Family Dollar Stores Inc. (FDO) recently posted second-quarter 2011 results. The quarterly earnings of 98 cents a share came in line with the Zacks Consensus Estimate, but jumped 21% from 81 cents earned in the prior-year quarter due to healthy sales witnessed in the Consumable and Seasonal categories.
The company had earlier guided earnings in the range of 97 cents to 98 cents for the quarter under review. The Zacks Consensus Estimate rose by 2 cents prior to the earnings release, resulting from 12 out of 24 analysts covering the stock revising their estimates upwards, and 2 analysts lowering their estimates in the last 30 days.
Management now expects third-quarter 2011 earnings between 92 cents and 97 cents, and fiscal 2011 earnings between $3.13 and $3.23. The current Zacks Consensus Estimates for the third quarter and fiscal 2011 are 94 cents and $3.12 per share.
We could witness a correction in the Zacks Consensus Estimates in the coming days with analysts tweaking their estimates to better align with the company’s guidance range. The shares of Family Dollar climbed 2% or $1.05 to $53.45 in pre-market trading.
We observe that Family Dollar’s strategic initiatives to improve merchandising and store operations have helped grow the top and bottom lines.
Let’s Dig Deep
The operator of self-service retail discount store chains posted an 8.3% increase in revenue to $2,263.2 million from the prior-year quarter, and reflected sales growth registered across Consumables categories (up 10.7%), Seasonal and Electronics (up 8%), Home Products (up 3%), and Apparel and Accessories (up 2.1%). Total revenue also came in line with the Zacks Consensus Estimate.
Family Dollar, which faces stiff competition from Wal-Mart Stores Inc. (WMT) and Dollar General Corporation (DG), forecasts fiscal 2011 net sales to jump by 8% to 10%. We believe effective price and inventory management, private label offering, expanded operating hours and merchandise initiatives should drive sales trends.
Gross margin expanded 30 basis points to 35.7%, whereas operating margin increased 20 basis points to 8.9%. Management expects operating margin to increase moderately in fiscal 2011. The jump in gross margin was due to reduced inventory shrinkage, which fully offset the increase in freight expense.
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 income 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 due to improved traffic counts. Comps jumped to 5.1% in the quarter under review. Management predicts third quarter and fiscal 2011 comps to rise between 5% and 7%.
Other Financial Details
Family Dollar ended the quarter with cash and cash equivalents of $195.4 million, total long-term debt of $548.5 million and shareholders’ equity of $1,189.8 million. Capital expenditures for six-months were $139 million. Management expects capital expenditures for fiscal 2011 between $300 and $350 million.
During the first-six months of fiscal 2011, the company repurchased 8.9 million shares, aggregating approximately $408 million. The company still has $349.8 million at its disposal under its share repurchase program.
Stores Update
During the first-six months of fiscal 2011, Family Dollar opened 146 stores and closed 43 stores taking the total store count up to 6,888. During fiscal 2011, the retailer plans to open about 300 new stores and close 80 to 100 stores.
Currently, we maintain our long-term Neutral’ rating on the stock. Furthermore, Family Dollar shares maintain a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation.
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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