Family Dollar Stores Inc.’s (FDO) strategic initiatives to improve merchandising, marketing and store operations have resulted in sustained growth in the top and bottom lines. Management now expects a growth of 8% to 10% in net sales, 5% to 7% in comparable-store sales and 19.5% to 23.3% in earnings per share for fiscal 2011.
We believe there is a tremendous opportunity to increase sales and improve gross margin through effective price management, cost containment, tighter inventory control, private label offering, expanded operating hours and merchandise initiatives. Moreover, in order to enhance its market share Family Dollar intends to focus on both consumable and discretionary categories.
The company’s point-of-sale technology (credit card and food stamp acceptance) and store realignment initiatives better positions it to drive traffic, meet customer oriented demand and improve in-store shopping experience.
Family Dollar offers general merchandise in four categories––consumables, home products, apparel and accessories, and seasonal and electronics––and sells merchandise at prices between under $1 and $10.
All these initiatives helped Family Dollar to post healthy second-quarter 2011 results. The quarterly earnings came in line with the Zacks Consensus Estimate but jumped 21% from the prior-year quarter, whereas net sales climbed 8.3% with comparable-store sales rising 5.1% driven by robust performance at consumable and seasonal categories.
North Carolina based, Family Dollar, now expects third-quarter 2011 earnings between 92 cents and 97 cents, and fiscal 2011 earnings between $3.13 and $3.23.
The self-service retail discount store chain has also been actively managing its cash flows, returning much of its free cash to shareholders through share repurchases and dividends. 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.
However, 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) may weigh on its results.
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 negatively impact their discretionary spending, and in turn the company’s growth and profitability. Management hinted that gross margin will likely remain under pressure in third-quarter 2011.
Given the pros and cons, we prefer to maintain a long-term ‘Neutral’ rating on the stock. Moreover, Family Dollar holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ 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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