Family Dollar Store: Earnings Preview

| About: Family Dollar (FDO)

Family Dollar Stores Inc. (NYSE:FDO), the operator of the self-service retail discount store chain, is slated to report its second-quarter 2011 financial results before the bell on Wednesday, March 30, 2011. The current Zacks Consensus Estimate for the quarter is 98 cents a share. For the quarter to be reported, the Zacks Consensus Estimate for revenue is $2,263 million.

First-Quarter 2011, a Synopsis

Family Dollar posted lower-than-expected first-quarter 2011 results. The quarterly earnings of 58 cents a share missed the Zacks Consensus Estimate of 61 cents, but jumped 18.4% from 49 cents earned in the prior-year quarter due to healthy sales witnessed in the Consumables category.

The company posted a 9.5% year-on-year increase in revenue to $1,996.9 million, which came ahead of the Zacks Consensus Estimate of $1,986 million, and reflects sales growth across Consumables (up 10.9%), Home Products (up 7.5%), Seasonal and Electronics (up 6.6%), and Apparel and Accessories (up 5.8%).

Management Guided

Family Dollar expects earnings to be in the range of 97 cents to 98 cents for the second quarter and between $3.08 and $3.23 per share for fiscal 2011.

Second-Quarter 2011 Zacks Consensus

The analysts considered by Zacks, expect Family Dollar to post second-quarter 2011 earnings of 98 cents a share. The current Zacks Consensus Estimate reflects a growth of 21% from the prior-year quarter’s earnings. The current Zacks Consensus Estimate for the quarter ranges between 97 cents and 98 cents.

Zacks Agreement & Magnitude

Of the 24 analysts following the stock, 12 analysts have raised their projections, whereas 2 analysts lowered their estimates in the last 30 days, which resulted in an increase of 2 cents in the Zacks Consensus Estimate. In the last 7 days, none of the analysts revisited their estimates keeping the Zacks Consensus Estimate unchanged at 98 cents.

Mixed Earnings Surprise History

With respect to earnings surprises, Family Dollar has missed as well as topped the Zacks Consensus Estimate over the last four quarters in the range of negative 4.9% to positive 9.8%. The average remained at positive 2.5%. This suggests that Family Dollar has beaten the Zacks Consensus Estimate by an average of 2.5% in the trailing four quarters.

Family Dollar Balances Risk-Reward

Family Dollar’s strategic initiatives to improve the merchandising, marketing and store operations have resulted in sustained growth in the top and bottom lines. Management now expects a growth of 8% to 10% in net sales and an increase of 17.6% to 23.3% in earnings per share in fiscal 2011.

The effective price management, cost containment, tighter inventory control, private label offering, expanded operating hours and recent merchandise initiatives should drive sales and margin trends. Moreover, in order to enhance the market share Family Dollar intends to focus on both consumable and discretionary categories.

The company’s point-of-sale technology and store realignment initiatives better position it to drive traffic, meet customer-oriented demand and improve in-store shopping experience. Consumers with lower disposable income have been prioritizing their purchases and looking for low-priced options. The company trades in merchandise generally priced under $10.

However, Family Dollar operates in the highly competitive discount retail merchandise sector. The company faces stiff competition from Wal-Mart Stores Inc. (NYSE:WMT) and Dollar General Corporation (NYSE:DG), which may weigh on its results.

Moreover, 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.

Currently, we maintain our long-term Neutral rating on the stock. Further, Family Dollar shares maintain a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation.