Family Dollar Earnings Preview

Jul.10.14 | About: Family Dollar (FDO)

By Bob Cramer

Family Dollar Stores Inc. (NYSE:FDO), a variety store chain in the United States with up to 8,100 stores, will announce its third-quarter (3Q) financial results on July 10 before stock markets open. The second-largest discount retailer of its type will also discuss potential business initiatives and its outlook for fiscal 2014 (FY14).

Earnings for 3QFY14 are expected to be $0.89 per share, 15.24% lower than last year. Sales are expected to increase 1.55% year-over-year to $2.61 billion.

The earnings are expected to fall despite an increase in sales due to the company's restructuring initiatives. Moreover, the steps to cut prices and boost promotional activities will likely contract profit margins.

Family Dollar has missed analysts' consensus earnings estimate for two consecutive quarters, with last quarter's earnings missing estimates by 10.61%. The company has missed sales projections for the last three quarters, with sales 1.81% lower than expectations last quarter.

The management is planning to shut down approximately 370 stores that are underperforming. This will negatively impact the bottom line in the short term, as the company will incur costs to close its stores. Family Dollar lowered the prices of about a thousand products, which also affected profits. The margins are shrinking, and need to be covered by greater sales volume. Analysts project the company's gross margins will contract about 25 basis points to 34.4% in 3QFY14.

Family Dollar's strategies related to strategic price investments and merchandising initiatives will eventually support the company's top-line growth in the long run by attracting more customers. However, these strategies will adversely impact earnings growth in the ongoing quarter. These strategies include the introduction of "every day low prices" and increased promotional expenditure. Analysts subsequently reduced their estimates for 3QFY14 gross margins.

FDO has returned 9.6% in the last three months, outperforming Dollar General Corp. (NYSE:DG), which yielded 3.43%, and Dollar Tree, Inc. (NASDAQ:DLTR), which rose 8.36%. Family Dollar increased after billionaire activist investor Carl Icahn, along with his affiliates, bought a 9.4% stake in the company for nearly $265.8 million, which made him the largest stakeholder in the consumer goods retailer. The stock is up about 6.4% since the news broke.

The company's earning guidance for this quarter is $0.85-0.95, with analysts' consensus estimate just falling short of the midpoint of the guidance. Family Dollar has cut annual earnings guidance for the past two quarters.

In the last five years, Family Dollar stock has traded at a premium of 10.6% to the S&P 500 General Merchandising Stores Index. However, it is currently trading 21.9% higher than the index, with a forward price-to-earnings (P/E) multiple of 19.2x. If the company continues to cut its annual guidance, or if its guidance for 4QFY14 falls below analysts' estimates, its stock price can tank.

Disclosure: No positions