however, remain under
Family Dollar offers general merchandise in four categories --
Consumables, Home Products, Apparel and Accessories, and Seasonal
and Electronics -- and sells merchandise at prices ranging from
under $1 to $10.
The Company Counts Upon
The company's strategic initiatives to improve merchandising,
marketing and store operations have resulted in sustained growth in
the top and bottom lines. Management now expects a growth of 13% to
15% in net sales and an increase of 12.6% to 20.9% in earnings per
share in fiscal 2013.
The company remains committed towards better price management,
cost containment efforts, effective inventory management, private
label offering and expanded operating hours that should augur well
for sales. Moreover, in order to enhance its market share, Family
Dollar intends to focus on both consumables and discretionary
The company has also been making prudent investments related to
store infrastructure; store openings, expansions and relocations;
and improvement of distribution centers to drive revenue
The company is accelerating new store openings. Family Dollar
opened 475 stores and renovated, expanded, or relocated 854 stores
during fiscal 2012. Through fiscal 2013, the retailer plans to open
about 500 new stores and renovate, expand, or relocate 850 stores.
The company projects store count to increase at a rate of 5% to 7%
over the next 3 to 5 years.
All these endeavors facilitated Family Dollar in posting
impressive fourth-quarter 2012 results. The quarterly earnings of
75 cents per share came in line with the Zacks Consensus Estimate
but jumped 13.6% from 66 cents earned in the prior-year quarter on
the heels of healthy sales witnessed in the Consumables and
Seasonal & Electronics categories, and marked the 18th
successive quarter of double-digit growth.
North Carolina-based Family Dollar now projects 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's target for 3
to 5 years includes double-digit bottom-line growth.
The operator of self-service retail discount store chains 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.
Margins under Pressure
Family Dollar registered growth in the top and bottom lines, but
it was insufficient in alleviating the concern regarding increasing
gross margin pressure. It was apparent that the growth in the top
line was backed by the lower-margin consumables category.
Consequently, the increase in sales of lower margin merchandises
weighed upon the company's gross margin that contracted 20 basis
points to 33.8% during the fourth quarter of 2012. Operating margin
shriveled 140 basis points to 6.1%. For fiscal 2012, gross margin
dropped 60 basis points to 34.9%.
It is obvious that given a dismal economy, consumers will focus
on basic necessities such as food, which generally carries a lower
margin. Management anticipates gross margin to remain under
pressure in fiscal 2013 due to increasing percentage of consumables
in sales mix.
Moreover, the company's customers remain sensitive to
macroeconomic factors including interest rate hikes, increase in
fuel and energy costs, credit availability, unemployment levels and
high household debt levels, which may adversely affect their
discretionary spending, and in turn the company's growth and
Tough Economy & Stiff Competition
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 contest.
Family Dollar operates in the highly competitive discount retail
merchandise sector. Peer pressure from the likes of
Wal-Mart Stores Inc.
Dollar General Corporation
) will likely continue to weigh on its results.
Holds Zacks #3 Rank
Given the pros and cons of the stock, we maintain our long-term
"Neutral" recommendation on it. Moreover, Family Dollar shares also
maintain a Zacks #3 Rank that translates into a short-term "Hold"
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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