Estimates have been rising for Family Dollar Stores, Inc. (FDO) after the company reported better than expected results for its fiscal fourth quarter. Same-store sales rose a solid 5.6% while EPS jumped 18% year-over-year.
Management issued bullish guidance for its fiscal 2012, prompting analysts to raise their estimates and sending the stock to a Zacks #2 Rank (Buy).
Much like other deep discount retailers, Family Dollar has seen strong sales and EPS growth over the last few years as consumers “trade down” to their stores looking for bargains. Considering all of the economic headwinds, this trend could very well continue for quite some time.
Analysts agree. Based on consensus estimates, analysts project 17% EPS growth this year and 16% next year. On top of this growth, the company pays a dividend that yields 1.3%.
Family Dollar operates more than 7,000 discount stores across 44 states.
Fourth Quarter Results
Family Dollar reported better than expected results for the fourth quarter of its fiscal year 2011. Earnings per share came in at 66 cents, beating the Zacks Consensus Estimate by 2 cents. It was a stellar 18% increase over the same quarter in 2010.
Net sales rose 9% to $2.134 billion, slightly ahead of the Zacks Consensus Estimate of $2.122 billion. Same-store sales rose a solid 5.6% for the quarter and 5.5% for the year.
The gross margin did decline, however, from 34.7% of sales to 34.0%. This was due in large part to stronger sales of lower-margin consumables. This was more than offset by the leveraging of its selling, general and administrative expenses which declined 100 basis points to 27.8%.
Meanwhile, the operating margin expanded from 5.9% to 6.9% of net sales in Q4.
Outlook
Management issued guidance for 2012 following a strong Q4. The company expects earnings per share between $3.50 and $3.75 on net sales growth of 8-10%.
This prompted analysts to raise their estimates, sending the stock to a Zacks #2 Rank (Buy). The Zacks Consensus Estimate for 2012 is now $3.64, within guidance and representing a 17% increase over 2011 EPS.
The 2013 consensus estimate rose to $4.21, corresponding with 16% EPS growth.
Discount retailers like Family Dollar should continue to see strong same-store sales growth as the economy sputters along. With the unemployment rate north of 9.0%, falling home prices and rising food and energy prices, U.S. consumers will likely continue to hunt for bargains, driving strong sales and EPS growth for at least the next few years.
Returning Value to Shareholders
Family Dollar generates strong free cash flow and has been returning value to shareholders through stock buybacks and dividend hikes. In 2011, the company spent approximately $670 million repurchasing 13.9 million shares while increasing its annual dividend by 16%.
Since 2000, the company has raised its dividend at an average annual rate of 11%:
It currently yields 1.3%.
Reasonable Valuation
Valuation looks reasonable for FDO. Shares trade at 16.2x 2012 earnings, a discount to the industry average of 18.3x. Its price to sales ratio of 0.8 is in-line with the group.
It sports a PEG ratio of 1.15 based on a 5-year projected EPS growth rate of 14.0%.
The Bottom Line
With favorable industry tailwinds, rising earnings estimates, strong growth projections and shareholder-friendly management, Family Dollar looks like a good value.
Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.
