Family Dollar Stores: Earnings Preview

| About: Family Dollar (FDO)
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Family Dollar Stores Inc. (NYSE:FDO), the operator of self-service retail discount store chains and an S&P 500 company, is slated to report its second-quarter 2012 financial results before market opens on March 28, 2012.

The current Zacks Consensus Estimate for the quarter is $1.13 per share, which reflects growth of 15.3% from the prior-year quarter’s earnings. The estimates in the current Zacks Consensus range between a low of $1.08 and a high of $1.16 per share. The Zacks Consensus estimates revenue at $2,461 million for the second quarter.

Recap of First-Quarter 2012

Family Dollar’s quarterly earnings of 68 cents a share, in line with the Zacks Consensus Estimate, jumped 17.2% from 58 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 7.6% increase in revenue to $2,148.3 million from the prior-year quarter, and reflected sales growth across Consumables (up 11.4%) and Seasonal and Electronics (up 5.6%), offset by Apparel and Accessories (down 3.4%) and Home Products (down 2.8%). However, total revenue fell short of the Zacks Consensus Estimate of $2,166 million.

Management Guidance

Based in Matthews, North Carolina, Family Dollar at its last conference call hinted that it expects second-quarter 2012 earnings between $1.10 and $1.18. However, the company reiterated its fiscal 2012 earnings guidance of $3.50 to $3.75.

Zacks Agreement & Magnitude

No movement was noticed in the Zacks Consensus Estimate for the second quarter of 2012, either in the last 7 or 30 days, since 21 analysts covering the stock kept their estimates intact, in the absence of any major news having a direct or an indirect impact on the estimates.

Mixed Earnings Surprise History

With respect to earnings surprises, Family Dollar has missed, met and topped the Zacks Consensus Estimate over the last four quarters in the range of negative 3.19% to positive 3.13%. The average remained at negative 0.03%. This suggests that Family Dollar has missed the Zacks Consensus Estimate by an average of 0.03% in the trailing four quarters.

Family Dollar’s earnings met the Zacks Consensus Estimate in the first quarter of 2012 as well as second quarter of 2011. It topped the Estimate in the fourth quarter of 2011 but missed the same in the third quarter of 2011.

Price Stats

Since its last earnings release on January 5, 2012, Family Dollar’s market price has declined marginally by 0.1% to $57.68 as of March 23, 2012. During trading hours on March 23, the stock reached an intra-day low of $57.03 and intra-day high of $57.75.

The stock price is within the range of the 52-week low-high range of $44.42 attained on August 9, 2011 and $60.53 touched on October 27, 2011. From January 5, 2012 to March 23, 2012, the stock dropped to a low of $53.03 on January 6 and 11, and rose to a high of $58.46 on February 9, 2012.

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.

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.

The economy is still not out of the woods, and consumers will remain cautious on their spending, buying only those things that fulfill their basic needs. Consequently, we could see more competitive pricing and new products attracting shoppers.

A trigger in the price war will definitely eat away margins, which in turn will affect the company’s results. In order to remain competitive, it is better to try out innovative ways to win the hearts of target consumers rather that fading away in an unhealthy contest.

Currently, we maintain our long-term Neutral recommendation on the stock. However, Family Dollar shares maintain a Zacks #4 Rank that translates into a short-term Sell rating.

DOLLAR GENERAL (DG): Free Stock Analysis Report

FAMILY DOLLAR (FDO): Free Stock Analysis Report

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