Family Dollar Earnings Miss by a Penny - Analyst Blog

Family Dollar Stores Inc. ( FDO ) posted first-quarter fiscal 2014 earnings of 68 cents a share that missed the Zacks Consensus Estimate by a penny, and dropped 1.4% from 69 cents delivered in the prior-year quarter. The earnings came between the previously provided guidance range of 65cents to 75 cents a share. The retailer offer lucrative discounts than it originally thought of to lure budget-conscious customers.

The Matthews, North Carolina-based company said that comparable-store sales fell 2.8% with customer transactions and average consumer transaction value also declining. Comps faced a tough year-over-year consumables comp comparisons.

Earlier, management had forecasted low-single digit decline in comparable-store sales. Further, management added that comps for the month of December tumbled 3%, given the uneven economic scenario and tough consumer environment as softness persists in discretionary categories.

Going forward, this self-service retail discount store chain does not see much improvement in macroeconomic trends and as a result lowered its earnings expectations. Shares of this Zacks Rank #4 (Sell) stock fell 7.5% or $4.94 to $61.40 during pre-market trading hours.

Let's Dig Further

Family Dollar posted a 3.2% increase in revenue to $2,499.7 million from the prior-year quarter, and reflected sales growth across Consumables (up 4.7%) and Seasonal & Electronics (up 1.2%), partially offset by Home Products (down 0.8%) and Apparel and Accessories (down 3.7%). However, total revenue fell short of the Zacks Consensus Estimate of $2,504 million.

The strength witnessed in the Consumables category came on the back of robust growth across refrigerated and frozen food, health aids, 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 going from one shop to another to grab the best deal, with their primary focus being on consumables. The sales in the quarter were driven by the lower-margin Consumables category, which now accounts for 75% of first-quarter fiscal 2014 sales compared with 74% in the prior-year quarter.

Gross profit jumped 3.6% to $856.8 million, whereas gross margin expanded 20 basis points to 34.3%. Higher markups and lower freight charges were partly offset by lower-margin carrying consumables items, increase markdowns and rise in inventory shrinkage. Management anticipates gross margin to remain flat during fiscal 2014.

Family Dollar stated that operating profit for the quarter came in at $120.3 million down 5.2% year-over-year, while operating margin contracted 40 basis points to 4.8%.

Other Financial Details

Family Dollar ended the quarter with cash and cash equivalents of $170.5 million, total long-term debt of $500.3 million, reflecting a total debt-to-capitalization ratio of 24.5%, and shareholders' equity of $1,538.9 million. Capital expenditures for the quarter were $112.5 million. Management now anticipates capital expenditures between $450 and $500 million for fiscal 2014.

During the quarter, Family Dollar bought back approximately 1.8 million shares for an aggregate amount of $125 million. As of Nov 30, 2013, the company still had $245.8 million at its disposal under its share repurchase authorization. In fiscal 2014, management plans to repurchase shares worth approximately $250 million.

Stores Update

During the quarter, Family Dollar opened 126 new outlets and closed 1 store taking the total store count to 8,041. The company also renovated, expanded, or relocated 179 stores. In fiscal 2014, the retailer plans to open about 525 new stores and close 80 stores.

Strolling Through Guidance

Management took a cautious stance while providing guidance for fiscal 2014. Family Dollar now projects earnings in the band of 85 cents to 95 cents a share for the second quarter and between $3.25 and $3.55 per share for fiscal 2014. Earlier, the company had projected earnings in the range of $3.80 to $4.15.

The current Zacks Consensus Estimates for the second quarter and fiscal 2014 are $1.21 and $3.99 per share, respectively. We could witness a downward trend in the Zacks Consensus Estimate in the coming days, given the trimmed outlook.

For fiscal 2014, management forecasts a low to mid-single digit growth in total net sales but a low-single digit decline in comparable-store sales. Comps are expected to decline in the low-single digit range during the second quarter.

Closing Comment

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 target consumers.

Other stock worth considering in the retail industry, include The TJX Companies, Inc. ( TJX ), Macy's Inc. ( M ) and Michael Kors ( KORS ), all of which hold Zacks Rank #2 (Buy).

FAMILY DOLLAR (FDO): Free Stock Analysis Report

MICHAEL KORS (KORS): Free Stock Analysis Report

MACYS INC (M): Free Stock Analysis Report

TJX COS INC NEW (TJX): 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 Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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