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We have maintained our Neutral recommendation on Family Dollar Stores Inc. (FDO - Analyst Report), the operator of self-service retail discount store chains, with a target price of $65.00. The stock currently carries a Zacks Rank #3 (Hold).

Why the Reiteration?

We believe that Family Dollar’s commitment toward better price management, cost containment, effective inventory management, private label offering, expanded operating hours and merchandise initiatives should drive sales and margin trends. Moreover, in order to enhance the market share the company intends to focus on both consumables and discretionary categories.

In our view, the company’s point-of-sale technology (credit card and food stamp acceptance) and store realignment initiatives position it better to drive traffic, meet customer oriented demand and improve in-store shopping experience. Despite a challenging macro environment, Family Dollar’s strategic initiatives to improve the merchandising, marketing and store operations have resulted in sustained growth in the top and bottom line. Management projects sales growth of 12% to 13% in net sales for fiscal 2013 driven by consumables.

However, management’s anticipation of soft discretionary sales in the second half of fiscal 2013 due to financial challenges that the customers are facing, makes us cautious on the stock.

Family Dollar remains concerned about the increasing gross margin pressure. Consumables category now accounts for 69.5% of second-quarter fiscal 2013 sales compared with 64.6% in the prior-year quarter. Consequently, the increase in sales of lower margin merchandises weighed upon the company’s gross margin that contracted approximately 150 basis points to 33.4% during the quarter. For fiscal 2013, management expects gross margin to remain under pressure.

This compelled Family Dollar to trim its fiscal 2013 earnings outlook. Management now expects earnings in the band of $3.73 to $3.93 per share for fiscal 2013, down from a range of $3.95 to $4.20 per share.

Other Stocks That Warrant a Look

Other stocks that are worth considering include Restoration Hardware Holdings, Inc. (RH - Snapshot Report), Flowers Foods, Inc. (FLO - Snapshot Report) and Bon-Ton Stores Inc. (BONT), all of which hold a Zacks Rank #1 (Strong Buy). These stocks are expected to continue with their upbeat performances.

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