Family Dollar Stores Inc. (FDO), the operator of self-service retail discount store chains, recently posted second-quarter 2011 results.
Street analysts had nearly a week to ponder on the news. In the subsequent paragraphs, we will cover the recent earnings announcement, subsequent analysts’ estimate revisions as well as the Zacks Rank and long-term recommendation on the stock.
Earnings Report Review
Family dollar’s quarterly earnings of 98 cents a share was in line with the Zacks Consensus Estimate, but climbed 21% from 81 cents earned in the prior-year quarter due to healthy sales witnessed in the Consumable and Seasonal categories.
Management now expects third-quarter 2011 earnings between 92 cents and 97 cents, and fiscal 2011 earnings in the range of $3.13 and $3.23.
The company posted an increase of 8.3% 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.
(Read our full coverage on this earnings report: Family Dollar Reports In Line)
Agreement of Estimate Revisions
Clearly, a positive sentiment is palpable among analysts, following the earnings release. In the last 7 days, 7 out of the 23 analysts covering the stock increased their estimates while 2 lowered the estimate for third-quarter 2011. For fourth-quarter 2011, 10 analysts revised their estimates in the upward direction, while 2 analysts chopped their estimates in the last 7 days.
For fiscal 2011, 11 analysts have increased their estimates in the last 7 days, while none lowered the projection. For fiscal 2012, 11 analysts revised their estimate in the upward direction, while 2 lowered the estimate.
Magnitude of Estimate Revisions
In the last 7 days, the Zacks Consensus Estimate for fiscal 2011 went up by 5 cents to $3.17, and for fiscal 2012, it inched up 2 cents to $3.62 per share.
For the third and fourth-quarter of 2011, the Zacks Consensus Estimate inched up by 2 cents to 96 cents and 65 cents a share, respectively, in the last 7 days.
The current Zacks Consensus for third-quarter 2011 is pegged from a low of 93 cents to a high of 97 cents. For fiscal 2011, the estimates range from $3.12 to $3.21.
Our View
We believe that there is a tremendous opportunity for Family Dollar 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, the company 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.
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, 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.
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.
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/
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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