Family Dollar Stores - Long-Term Appeal After The Company Guides For Strong Future Earnings Growth

| About: Family Dollar (FDO)
This article is now exclusive for PRO subscribers.

Shares of Family Dollar Stores (FDO) rose almost 4% in Wednesday's trading session. The operator of a chain of general merchandise retail stores reported its fourth quarter and full year results for 2012.

Fourth Quarter Results

Family Dollar Stores reported fourth quarter revenues of $2.36 billion, up 10.8% on the year. Revenues came in line with analysts' expectations.

Net income for the final quarter came in at $80.9 million, up from $79.8 million compared to last year. Net income per diluted share rose 4.5% to $0.69 per share, as a result of share buybacks. Earnings were impacted by a litigation charge of $0.06 per share. Non-GAAP earnings per share of $0.75 per share, came in line with the company's guidance of $0.71-$0.81 per share, issued in June.

For the full year of its fiscal 2012, the company reported sales of $9.33 billion, up 9.2% on the year. Net income per diluted share rose 14.7% to $3.58 per share.

Chairman and CEO Howard R. Levine commented on the results:

"Fiscal 2012 was a year of great progress for Family Dollar. We expanded our merchandise assortment to increase our relevancy to our customers; we continued to improve the shoppability of our stores; and we repositioned our leadership team to better support our growth. As a result of these efforts, we delivered another strong year for our shareholders."


For the next three to five years, Family Dollar hopes to deliver five to seven percent in new store growth. Furthermore, the company anticipates mid-single digit comparable sales growth, operating margin expansion and double-digit earnings per share growth.

For the fiscal year of 2013, Family Dollar expects to earn between $4.10-$4.40 per share, up 19% compared to 2012's earnings per share, based on the midpoint of the range. The fact that 2013 will have 53 working weeks will add approximately $0.10 per share in annual earnings. The full year guidance is in line with analysts' expectations of $4.22 per share.

The outlook for 2013 assumes comparable store sales between 4 and 6%. The company anticipates opening 500 new stores, while closing 70-90 stores. Gross margins will come under pressure as a result of a mix towards lower-margin items.

For the first quarter, Family Dollar expects comparable store sales growth of 4 to 6%. Earnings per share are expected to come in between $0.69 and $0.78 per share, compared to $0.68 in the first quarter of 2012. The first quarter guidance of Family Dollar was a little soft compared to analysts' forecasts of $0.77 per share.


Family Dollar Stores ended its fourth quarter with $225 million in cash, equivalents, short-term investments and restricted cash. The company operates with roughly $547 million in short and long-term debt, for a net debt position of $322 million.

Based on Thursday's closing price of $68.65, the market values the firm at $8.0 billion. Full revenues for 2013 are expected to come in above $10 billion, valuing the firm at 0.8 times annual revenues. Based on the midpoint guidance of full year 2013 earnings per share of $4.25, the market values the firm at 16 times annual earnings.

The valuation compares to a revenue multiple of 1.6 times for Dollar Tree (DLTR) and 1.2 times for Dollar General (DG). These competitors trade at 21 and 20 times annual earnings, respectively.

Currently, Family Dollar Stores pays a quarterly dividend of $0.21 per share, for an annual dividend yield of 1.2%.

Investment Thesis

Year to date, shares of Family Dollar Stores have risen some 20%. Shares gradually rose from low fifties in January to peak at $75 in June of the year, after the company raised its full year 2012 outlook. Shares fell back to $61 in August, amidst worries about the prospects for discount retailers, but rose back to $69 in recent weeks.

Over the past five years, shares have roughly risen some 150%. Shares steadily rose from $15 in the beginning of 2008, to peaks of $75 earlier this year. Between 2008 and 2012, the company grew its annual revenues from $7.4 billion to $9.3 billion. Net income rose from $291 million to $422 million over the same period of time. The company retired roughly 15% of its shares outstanding, boosting annual earnings per share from $2.07 to $3.58.

The long-term prospects for Family Dollar Stores look relatively good. The discount retailer guides for solid new store growth in the next three to five years. Furthermore, earnings will receive a boost from comparable sales growth and margin expansion. Earnings per share are expected to rise even further, as the company has a history of repurchasing its own shares.

The valuation of Family Dollar Stores is reasonably fair. The firm trades at 16 times 2013's annual earnings. While the multiple is fair, the company guides for double-digit earnings growth in the following years, bringing earnings multiples down. The valuation is even more appealing in light of the earnings multiple of 20 and 21 times for Dollar General and Dollar Tree.

Shares still offer appeal for long term investors, after the company gave a strong long-term guidance. I expect shares to take out its all-time highs under calm market conditions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.