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Earnings Preview: Family Dollar

FDO WMT DG

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Family Dollar Stores Inc. (FDO - Analyst Report), the operator of self-service retail discount store chains and an S&P 500 company, is slated to report its fourth-quarter 2012 financial results on October 3, 2012.

The current Zacks Consensus Estimate for the quarter is 75 cents a share, which reflects a growth of 13.6% from the prior-year quarter’s earnings. The estimates in the current Zacks Consensus range between a low of 70 cents and a high of 78 cents a share. The Zacks Consensus estimates revenue at $2,367 million for the quarter.

The current Zacks Consensus Estimate for fiscal 2012 is $3.64 per share. Further, analysts polled by Zacks expect full year revenue to be $9,334 million.

Recap of Third-Quarter 2012

Family Dollar’s quarterly earnings of $1.06 per share came in line with the Zacks Consensus Estimate but jumped 16.5% from 91 cents earned in the prior-year quarter on the heels of healthy sales witnessed in the Consumables, and Seasonal and Electronics categories, and marked a 17th successive quarter of double-digit growth.

The company posted a 9.6% increase in revenue to $2,360 million from the prior-year quarter, and reflected sales growth across Consumables (up 12.2%), Seasonal and Electronics (up 15.4%) and Apparel and Accessories (up 1.1%), partially offset by Home Products (down 1.8%). However, total revenue fell short of the Zacks Consensus Estimate of $2,373 million.

Management Guided

Based in Matthews, North Carolina, Family Dollar at its last conference call hinted that it expects earnings between 71 cents and 81 cents for the fourth quarter and in the range of $3.60 to $3.70 per share for fiscal 2012.

Zacks Agreement & Magnitude

No movement was noticed in the Zacks Consensus Estimate for the fourth quarter of 2012, since the upward revision in estimate made by 1 out of 21 analysts covering the stock in the last 7 and 30 days, did not have a material impact. 

For fiscal 2012, the Zacks Consensus Estimate remains stable despite increase in estimate made by 1 analyst in the last 30 days.  In the last 7 days, 1 analyst raised the estimate and another analyst lowered the same, thereby keeping the Zacks Consensus Estimate constant.

Mixed Earnings Surprise History

With respect to earnings surprises, Family Dollar has met as well as topped the Zacks Consensus Estimate over the last four quarters in the range of 0.0% to 3.1%. The average remained at 2.5% suggesting that Family Dollar has outperformed the Zacks Consensus Estimate by the same magnitude in the trailing four quarters.

Family Dollar’s earnings met the Zacks Consensus Estimate in the first and third quarters of 2012. It topped the Estimate in the second quarter of 2012 by 1.8% and in the fourth quarter of 2011 by 3.1%.

Family Dollar in Neutral Lane

The economic recovery is still unstable, and bargain hunters have no choice but to go from one shop to another to grab the best deal, with their principal focus on essential items, such as food. Family Dollar with its low cost options remains successful in luring budget-constrained consumers amidst the fragile economic recovery. However, margins remain under pressure.

Family Dollar offers general merchandise in four categories –– consumables, home products, apparel and accessories, and seasonal and electronics –– and sells merchandise at prices from under $1 to $10.

The company’s strategic initiatives to improve merchandising, marketing and store operations have resulted in sustained growth in the top and bottom lines. For fiscal 2012, management expects growth of 9% to 10% in net sales and 15.4% to 18.6%in earnings per share.

The company remains committed towards better price management, cost containment efforts, effective inventory management, private label offering and expanded operating hours that should augur well for sales. Moreover, in order to enhance its market share, Family Dollar intends to focus on both consumables and discretionary categories.

Family Dollar registered growth in the top and bottom lines, but it was unsuccessful in eliminating the concerns regarding increasing gross margin pressure. It was apparent that the growth in the top line was backed by the lower-margin consumables category. Consequently, the increase in sales of lower margin merchandises weighed upon the company’s gross margin that contracted 40 basis points to 35.8%. Operating margin shriveled 20 basis points to 8.4%.

It is obvious that given a dismal economy, consumers will focus on basic necessities such as food, which generally carry a lower margin. Management expects margins to remain under pressure in the fourth quarter and in the beginning of fiscal 2013.

Family Dollar operates in the highly competitive discount retail merchandise sector. Peer pressure from the likes of Wal-Mart Stores Inc. (WMT - Analyst Report) and Dollar General Corporation (DG - Analyst Report), will likely continue to weigh on its results.

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

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