Family Dollar Misses by a Penny - Analyst Blog

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Family Dollar Stores Inc. ( FDO ), the operator of self-service retail discount store chains, posted lower-than-expected second-quarter fiscal 2013 results citing that the unexpected delay in tax refunds of 2012 adversely impacted sales at the end of January and at the beginning of February.

The quarterly earnings of $1.21 per share missed the Zacks Consensus Estimate by a penny but rose 5.2% from $1.15 earned in the prior-year quarter.

The earnings came in at the lower-end of the previously provided guidance range of $1.18 to $1.28 per share.

Further, management hinted that going forward discretionary sales would remain under pressure because of financial challenges that the customers are facing and due to cold spring weather. Moreover, this Zacks Rank #4 (Sell) stock also trimmed its earnings outlook.

Let's Dig Further

Family Dollar, which competes with Wal-Mart Stores Inc. ( WMT ), Dollar Tree, Inc. ( DLTR ) and Dollar General Corporation ( DG ), posted a 17.7% increase in net sales to $2,894 million from the prior-year quarter, and reflected sales growth across Consumables (up 26.6%), Seasonal & Electronics (up 4.7%) and Apparel and Accessories (up 0.5%), partially mitigated by Home Products (down 1.4%). Total revenue came ahead of the Zacks Consensus Estimate of $2,885 million.

The strength witnessed in the Consumables category came on the back of robust growth across tobacco, food, and health and beauty aids. However, management cautioned that Home and Apparel sales would be lower-than-expected in the second-half of fiscal 2013 due to budget constraints.

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.

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 budget-conscious consumers. Comps jumped 2.9% in the quarter compared with a growth of 5.4% in the prior-year quarter.

The sales in the quarter were driven by the lower-margin Consumables category, which now accounts for 69.5% of second-quarter fiscal 2013 sales compared with 64.6% in the prior-year quarter. Consequently, the increase in sales of lower margin merchandises weighed upon the company's gross margin that contracted approximately 150 basis points to 33.4% during the quarter under review. Higher inventory shrinkage also hurt the margins. For fiscal 2013, management expects gross margin to remain under pressure.

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. Family Dollar stated that people are now becoming more cautious on their discretionary spending.

Other Financial Details

Family Dollar ended the quarter with cash and cash equivalents of $117.8 million, total long-term debt of $516.4 million, reflecting a total debt-to-capitalization ratio of 26.6%, and shareholders' equity of $1,424.7 million. Capital expenditures for the first-half of fiscal 2013 were $409.7 million. Management now anticipates capital expenditures between $650 million and $700 million for fiscal 2013.

During the first-half, the company repurchased about 1.2 million shares, aggregating approximately $75 million and paid $48.5 million in dividends. As of Mar 2, 2013, the company still had $370.8 million at its disposal under its share repurchase program.

Stores Update

During the quarter, Family Dollar opened 126 new outlets and closed 17 locations taking the total store count to 7,675. The company also renovated, expanded, or relocated 159 stores. Through fiscal 2013, the retailer plans to open about 500 new stores and close 30 to 50 stores.

Strolling Through Guidance

Management now expects earnings between 98 cents and $1.08 for the third quarter and in the band of 85 cents to 95 cents a share for the fourth quarter of fiscal 2013. For fiscal 2013, Family Dollar now projects earnings in the range of $3.73 to $3.93 per share. The company had earlier forecasted fiscal 2013 earnings between $3.95 and $4.20 per share.

The current Zacks Consensus Estimates for the third quarter and fiscal 2013 are $1.19 and $3.97 per share, respectively, which lies ahead of the company's guidance range. Consequently, we could witness a correction in the Zacks Consensus Estimates in the coming days.

Management expects that sales of discretionary categories would remain soft in the second-half of fiscal 2013, and anticipates comparable-store sales growth of 2% to 4% with comps in the third quarter forecasted to be at the lower end of the projected range and that of the fourth quarter at the upper end.

For fiscal 2013 comparable-store sales are expected to increase between 3% and 4%. The company had previously forecasted comps in the range of 4% to 6%.

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.

DOLLAR GENERAL (DG): Free Stock Analysis Report

DOLLAR TREE INC (DLTR): Free Stock Analysis Report

FAMILY DOLLAR (FDO): Free Stock Analysis Report

WAL-MART STORES (WMT): 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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