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Zacks Investment Research downgraded Family Dollar Stores Inc. (FDO - Analyst Report) to a Zacks Rank #5 (Strong Sell) on Jan 12, 2013.

Why the Downgrade?

Family Dollar has witnessed a sharp downward revision in estimates after posting lower-than-expected first-quarter fiscal 2013 results on Jan 3, 2013, that prompted management to take a conservative stance on its future earnings.

The quarterly earnings of 69 cents a share missed the Zacks Consensus Estimate of 74 cents but inched up 1.5% from 68 cents earned in the prior-year quarter. The earnings also came in at the lower-end of the previously provided guidance range of 69 cents to 78 cents due to gross margin pressure coupled with anticipated headwinds related to insurance expenditure.

The increase in sales of lower margin merchandises weighed upon the company’s gross margin that contracted approximately 120 basis points to 34.1% during the quarter under review. Increased discounts and higher inventory shrinkage also hurt the margins. For fiscal 2013, management expects gross margin to remain under pressure.

Management anticipates earnings between $1.18 and $1.28 for the second quarter and in the band of $3.95 to $4.20 per share for fiscal 2013. The company had earlier forecasted fiscal 2013 earnings between $4.10 and $4.40 per share.

The Zacks Consensus Estimate for the second and third quarters of fiscal 2013 dropped 11.5% and 2.5% to $1.23 and $1.19 per share, respectively, over the past 30 days. Moreover, for fiscal 2013 and 2014, the Zacks Consensus Estimate fell by 6.1% and 7.3% to $3.99 and $4.47 per share, respectively, over the same time frame.

Other Stocks to Consider

Not all discount store chains are performing as disappointingly as Family Dollar. Big Lots Inc. (BIG - Analyst Report), Ross Stores Inc. (ROST - Analyst Report) and The TJX Companies Inc. (TJX - Analyst Report) look promising and are expected to continue with their upbeat performances in the coming quarters. These stocks hold a Zacks Rank #2 (Buy).

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