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The discount store Family Dollar Stores, Inc. (FDO) thrived during the recession as cash-strapped consumers were drawn to its low prices. But the company has underperformed Wal-Mart Stores, Inc. (WMT) and Dollar General Corp. (DG) by about 20 percentage points since the start of the year, around the time Family Dollar reported disappointing earnings.

Over the last few years, Dollar Stores have surprised retail giants with its simple but strategy of low operation costs, a targeted customer base, convenient locations and small-box format stores that provide an easier, less stressing shopping experience. While this business has not yet reached its ceiling, growth prospects make it an interesting choice for investors. As a result of this advantage, Dollar Stores have offered a comparable store sales growth, approximately 5% on average since 2010 to date, which was considerably higher than its industry average of just under 3%, for the same period. Recent catalysts for Family Dollar make it an attractive buy, and will drive the stock price higher in the near future.

Recent Positive Catalysts

  1. On Monday, Family Dollar was upgraded by Zacks from an "underperform" rating to a "neutral" rating in a note issued to investors on Monday, Analystratings.net reports. The firm currently has a $64.00 target price on the stock (5% above its current value).
  2. Several initiatives like the roll-out of tobacco, an aggressive remodel campaign and a distribution agreement with McLane generate considerable prospects to narrow the gap, $2.00 of earnings potential per share, with Dollar General. As stated by Credit Suisse, "closing half the gap could add ~30% to earnings, before considering the added benefit from its strong organic store growth."
  3. An ongoing plan to comprehensively renovate, relocate or expand stores is being executed. Family Dollar management stated in the past conference call last week, that by the end of fiscal year 2013, about 60% of the stores will offer customers an enhanced shopping experience. A report by the company found that stores which were remodeled, are currently 10% more profitable than before (and have not lost this performance after cycling the remodel year).
  4. The expansion of food SKUs by 30% in 2012 and HBA SKUs by over 60% represent another important development opportunity, and have already resulted in noticeable improvements in market shares. The likely launch of beer and wine sales in the near future are another element to take into account when evaluating the company's growth potential.
  5. The Wall Street Journal noted that low-income consumers are likely to notice differences in prices for groceries at Family Dollar compared with rival like Supervalu (SVU) which typically doesn't offer discounts that are as big on goods. And while the payroll-tax increase began to hit Americans in early January, the impact could be milder for Family Dollar. With fewer dollars to spend in a week, low-income Americans may skip one big shopping trip to the likes of Wal-Mart in favor of more trips for fewer goods at dollar stores.
  6. The company's stock trades at 14.3 times consensus earnings for the year through February 2014, compared with a multiple of 15.3 times for Dollar General in the year through next January. Just three months ago, it was Family Dollar that fetched a higher multiple. Further, top managers: Leon Cooperman (Omega Advisors), Lee Ainslie (Maverick Capital), and Murray Stahl (Horizons) accumulated Family Dollar at an average price of $64 in the last reported quarter according to the company's 13F form.
Source: Family Dollar's Recent Positive Catalysts