Earnings Scorecard – Family Dollar - Analyst Blog

Family Dollar Stores Inc. (FDO), the operator of the self-service retail discount store chain, posted fourth-quarter 2010 results on September 29, 2010 that outpaced the Zacks Consensus Estimate on the heels of healthy sales witnessed in the Consumables categories.

Street analysts had nearly a week to digest the news. In the paragraphs that follow, we cover the recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for the short-term and long-term outlook for the stock.

Earnings Report Review

Family Dollar’s quarterly earnings of 56 cents a share surpassed the Zacks Consensus Estimate of 51 cents, and jumped 30.2% from 43 cents earned in the prior-year quarter.

The company posted an 8% year-over-year increase in revenues to $1,956.8 million, which remained in line with the Zacks Consensus Estimate, and reflects sales growth registered across Consumables (up 9.8%), Seasonal and Electronics (up 5.7%), Home Products (up 4.9%) and Apparel and Accessories (up 3%).

Based in Matthews, North Carolina , Family Dollar hinted that comparable-stores sales are on the rise due to improved traffic counts. Comps jumped to 6.1% in the quarter under review.

Management Guided

Management now expects first-quarter 2011 earnings between 55 cents and 60 cents, and fiscal 2011 earnings between $2.95 and $3.15 per share. Family Dollar forecast fiscal 2011 sales to jump by 8% to 10%. Management predicts both first-quarter and fiscal 2011 comps to increase by 5% to 7%.

(Read our full coverage on this earnings report: Family Dollar Outperforms

Agreement of Estimate Revisions

Clearly, a positive sentiment is palpable among analysts, who remain optimistic about Family Dollar’s performance. Following the earnings release, the Zacks Consensus Estimate has been on the rise with analysts remaining bullish on the stock. The healthy earnings and sales outlook has bolstered analysts’ confidence.

Analysts remain encouraged by the company’s decision to expand its store base by about 300 stores with plans to remodel 600 to 800 stores in fiscal 2011. Moreover, Family Dollar’s share repurchase program of $750 million will also be accretive to earnings. The company also maintains a healthy balance sheet.

In the last 7 days, 7 out of 26 analysts covering the stock have lifted their first-quarter 2011 earnings estimates following better-than-expected results. For the second-quarter 2011, 11 analysts raised their estimates, whereas for fiscal 2011, 22 analysts revised their estimates in the upward direction. In the last 7 days, only one analyst has lowered his estimate for second-quarter 2011.

Magnitude of Estimate Revisions

The magnitude of estimate revisions indicates that the analysts were buoyed by Family Dollar’s healthy fourth-quarter 2010 performance and optimistic outlook. Consequently, the Zacks Consensus Estimate has been rising since the earnings release.

In the last 7 days, the Zacks Consensus Estimate for first-quarter 2011 climbed 3 cents to 60 cents, and for second-quarter 2011 it increased by 4 cents to 98 cents a share. For fiscal 2011, the Estimate jumped 12 cents to $3.08, and for fiscal 2012, the Estimate rose 14 cents to $3.53, in the last 7 days.

The estimates in the current Zacks Consensus for first-quarter 2011 range from a low of 57 cents to a high of 63 cents. For fiscal 2011, the estimates range from $2.85 to $3.27.

Family Dollar Holds Zacks #1 Rank

Family Dollar’s shares maintain a Zacks #1 Rank, which translates into a short-term ‘Strong Buy’ recommendation. Despite an uncertain macro environment, Family Dollar’s strategic initiatives to improve the merchandising, marketing, and store operations have resulted in sustained growth in the top and bottom lines.

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 have been prioritizing their purchases and looking for low-priced options. The company trades in merchandise generally priced under $10.

The effective price management, cost containment, tighter inventory control, private label offering, expanded operating hours and recent merchandise initiatives should drive sales and margin trends. Moreover, in order to enhance its market share, Family Dollar intends to focus on both consumable and discretionary categories.

However, Family Dollar operates in the highly competitive discount retail merchandise sector, and faces stiff competition from Wal-Mart Stores Inc. (WMT) and Dollar General Corporation (DG), which 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 our long-term recommendation for the stock remains ‘Neutral’.

About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/