The economic recovery is still unstable, and bargain hunters
have no choice but to go from one shop to another to grab the best
deal, with their principal focus on essential items, such as food.
Family Dollar Stores Inc.
(
FDO
), with its low cost options, remains successful in luring
budget-constrained consumers amidst the fragile economic recovery.
However, margins remain under pressure.
Family Dollar offers general merchandise in four categories --
consumables, home products, apparel and accessories, and seasonal
and electronics -- and sells merchandise at prices from under $1 to
$10.
The Drivers
The company's strategic initiatives to improve merchandising,
marketing and store operations have resulted in sustained growth in
the top and bottom lines. For fiscal 2012, management expects
growth of 9% to 10% in net sales and 15.4% to 18.6%in earnings per
share.
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
categories.
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
growth.
The company is accelerating new store openings. Family Dollar
now plans to open 50% more stores in fiscal 2012 compared with the
prior-year. The retailer targets to open about 450 to 500 new
stores, and plans to renovate, expand or relocate approximately
1,000 stores in fiscal 2012.
Impressive Results
All these initiatives aided Family Dollar in posting impressive
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 back of healthy sales witnessed in the Consumables, and
Seasonal and Electronics categories, and marked the 17
th
successive quarter of double-digit growth. Earnings came in line
with the Zacks Consensus Estimate.
North Carolina-based Family Dollar 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 operator of self-service retail discount store chains 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.
Rewarding Shareholders
Family Dollar has been actively managing its cash flows,
returning bulk of its free cash to shareholders through share
repurchases and dividends. In January this year, the company raised
its quarterly dividend by 16.7% to 21 cents a share. Since the
inception of the dividend program in 1976, the company has raised
its dividend every year at a compounded average growth rate of
about 16%. 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.
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 40 basis
points to 35.8%. Operating margin shriveled 20 basis points to
8.4%.
It is obvious that given a dismal economy, consumers will focus
on basic necessities such as food, which generally carry a lower
margin. Management expects margins to remain under pressure in the
fourth quarter and in the beginning of fiscal 2013.
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
profitability.
Tough Economy & Stiff Competition
The economy is still not out of the woods, and consumers remain
cautious regarding their spending, buying only those things that
cater to their basic needs. Consequently, we could see more
competitive pricing and new products to attract shoppers.
Triggering 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.
(
WMT
) and
Dollar General Corporation
(
DG
) will likely continue to weigh on its results.
Holds Zacks #2 Rank
Given the pros and cons of the stock, we maintain our long-term
'Neutral' recommendation on it. 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
Report
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