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Family Dollar Pinned To Neutral

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We have maintained our Neutral recommendation on Family Dollar Stores Inc. , the operator of self-service retail discount store chains, with a target price of $71.00. The stock currently carries a Zacks Rank #3 (Hold).

Why the Reiteration?

Earlier this month, Family Dollar came out with its third-quarter fiscal 2013 results, wherein earnings of $1.05 per share beat the Zacks Consensus Estimate by a couple of cents, but fell by a penny from the prior-year quarter. Sales did increase 9% to $2,573.5 million but missed the Zacks Consensus Estimate.

However, the fact that the sales in the quarter were driven by the lower-margin Consumables category remains a concern. The category now accounts for 72.5% of third-quarter fiscal 2013 sales compared with 68.9% in the prior-year quarter. We are skeptical regarding the increasing gross margin pressure due to fall in sales of high margin products.

Going forward, Family Dollar will increase emphasis on better price management, cost containment, inventory management and private label offering to drive sales and margins.

Management now expects earnings to be in the range of 82 cents to 87 cents a share for the fourth quarter of fiscal 2013. Moreover, for fiscal 2013, earnings are projected to be in the range of $3.77 to $3.82 per share. Comparable-store sales are expected to rise by 2% during the fourth quarter, while for fiscal 2013, it is expected to increase in the range of 3% to 4%.

Other Stocks That Warrant a Look

Until any further upward revision in the Zacks Rank on Family Dollar, the other stock in the retail/wholesale sector worth considering includes Fred's, Inc. ,which carries a Zacks Rank #1 (Strong Buy). Ross Stores Inc. (ROST - Free Report) and Dollar Tree, Inc. (DLTR - Free Report) both carrying a Zacks Rank #2 (Buy) are also worth considering.

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