Family Dollar Earnings Preview

| About: Family Dollar (FDO)

Family Dollar Stores Inc. (NYSE:FDO), the operator of self-service retail discount store chains, is slated to report its first-quarter 2012 financial results on January 5. The current Zacks Consensus Estimate for the quarter is 67 cents a share. The Zacks Consensus estimates revenue at $2,165 million.

Fourth-Quarter 2011, a Synopsis

Amid the global economic turmoil, Family Dollar 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 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 in ahead of the Zacks Consensus Estimate of $2,122 million.

Management Guided

Based in Matthews, North Carolina, Family Dollar at its last conference call hinted that it expects first-quarter 2012 earnings between 65 cents and 73 cents, and fiscal 2012 earnings between $3.50 and $3.75.

First-Quarter 2012 Zacks Consensus

The analysts considered by Zacks, expect Family Dollar to post first-quarter 2012 earnings of 67 cents a share. The current Zacks Consensus Estimate reflects a growth of 15.5% from the prior-year quarter’s earnings. The current Zacks Consensus Estimate for the quarter ranges between 65 cents and 70 cents.

Zacks Agreement & Magnitude

Of the 20 analysts following the stock, only 1 analyst revised the estimate downward, while none of them revised the same upward in the last 30 days, keeping the Zacks Consensus Estimate constant at 67 cents. In the last 7 days, none of the analysts revisited their estimates, thereby keeping the Zacks Consensus Estimate unchanged.

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 3.1%. The average remained at negative 1.7%. This suggests that Family Dollar has missed the Zacks Consensus Estimate by an average of 1.7% in the trailing four quarters.

Price Stats

Since its last earnings release on September 28, 2011, Family Dollar’s market price increased 8.5% to $57.66 as of December 30, 2011. During trading hours on December 30, the stock reached the day low of $57.65 and the day high of $58.31. The stock price is within the range of the 52-week low-high range of $41.31 attained on February 2, 2011 and $60.53 achieved on October 27, 2011. From September 28, 2011 to December 30, 2011, the stock dropped to a low of $49.17 on October 4, 2011 and rose to a high of $60.53 on October 27, 2011.

Family Dollar in Neutral Lane

Family Dollar’s strategic initiatives to improve 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 12.2% to 20.2% in earnings per share in fiscal 2012.

We believe there is a tremendous opportunity to increase sales and gross margin through effective price management, cost containment, tighter inventory control, private label offering, expanded operating hours and merchandise initiatives. Moreover, in order to enhance its market share Family Dollar intends to focus on both consumable and discretionary categories.

Family Dollar offers general merchandise in four categories––consumables, home products, apparel and accessories, and seasonal and electronics––and sells merchandise at prices from under $1 to $10.

The company has also been actively managing its cash flows, returning much of its free cash to shareholders through share repurchases and dividends. Its prudent investments related to store infrastructure; store openings, expansions and relocations; and improvement of distribution centers to drive revenue growth are also impressive.

However, Family Dollar operates in the highly competitive discount retail merchandise sector. Peer pressure from the likes of Wal-Mart Stores Inc. (NYSE:WMT) and Dollar General Corporation (NYSE:DG) will likely continue to 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.

Given the pros and cons, we prefer to maintain a long-term ‘Neutral’ rating on the stock. Moreover, Family Dollar holds a Zacks #3 Rank that translates into a short-term ‘Hold’ rating and correlates with our long-term view. A fragile job market and aggravated economic turmoil may take a toll on the stock.

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