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Earnings Scorecard: 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, recently posted fourth-quarter 2012 results. Street analysts have had adequate time to contemplate 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 fourth quarter financial results on October 3, 2012. The quarterly earnings of 75 cents a share came in line with the Zacks Consensus Estimate but jumped 13.6% from 66 cents earned in the prior-year quarter owing to healthy sales witnessed in the Consumables and Seasonal & Electronics categories.

Family Dollar posted a 10.8% increase in revenue to $2,364.1 million from the prior-year quarter, and reflected sales growth across Consumables (up 16.1%) and Seasonal & Electronics (up 4.8%) partially mitigated by Apparel and Accessories (down 6.7%) and Home Products (down 1.4%). However, total revenue fell short of the Zacks Consensus Estimate of $2,367 million.

The company hinted that comparable-stores sales are on the rise due to improved traffic count and a boost in average consumer transaction values. Comps jumped 5.4% in the quarter compared with a growth of 5.6% in the prior-year quarter.

Strolling Through Guidance

Family Dollar now expects earnings between 69 cents and 78 cents for the first quarter and in the band of $4.10 to $4.40 per share for fiscal 2013.

Management predicts first quarter and fiscal 2013 comparable-store sales to increase between 4% 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 13% to 15%.

(Read our full coverage on this earnings report: Family Dollar Meets, Profit Rises)

Agreement of Estimate Revisions

In the last 7 days, 11 out of 21 analysts covering the stock lowered their estimates, whereas only 1 analyst raised the same for the first quarter of 2013. For the second quarter, 10 analysts made upward revisions, whereas 2 analysts trimmed their estimates.

For fiscal 2013, 11 analysts revised their estimates upward, with 5 analysts revising the same downward in the last 7 days. For fiscal 2014, 2 analysts increased their estimates and 4 analysts decreased the same.

What Drives Estimate Revision

Family Dollar’s healthy results and an upbeat outlook impressed the analysts, who went on to revise their estimates upwards 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 intensifying gross margin pressure. It was apparent that the growth in the top line was led by the lower-margin consumables category. Lower-margin consumables category now accounts for 72.5% of fourth-quarter 2012 sales compared with 69.1% in the prior-year quarter.

Consequently, the increase in sales of lower margin merchandises weighed upon the company’s gross margin that contracted about 20 basis points to 33.8%. Operating margin shriveled 140 basis points to 6.1%. For fiscal 2012, gross margin dropped approximately 60 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 anticipates gross margin to remain under pressure in fiscal 2013 due to increasing percentage of consumables in sales mix.

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 first quarter of 2013 dropped by 4 cents to 74 cents a share in the last 7 days. The Zacks Consensus Estimate for the second quarter moved up by 5 cents to $1.40, in the same time frame.

For fiscal 2013, the Zacks Consensus Estimate jumped 3 cents to $4.25 in the last 7 days. However, for fiscal 2014, the Zacks Consensus Estimate plunged 12 cents to $4.83.

Closing Comment

The economy is still not completely awakened from the state of hibernation, and buyers remain prudent with respect to their expenditures, purchasing only those items that cater to their basic needs. Thus, we could witness more competitive pricing and new offerings to lure consumers.

The onset of a price war will definitely eat away margins, and in turn affect the company’s results. In order to remain competitive, it is better to experiment with innovative ways to win the hearts of target consumers rather than lagging in an unhealthy contest.

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.

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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