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Family Dollar Stores Inc. (FDO - Analyst Report), the operator of self-service retail discount store chains, posted fourth-quarter fiscal 2013 earnings of 86 cents a share that beat the Zacks Consensus Estimate by a couple of cents, and rose 14.7% from 75 cents delivered in the prior-year quarter. The earnings came near the high-end of the previously provided guidance range of 82 cents to 87 cents a share. Consumables category was the driving factor behind the sturdy results.

Matthews, North Carolina-based Family Dollar said that comparable-store sales remained flat with traffic count and average consumer transaction value also remaining even. Earlier, management had forecasted 2% jump in comparable-store sales. Consequently, shares fell 3.2% or $2.25 to $67.20 during pre-market trading hours.

Including one-time items, earnings came in at 88 cents a share, up 27.5% from 69 cents earned in the year-ago quarter.

Let’s Dig Further

Family Dollar posted a 5.8% increase in revenue to $2,502.3 million from the prior-year quarter, and reflected sales growth across Consumables (up 8.3%), Seasonal & Electronics (up 2.3%) and Home Products (up 0.1%), partially offset by Apparel and Accessories (down 4.9%). However, total revenue fell short of the Zacks Consensus Estimate of $2,556 million.

The strength witnessed in the Consumables category came on the back of robust growth across refrigerated and frozen food, health aids, and tobacco. Strong focus on consumables helped Family Dollar to drive business from budget-constrained consumers.

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 economic recovery is still patchy, and bargain hunters are going from one shop to another to grab the best deal, with their primary focus being on consumables. The sales in the quarter were driven by the lower-margin Consumables category, which now accounts for 74.2% of fourth-quarter fiscal 2013 sales compared with 72.5% in the prior-year quarter.

Adjusted gross profit jumped 8% to $863.5 million, whereas gross margin expanded 70 basis points to 34.5%. Higher markups and lower freight charges were partly offset by lower-margin carrying consumables items, increase markdowns and rise in inventory shrinkage. Management anticipates gross margin expansion during fiscal 2014.

Family Dollar stated that adjusted operating profit for the quarter came in at $150.6 million up from $137.1 million, while adjusted operating margin increased 20 basis points to 6%.

Other Financial Details

Family Dollar ended the quarter with cash and cash equivalents of $141 million, total long-term debt of $516.5 million, reflecting a total debt-to-capitalization ratio of 24.4%, and shareholders’ equity of $1,599.1 million. Capital expenditures for fiscal 2013 were $744.4 million. Management now anticipates capital expenditures between $550 and $600 million for fiscal 2014.

During the year, Family Dollar paid a dividend of $108.3 million and bought back approximately 1.2 million shares for an aggregate amount of $75 million. As of August 31, 2013, the company still had $370.8 million at its disposal under its share repurchase authorization. In fiscal 2014, management plans to repurchase shares worth approximately $100 million.

Stores Update

During fiscal 2013, Family Dollar opened 500 new outlets and closed 26 stores, taking the total store count to 7,916. The company also renovated, expanded, or relocated 830 stores. In fiscal 2014, the retailer plans to open about 525 new stores and close 80 stores.

Strolling Through Guidance

Management took a cautious stance while providing guidance for fiscal 2014. Family Dollar now projects earnings in the band of 65 cents to 75 cents a share for the first quarter and between $3.80 and $4.15 per share for fiscal 2014.

The current Zacks Consensus Estimates for the first quarter and fiscal 2014 are 77 cents and $4.14 per share, respectively.

For fiscal 2014, management forecasts a mid-single digit growth in total net sales and a low-single digit jump in comparable-store sales. However, comps are expected to decline in the low-single digit range during the first quarter.

Closing Comment

The economy is still not completely out of hibernation 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 would be better to try out innovative ways to win the heart of target consumers. Family Dollar currently holds Zacks Rank #4 (Sell).

Other stock worth considering in the retail industry, include The TJX Companies, Inc. (TJX - Analyst Report), Dollar General Corp. (DG - Analyst Report) and Ross Stores Inc. (ROST - Analyst Report), all of which hold Zacks Rank #2 (Buy).

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