Family Dollar (FDO) was beaten up pretty badly yesterday for not meeting the expectations of the market with its latest earnings report (see conference call transcript here). A nationwide chain of discount stores in over 40 states and over 6800 locations, it does help give us a pulse of how the American consumer is doing. As such, it is an important stock to watch in order to get a relative idea of what to expect with others such as Wal-Mart (WMT), Dollar General (DG) and to a limited amount, higher end stores.
After earnings were reported, FDO closed down almost 9% for the day. Not a real good result for a company that saw a bottom line improvement of over 9% in the same quarter last year. The top line was about the same with a 9% improvement over last year same period.
FDO increased the sales of food products, which I find interesting; I wonder how much of those food sales where taken away from places like A&P, which filed for bankruptcy about a month ago. Perhaps some food sales are being taken away from WMT superstores? I think it will be valuable to keep a close watch on how this plays out and how well FDO can continue to execute the ability to sell food products. In my opinion, food sales is a net zero game with gains in sales meaning losses in sales from others. The only other way to increase the market share is if there are more people eating or simply more people.
FDO plans on having a net increase in stores next year of about 200 stores. This again does not seem like the reporting of a company that just lost over 9% of its value - although its competitor Dollar General plans on opening a lot more stores, and perhaps the market is pricing in the increased stores, thus putting pressure on earnings growth. One thing is clear: the market was pricing in a much longer growth period for the discount stores and yesterday those expectations were not met even though many companies would have loved to be able to report and guide the same. It is not uncommon, though, for companies to lose 15% of value after lowering guidance and FDO did commit the half sin of lowering the top end of the guidance. I did consider going long FDO via selling some put options, but the implied volatility was much lower than I expected. This means that the market is not pricing in any over sized moves in the price going forward. I found this very interesting and considered buying calls, but feel it's a bit early and I could just as easily buy the stock if I am not going to collect a time premium.
I am going to watch FDO in the next few days and if it does sell off into the 42.85 price range, which is the 200 day moving average or lower, I will consider the stock to be oversold and start going long. I would expect that the option premium will have moved higher due to the continued fall and then look to sell puts or do covered calls. FDO has over twice the amount of cash needed to become debt free, which I like in a stock that I may hold for the long term. With a forward PE of way under 20 and a dividend yield now over 1%, this could turn into a real nice stock to hold.