Family Dollar's Top- And Bottom-Line Growth Beats The Street

| About: Family Dollar (FDO)

Amid the global economic turmoil, Family Dollar Stores Inc. (NYSE:FDO) posted better-than-expected fourth-quarter 2011 results. The quarterly earnings of 66 cents a share outpaced the Zacks Consensus Estimate of 64 cents, and jumped 17.9% from 56 cents earned in the prior-year quarter on the heels of healthy sales witnessed in the Consumables, and Seasonal and Electronics categories.

The company had earlier guided earnings in the range of 62 cents to 70 cents for the quarter under review. Management now expects first-quarter 2012 earnings between 65 cents and 73 cents, and fiscal 2012 earnings between $3.50 and $3.75.

The current Zacks Consensus Estimates for the first quarter and fiscal 2012 are 66 cents and $3.59 per share, respectively. Following better-than-expected results a positive sentiment may be palpable among the analysts and we could witness a rise in the Zacks Consensus Estimates in the coming days with analysts tweaking their estimates to better align with management’s guidance range.

We observe that Family Dollar’s strategic initiatives to improve merchandising and store operations have helped grow the top and bottom lines. The company now plans to open 50% more stores in fiscal 2012 compared with the prior-year.

Let’s Dig Deep

The operator of self-service retail discount store chains posted a 9.1% increase in revenue to $2,134.3 million from the prior-year quarter, and reflected sales growth across Consumables categories (up 12%), Seasonal and Electronics (up 9.2%), Apparel and Accessories (up 0.5%) and Home Products (up 0.1%). Total revenue also came ahead of the Zacks Consensus Estimate of $2,122 million.

Family Dollar, which faces stiff competition from Wal-Mart Stores Inc. (NYSE:WMT) and Dollar General Corporation (NYSE:DG), forecasts fiscal 2012 net sales to jump by 8% to 10%. We believe effective price and inventory management, private label offering, expanded operating hours and merchandise initiatives should drive sales.

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 incomes are now prioritizing their purchases and looking for low-priced options. The company trades in merchandise generally priced under $10.

Based in Matthews, North Carolina, Family Dollar hinted that comparable-stores sales are on the rise due to improved traffic counts and increase in average consumer transaction values. Increased focus on consumables helped Family Dollar to drive business from budget-constrained consumers. Comps jumped to 5.6% in the quarter under review. Management predicts both first quarter and fiscal 2012 comps to rise between 4% and 6%.

Gross margin contracted 70 basis points to 34%, whereas operating margin expanded 30 basis points to 6.2%. Management expects operating margin to increase moderately in fiscal 2012.

Other Financial Details

Family Dollar ended the quarter with cash and cash equivalents of $141.4 million, total long-term debt of $548.6 million and shareholders’ equity of $1,087.1 million. Capital expenditures for fiscal 2011 were $345.3 million. Management expects capital expenditures for fiscal 2012 between $550 and $600 million.

During fiscal 2011, the company repurchased 13.9 million shares, aggregating approximately $670.5 million. As of August 27, 2011, the company still has $87.3 million at its disposal under its share repurchase program. Family Dollar’s Board of Directors approved plans to repurchase an additional $250 million worth of shares in fiscal 2012.

Stores Update

During fiscal 2011, Family Dollar opened 300 stores and closed 62 stores, taking the total store count to 7,023. The company also bought 44 stores and renovated, expanded or relocated 1,019 stores in fiscal 2011. During the upcoming fiscal year, the retailer plans to open about 450 to 500 new stores and close 80 to 100 stores.

Our Take

Going by the pulse of the economy, we believe that consumers will remain cautious on their spending this holiday season, and thereby we could see more competitive pricing and new products to attract shoppers. We believe that retailing companies will leave no stone unturned to win the hearts of bargain-hunters, and it definitely remains a wait-and-watch story as to who emerges successful in wooing consumers in this distressed economy.

Currently, we maintain our long-term Neutral rating on the stock. Furthermore, Family Dollar shares maintain a Zacks #3 Rank that translates into a short-term Hold recommendation that correlates with our long-term view.