The economy is still not out of the woods, and bargain hunters are going from one shop to another to grab the best deal, with their primary focus being on consumable items. Family Dollar Stores Inc. (FDO), the operator of self-service retail discount store chains, remains successful in luring cautious consumers amid fragile economic recovery.
This was quite evident from the company’s second-quarter 2012 results. The quarterly earnings of $1.15 per share beat the Zacks Consensus Estimate by a couple of cents, and jumped 17.3% from 98 cents earned in the prior-year quarter on the heels of healthy sales witnessed in the Consumables, and Seasonal and Electronics categories.
The company had earlier guided earnings in the range of $1.10 to $1.18 per share for the quarter under review. Management now expects earnings between $1.01 and $1.11 for the third quarter and in the range of $3.55 to $3.75 per share for fiscal 2012.
The current Zacks Consensus Estimates for the third quarter and fiscal 2012 are $1.05 and $3.61, respectively.
We observe that Family Dollar’s strategic initiatives to improve merchandising and store operations have aided top and bottom line growth.
Let’s Unveil the Picture
Family Dollar posted an 8.6% increase in revenue to $2,458.6 million from the prior-year quarter, and reflected sales growth across Consumables (up 12.9%) and Seasonal and Electronics (up 9.4%), offset by Apparel and Accessories (down 5.9%) and Home Products (down 0.5%). However, total revenue fell short of the Zacks Consensus Estimate of $2,461 million.
Family Dollar, which faces stiff competition from Wal-Mart Stores Inc. (WMT) and Dollar General Corporation (DG), expects fiscal 2012 net sales to jump by 9% to 10%. We believe effective pricing and inventory management, private label offering, expanded operating hours and merchandise initiatives should drive sales.
The company’s point-of-sale technology and store realignment initiatives better position it to drive traffic, meet customer-oriented demand and improve in-store shopping experience. Consumers with lower disposable incomes are now prioritizing their purchases and looking for low-priced options. The company trades in merchandise generally priced under $10.
Based in Matthews, North Carolina, Family Dollar hinted that comparable-stores sales are on the rise on improved traffic count and increase in average consumer transaction value. Deeper focus on consumables helped Family Dollar to drive business from budget-constrained consumers.
Comps jumped to 4.5% in the quarter compared with a growth of 5.1% in the prior-year quarter. Management predicts third quarter comps to rise between 5% and 7%, and fiscal 2012 comps to climb between 5% and 6%.
The sales in the quarter were driven by the lower-margin Consumables category that registered double-digit sales growth. Given the dismal economy, consumers remain focused on basic necessities, such as food, and with Family Dollar offering low cost options, it remains the choice of shoppers.
The increase in sales of lower margin merchandises weighed upon the company’s gross margin that contracted 80 basis points to 34.9%. Operating margin expanded 10 basis points to 9%.
Other Financial Details
Family Dollar ended the quarter with cash and cash equivalents of $105.8 million, total long-term debt of $532.4 million, reflecting total debt-to-capitalization ratio of 30.4% and shareholders’ equity of $1,221 million. Capital expenditures for the first-six months were $236.3 million. Management now anticipates capital expenditures between $600 and $650 million for fiscal 2012.
During the first half of fiscal 2012, the company repurchased 1.3 million shares, aggregating approximately $72.1 million. As of February 25, 2012, the company still had $265.2 million at its disposal under its share repurchase program.
In the first six months of the fiscal year, Family Dollar opened 184 stores and closed 36 taking the total store count to 7,171. The company also renovated, expanded, or relocated 342 stores. Through fiscal 2012, the retailer plans to open about 450 to 500 new stores and close 80 to 100 stores.
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 to attract shoppers.
A price war would definitely eat away margins, which in turn would affect the company’s results. In order to remain competitive, it is better to try out innovative ways to win targeted consumers rather 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
WAL-MART STORES (WMT): Free Stock Analysis Report
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