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 17.6% to 23.3% in earnings per share for fiscal 2011.
We believe there is a tremendous opportunity to increase sales and 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 from under $1 to $10.
All these initiatives helped Family Dollar to post healthy second-quarter 2011 sales results. The company’s net sales climbed 8.3% with comparable-store sales rising 5.1% driven by robust performance at consumable and seasonal categories. Buoyed by healthy sales results, Family Dollar raised its second-quarter 2011 earnings guidance.
North Carolina, based company, Family Dollar now expects earnings in the range of 97 cents to 98 cents a share for the second quarter of fiscal 2011 compared with its previous guidance of 92 cents to 97 cents.
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 ofWal-Mart Stores Inc. (WMT) and Dollar General Corporation (DG) will likely continue to 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.
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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