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Family Dollar Upped to Outperform

FDO WMT DG

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We recently upgraded our recommendation on Family Dollar Stores Inc. (FDO - Analyst Report) to Outperform with a price target of $73.00 on the back of strategic initiatives undertaken to improve merchandising and store operations. This has inspired growth in top and bottom lines. Earlier, we had a Neutral view on the stock.

This is evident from the company’s fourth-quarter fiscal 2012 results. The quarterly earnings of 75 cents per share came in line with the Zacks Consensus Estimate but jumped 13.6% from 66 cents earned in the prior-year quarter. The operator of self-service retail discount store chains posted a 10.8% increase in revenue to $2,364.1 million from the prior-year quarter.

The economy is witnessing an uneven recovery and amidst such a scenario, bargain hunters have no alternative but to hop several shops in search of the best deal, with their main focus on essential items, such as food. Family Dollar, with its low cost options remains successful in enticing budget-constrained consumers.

Family Dollar, which competes with Wal-Mart Stores Inc. (WMT - Analyst Report) and Dollar General Corporation (DG - Analyst Report), now expects growth of 13% to 15% in net sales and an increase of 12.6% to 20.9% in earnings per share in fiscal 2013. The company’s target for 3 to 5 years includes double-digit bottom-line growth.

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. The company also intends to increase its direct-to-factory purchases to 13% in fiscal 2015 from 4% in fiscal 2012.

The company is accelerating new store openings. Family Dollar opened 475 stores and renovated, expanded, or relocated 854 stores during fiscal 2012. Through fiscal 2013, the retailer plans to open about 500 new stores and renovate, expand, or relocate 850 stores. The company projects store count to increase at a rate of 5% to 7% over the next 3 to 5 years.

The above analysis advocates our bullish stance on the stock, which is well defined through our Zacks #2 Rank that translates into a short-term “Buy” rating.

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