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Family Dollar Stores Inc. (FDO - Analyst Report), the operator of self-service retail discount store chains, recently posted second-quarter 2012 results. Street analysts had enough time to ponder over the company’s scores. In the paragraphs that follow, we cover the recent earnings announcement, subsequent estimate revisions by analysts as well as the Zacks Rank and long-term recommendation for the stock.

Last Quarter Synopsis

Based in Matthews, North Carolina, Family Dollar unveiled its second quarter financial results on March 28, 2012. 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.

Family Dollar posted an 8.6% increase in revenue to $2,458.6 million from the prior-year quarter, reflecting 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.

The company hinted that comparable-stores sales are on the rise due to improved traffic count and an increase in average consumer transaction values. Comps jumped to 4.5% in the quarter compared with a growth of 5.1% in the prior-year quarter.

Strolling Through Guidance

Family Dollar 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.

Management predicts third quarter comps to rise between 5% and 7%, and fiscal 2012 comps to climb between 5% and 6%. Family Dollar, which faces stiff competition from Wal-Mart Stores Inc. (WMT - Analyst Report) and Dollar General Corporation (DG - Analyst Report), expects fiscal 2012 net sales to jump by 9% to 10%.

(Read our full coverage on this earnings report: Family Dollar Beats Estimate)

Agreement of Estimate Revisions

The agreement of estimate revisions indicates that the majority of analysts were unidirectional following Family Dollar’s first-quarter 2012 results.

In the last 30 days, 9 out of 21 analysts covering the stock raised their estimates, whereas 4 analysts lowered the same for the third quarter of 2012. For the fourth quarter, 10 analysts made upward revisions, whereas 4 analysts trimmed their estimates.

For fiscal 2012, 17 analysts revised their estimates upward, with only 1 analyst revising the same downward in the last 30 days. For fiscal 2013, 14 analysts increased their estimates and only 2 analysts made downward revisions.

What Drives Estimate Revision

Clearly, a positive sentiment is palpable among most of the analysts, who remain optimistic on Family Dollar’s performance. Following the earnings release, the Zacks Consensus Estimate has been portraying an upward trend with the majority of analysts remaining bullish on the stock.

The better-than-expected bottom-line results and upbeat earnings guidance impressed the analysts, who went on to revise their estimates to better align with management’s guidance range. Going forward, analysts remain confident about the company’s commitment towards better price management, cost containment efforts, effective inventory management, private label offering, store expansion and renovation, and merchandise initiatives.

Family Dollar did register growth in the top and bottom lines, but the increments were not enough to alleviate the concern about increasing gross margin pressure. This kept some of the analysts on the back foot. It was apparent that the growth in the top line was led by the lower-margin consumables category. Consequently, the increase in sales of lower margin merchandises weighed upon the company’s gross margin that contracted 80 basis points to 34.9%.

It is obvious that given a dismal economy, consumers will focus on basic necessities only, such as food that generally carries lower margin. Management expects gross margin to remain under pressure for the year.

Magnitude of Estimate Revisions

The magnitude of estimate revisions by the analysts is clearly reflected through changes in the Zacks Consensus Estimates.      

The Zacks Consensus Estimate for the third quarter of 2012 has remained constant at $1.06 in the last 30 days, as the revisions made by the analysts has a neutral impact on the Zacks Consensus. The Zacks Consensus Estimate for the fourth quarter moved up by a couple of cents to 77 cents, in the last 30 days.

For fiscal 2012, the Zacks Consensus Estimates jumped 4 cents to $3.66 in the last 30 days. For fiscal 2013, the Zacks Consensus Estimates increased 4 cents to $4.22.

Closing Comment

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 trigger in price war will definitely eat away margins, which in turn will affect the company’s results. In order to remain competitive, it is better to try out innovative ways to win the hearts of target consumers rather than fading away in an unhealthy contest.

Currently, we maintain our long-term ‘Neutral’ recommendation on the stock. However, Family Dollar shares maintain a Zacks #2 Rank that translates into a short-term ‘Buy’ rating.

About Earnings Estimate Scorecard

As a PhD from MIT, Len Zacks 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

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