Why Family Dollar Is Still A Good Investment On Its Own

| About: Family Dollar (FDO)
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Summary

Dollar General and Dollar Tree are engaged in a fight over Family Dollar, but the company still remains a good standalone investment.

Since Family Dollar has worked on decreasing the prices of its goods, it should benefit from improving consumer confidence.

Family Dollar is focused on improving productivity in its stores, apart from building a strong network to serve more customers.

The dollar store space has heated up in recent months. On one hand, Dollar General (NYSE:DG) is intent on acquiring Family Dollar Stores (NYSE:FDO), while on the other Dollar Tree (NASDAQ:DLTR) is looking to merge with Family Dollar. Dollar General has put forward an offer of $80 per share for Family Dollar, while Dollar Tree has an offer of $74.50 per share. It is still not clear which way Family Dollar will go, and there will be more clarity once investors vote regarding the Dollar Tree offer on Dec. 23.

But one thing is quite clear; whichever way Family Dollar goes, it will add value to the acquirer. Additionally, even if Family Dollar remains as an independent company, it will still be a good investment. Let's see why.

Focus on lowering prices and productivity

Consumer confidence in the U.S. is rising. According to a Reuters report, "The Thomson Reuters/University of Michigan's final November reading on the overall index on consumer sentiment came in at 88.8, its highest reading since July 2007 on a final basis. The reading was up from the 86.9 the month before but slightly below the preliminary reading of 89.4." However, the fact the no one ignores a bargain deal needs to be kept in mind. As such, Family Dollar's investments to keep the prices of its products low will come in handy going forward.

The company has invested over $50 million on an annualized basis this year in order to reduce prices of almost 1,000 basic items in order to strengthen its value proposition. In fact, this move alone is expected to generate mid-single digit expansion in unit sales going forward. On the other hand, Family Dollar is also making its business more efficient by closing underperforming stores and cutting the workforce, a move that will result in $40 million-$45 million in savings.

A smart store strategy

Moreover, in order to ensure that its low prices reach a strong customer base, Family Dollar has been investing aggressively in its stores. It plans to open 375 new stores next year, and has already opened 526 new ones this year. Moreover, the company is also refreshing the format of its stores. For example, in 2014, it has remodeled 738 stores. Now, these remodels will play a key role in helping the company improve its performance in the long run and counter the competition. The new store formats are aimed at decreasing costs by enhancing process efficiencies. Further, by refining the store layout, the remodeled stores can deliver improved productivity.

The company is also leveraging technology in order to improve store performance. By enhancing its point of sale program to more than 1,100 stores, Family Dollar should be able to increase its efficiency further. Moreover, the company has integrated its voice data and security monitoring systems, and this has lowered costs by integrating bandwidth, better voice, reliable security services, and improved wireless network connection.

The home improvement market will be another catalyst

Additionally, the company is also focusing on enhancing its assortments, especially in the home segment. This is another probable catalyst for the company, as the home improvement market is growing at a good pace. According to a Harvard report:

"Growth in home remodeling activity continues to hover around its longer-term average of mid-single digit gains," says Abbe Will, a research analyst in the Remodeling Futures Program at the Joint Center. "Even though the housing market overall has been lackluster, many areas of the country remain economically healthy and remodeling contractor sentiment remains high."

By making modifications to its household area, the company can push sales of higher value items. Family Dollar's focus on bedding and home decor products, along with window treatments will help it benefit from a robust home improvement market.

Conclusion

Hence, it is clear that Family Dollar will bring value to the company that acquires it. But, even if shareholders reject the potential deals, the company looks like a good investment on its own. Hence, even though Family Dollar shares have gained 22% this year, the stock still looks like a good investment.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.