Family Dollar Misses on Bottom-Line - Analyst Blog

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Family Dollar Stores Inc. ( FDO ), the operator of self-service retail discount store chains, posted lower-than-expected first-quarter fiscal 2013 results and trimmed its earnings outlook. The quarterly earnings of 69 cents a share missed the Zacks Consensus Estimate of 74 cents but inched up 1.5% from 68 cents earned in the prior-year quarter.

The earnings came in at the lower-end of the previously provided guidance range of 69 cents to 78 cents due to gross margin pressure coupled with anticipated headwinds related to insurance expenditure. Shares of Family Dollar fell 9% or $5.79 to $58.25 during pre-market trading hours.

Let's Dig Further

Family Dollar posted a 12.7% increase in revenue to $2,421.7 million from the prior-year quarter, and reflected sales growth across Consumables (up 18.5%) and Seasonal & Electronics (up 2.7%) partially mitigated by Apparel and Accessories (down 4.4%) and Home Products (down 1.5%). Total revenue also came ahead of the Zacks Consensus Estimate of $2,383 million. The strength witnessed in the Consumables category came on the back of robust growth across tobacco, food and health, and beauty aids.

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. The company trades in merchandise generally priced under $10.

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-constrained consumers. Comps jumped 6.6% in the quarter compared with a growth of 4.1% in the prior-year quarter.

The sales in the quarter were driven by the lower-margin Consumables category, which now accounts for 73.9% of first-quarter fiscal 2013 sales compared with 70.3% in the prior-year quarter. Consequently, the increase in sales of lower margin merchandises weighed upon the company's gross margin that contracted approximately 120 basis points to 34.1% during the quarter under review. Increased discounts and 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, and added that holiday season appeared much tough than actually thought of. The company's December comparable-store sales rose approximately 2.5% on the back of double-digit sales in consumable items.

Other Financial Details

Family Dollar ended the quarter with cash and cash equivalents of $112.3 million, total long-term debt of $516.4 million, reflecting a total debt-to-capitalization ratio of 27.6%, and shareholders' equity of $1,352.6 million. Capital expenditures for the quarter were $196.4 million. Management now anticipates capital expenditures between $600 and $650 million for fiscal 2013.

During the quarter, the company repurchased about 0.4 million shares, aggregating approximately $25 million and paid $24.2 million in dividends. As of November 24, 2012, the company still had $120.8 million at its disposal under its share repurchase program.

Stores Update

During the quarter, Family Dollar opened 125 new outlets and closed 1 location taking the total store count to 7,566. The company also renovated, expanded, or relocated 169 stores. Through fiscal 2013, the retailer plans to open about 500 new stores and close 70 to 90 stores.

Strolling Through Guidance

Management now expects earnings between $1.18 and $1.28 for the second quarter and in the band of $3.95 to $4.20 per share for fiscal 2013. The company had earlier forecasted fiscal 2013 earnings between $4.10 and $4.40 per share. The current Zacks Consensus Estimates for the second quarter and fiscal 2013 are $1.39 and $4.25 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 projects second quarter comparable-store sales growth in the range of 4% to 5% and fiscal 2013 comparable-store sales to increase between 4% and 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.

Currently, we have a long-term Outperform recommendation on the stock. Moreover, Family Dollar, which competes with Wal-Mart Stores Inc. ( WMT ) and Dollar General Corporation ( DG ), 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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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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