We have recently initiated coverage on Family Dollar Stores Inc. (FDO), a self-service retail discount store chain, with a Neutral recommendation and a target price of $29.00, as we anticipate it to perform in line with the industry.
Headquartered in Matthews, North Carolina, 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.
Despite a challenging macro environment, the company’s strategic initiatives to improve the merchandising, marketing, and store operations have resulted in sustained growth in the top and bottom lines. Management now expects a growth of 5% to 7% in net sales, 3% to 5% in comparable-store sales and 3.9% to 13.5% in earnings per share in fiscal year 2010.
We believe there is a tremendous opportunity to increase gross margin through renewed effort on the store brand portfolio. Family Dollar’s point-of-sale technology and store realignment initiatives position it to drive traffic, meet customer demand and improve in-store shopping experience.
However, intense competition from other established players such as Wal-Mart Stores Inc. (WMT) and shift in demand to lower margin consumable merchandise categories triggered by the economic downturn will play spoiler.
Consequently, Family Dollar’s first-quarter 2010 sales underachieved the guidance. Although comparable store-sales for the quarter rose 2.4%, a jump of 30 basis points year-over-year, it remained below its guidance of 3% to 5%. The volatility in sales trend and the financial distress continue to adversely affect sales.
Family Dollar currently operates a chain of more than 6,600 general merchandise retail discount stores in 44 states and the District of Columbia.
Read the full analyst report on “FDO”
Read the full analyst report on “WMT”
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