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Family Dollar Stores Inc. (FDO) reports preliminary financial results for the year ended 2012-08-31.

Family Dollar Stores Inc. recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company.

Family Dollar Stores Inc.'s analysis versus peers uses the following peer-set: Costco Wholesale Corp. (NASDAQ:COST), Target Corp.(NYSE:TGT), Dollar General Corp.(NYSE:DG), Dollar Tree Inc.(NASDAQ:DLTR), Big Lots Inc.(NYSE:BIG) and Fred's Inc.(NASDAQ:FRED). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Annual (USD million)2012-08-312011-08-312010-08-312009-08-312008-08-31
Revenues9,331.08,547.87,867.07,400.66,983.6
Revenue Growth %9.28.76.36.02.2
Net Income422.2388.4358.1291.3233.1
Net Income Growth %8.78.523.025.0(4.0)
Net Margin %4.54.54.63.93.3
ROE %35.431.025.021.619.2
ROA %13.313.012.310.68.8

Valuation Drivers

Family Dollar Stores Inc.'s current Price/Book of 5.9 is about median in its peer group. Family Dollar Stores Inc. 's operating performance is higher than the median of its chosen peers (ROE of 35.4% compared to the peer median ROE of 19.4%) but the market does not seem to expect higher growth relative to peers (PE of 18.5 compared to peer median of 18.5) but simply to maintain its relatively high rates of return.

The company's asset efficiency (asset turns of 2.9x) and net profit margins of 4.5% are both median for its peer group. Family Dollar Stores Inc. 's net margin continues to trend downward but is still within one standard deviation above its five-year average net margin of 4.0%.

Economic Moat

Family Dollar Stores Inc. 's revenues have changed in-line with its peers (year-on-year change in revenues is 9.2%) but its earnings have lagged (annual reported earnings have changed by 8.7% compared to the peer median of 12.2%), implying that the company has less control over its costs relative to its peers. Family Dollar Stores Inc. is currently converting every 1% of change in revenue into 0.9% change in annual reported earnings.

Family Dollar Stores Inc. 's return on assets is above its peer median both in the current period (13.3% vs. peer median 9.1%) and also over the past five years (11.6% vs. peer median 6.1%). This performance suggests that the company's relatively high operating returns are sustainable.

The company's gross margin of 37.2% is around peer median suggesting that Family Dollar Stores Inc. 's operations do not benefit from any differentiating pricing advantage. In addition, Family Dollar Stores Inc. 's pre-tax margin of 7.1% is also around the peer median suggesting no operating cost advantage relative to peers.

Growth & Investment Strategy

Family Dollar Stores Inc. 's revenues have grown at about the same rate as its peers (8.0% vs. 7.0% respectively for the past three years). Similarly, the stock price implies median long-term growth as its PE ratio is around the peer median of 18.5. The historical performance and long-term growth expectations for the company are largely in sync.

Family Dollar Stores Inc. 's annualized rate of change in capital of 3.0% over the past three years is higher than its peer median of 2.0%. This investment has generated an above peer median return on capital of 23.0% averaged over the same three years. Evidently, the relatively high capital investment was successful given the relatively strong growth in its returns.

Earnings Quality

Family Dollar Stores Inc. 's reported net income margin for the last twelve months is around the peer median (4.5% vs. peer median of 4.1%). However, the company has also recorded a relatively low level of accruals (-0.6% vs. peer median of 2.1%) which suggests possible overstatement of its reported net income.

Family Dollar Stores Inc. 's accruals over the last twelve months are around zero. However, this modestly negative level is also less than the peer median which suggests some amount of draining of reserves.

Trend Charts

Company Profile

Family Dollar Stores, Inc. operates general merchandise retail discount stores. Its products are categorized under consumables, home products, apparel and accessories, and seasonal and electronic products. The company has offices in China, Hong Kong, Luxembourg and the United States of America. It was founded by Leon Levine in November 1959 and is headquartered in Matthews, NC.

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Source: Earning Analysis: Family Dollar Stores Inc.