The economy is still looking for remedies, and bargain hunters
have no choice but to go from one shop to another to grab the best
deal, with their primary focus being on essential items, such as
food.
Family Dollar Stores Inc.
(
FDO
), with its low cost options, remains successful in luring
budget-constrained consumers amidst unstable 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.
What the Company Counts On
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.
Healthy Results
All these initiatives aided Family Dollar in posting healthy
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 a 17
th
successive quarter of double-digit growth.
However, earnings missed the Zacks Consensus Estimate by a
penny.
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, partially offset by Home Products (down 1.8%). The company
reflected sales growth across Consumables (up 12.2%), Seasonal and
Electronics (up 15.4%) and Apparel and Accessories (up 1.1%).
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
that was not enough to alleviate the concern about 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 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.
Challenging Economy & Competition
The economy has still not awakened from a state 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 trigger in price war will definitely eat away margins, and in
turn will affect the company's results. In order to remain
competitive, it is better to try out innovative ways to win the
hearts of target consumers rather than fading away 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 #3 Rank
Given the pros and cons embedded in the stock, we maintain our
long-term Neutral recommendation on it. Furthermore, Family Dollar
shares maintain a Zacks #3 Rank that translates into a short-term
Hold rating and correlates with our long-term view.
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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