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Analyst Blog

Family Dollar Stores Inc. , the operator of self-service retail discount store chains, recently posted third-quarter 2011 results.

Street analysts had a week to ponder on the news. In the subsequent paragraphs, we will cover the recent earnings announcement, subsequent analysts’ estimate revisions as well as the Zacks Rank and long-term recommendation on the stock.

Earnings Report Review

Family dollar’s quarterly earnings of 91 cents a share missed the Zacks Consensus Estimate of 95 cents, but jumped 18.2% from 77 cents earned in the prior-year quarter due to healthy sales witnessed in the Consumable and Home Products categories.

Management now expects fourth-quarter 2011 earnings between 62 cents and 70 cents, and fiscal 2011 earnings between $3.08 and $3.16.

The company posted an increase of 7.8% in revenue to $2,153.4 million from the prior-year quarter, and reflected sales growth across Consumables categories (up 10.6%) and Home Products (up 8.2%) but sales declined at Seasonal and Electronics (down 0.4%) and Apparel and Accessories (down 1.1%). Total revenue also fell short of the Zacks Consensus Estimate of $2,166 million.

Family Dollar, which faces stiff competition from Wal-Mart Stores Inc. (WMT - Analyst Report) and Dollar General Corporation (DG - Analyst Report), forecasts fiscal 2011 net sales to jump by 8% to 9%. We believe effective price and inventory management, private label offering, expanded operating hours and merchandise initiatives should drive sales trends.

(Read our full coverage on this earnings report: Family Dollar Misses, Earnings Up)

Agreement of Estimate Revisions

Clearly, a negative sentiment is palpable among analysts, following the earnings release. In the last 7 days, 7 out of the 22 analysts covering the stock decreased their estimates while none of the analyst revised their estimates upward for the fourth quarter of 2011. For the first quarter of 2012, 1 analyst revised the estimate in the downward direction, while none of the analysts raised their estimates in the last 7 days.

For fiscal 2011, 2 analysts have decreased their estimates in the last 7 days, while none raised the projection. For fiscal 2012, 7 analysts revised their estimate in the downward direction, while 1 raised the estimate.

Magnitude of Estimate Revisions

In the last 7 days, the Zacks Consensus Estimate for fiscal 2011 inched down by a penny to $3.10, and for fiscal 2012, it went down by 3 cents to $3.59 per share.

For the fourth quarter of 2011, the Zacks Consensus Estimate came down by 2 cents to 63 cents, while it remained flat at 66 cents for the first quarter of 2012, in the last 7 days.

The current Zacks Consensus for fourth-quarter 2011 is pegged from a low of 58 cents to a high of 65 cents. For fiscal 2011, the estimates range from $3.04 to $3.16.

Our View

We believe that there is a tremendous opportunity for Family Dollar to increase sales and improve gross margin through effective price management, cost containment, tighter inventory control, private label offering, expanded operating hours and merchandise initiatives. Moreover, in order to enhance its market share, the company intends to focus on both consumable and discretionary categories.

The company’s point-of-sale technology (credit card and food stamp acceptance) and store realignment initiatives better positions it to drive traffic, meet customer oriented demand and improve in-store shopping experience.

The self-service retail discount store chain has also been actively managing its cash flows, returning much of its free cash to shareholders through share repurchases and dividends. The company has also been making prudent investments related to store infrastructure, store openings, expansions and relocations, and improvement of distribution centers to drive revenue growth.

However, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels and high household debt levels, which may negatively impact their discretionary spending, and in turn, the company’s growth and profitability.

Currently, we maintain our long-term Neutral rating on the stock. Furthermore, Family Dollar shares maintain a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation.

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/