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On Apr 30, 2014, Zacks Investment Research downgraded Family Dollar Stores Inc. (FDO - Analyst Report), the self-service retail discount store chain, to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Estimates for Family Dollar have shown a downtrend since it reported soft second-quarter fiscal 2014 results on Apr 10. The quarterly earnings of 80 cents a share missed the Zacks Consensus Estimate of 90 cents, and plunged approximately 34% from the prior-year quarter. Management blamed the quarter’s debacle on harsh weather conditions that resulted in shuttering of stores, disturbance in the delivery of merchandises, and increase in utility and store maintenance costs.

The Matthews, NC-based company said that comparable-store sales fell 3.8% due to decline in customer transactions, partly offset by rise in average consumer transaction value. Family Dollar, which competes with Dollar General Corp. (DG - Analyst Report), posted a 6.1% decrease in net sales to $2,716.6 million from the prior-year quarter, and also fell short of the Zacks Consensus Estimate of $2,789 million.

Family Dollar announced a slew of measures to improve its operational and financial performance. Management intends to reduce prices of 1,000 basic items, optimize cost structure by lowering the headcount, closing of about 370 underperforming outlets and being more rational on new store openings to reap higher return on investment. We believe only time will tell how successful management will be in its endeavors to bring the company back on the growth trajectory.

Management now projects earnings in the band of 85 cents to 95 cents a share for the third quarter and between 75 cents and 85 cents for the fourth quarter. For fiscal 2014, the company envisions earnings in the range of $3.05 to $3.25 per share.

The lower-than-expected results triggered a downtrend in the Zacks Consensus Estimate, as analysts become less constructive on the stock’s future performance. This is evident from the movement witnessed in the Zacks Consensus Estimate, which fell 7.9% to $3.15 for fiscal 2014 and 10.7% to $3.43 for fiscal 2015 in the past 30 days.

Stocks That Warrant a Look

Other better-ranked retail stocks that look promising and are expected to continue with their upbeat performance include Skechers USA Inc. (SKX - Analyst Report) holding a Zacks Rank #1 (Strong Buy), and Foot Locker, Inc. (FL - Snapshot Report) carrying a Zacks Rank #2 (Buy).

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