The economy seems in no mood for a respite, and bargain hunters are going from one shop to another to grab the best deal, with their primary focus being on consumable items, and Family Dollar Stores Inc. (FDO”>FDO), the operator of self-service retail discount store chains, remains successful in luring cautious consumers amid the economic gloom.
This was quite evident from the company’s first-quarter 2012 results. The quarterly earnings of 68 cents a share that came in line with the Zacks Consensus Estimate jumped 17.2% from 58 cents earned in the prior-year quarter on the heels of healthy sales witnessed in the Consumables, and Seasonal and Electronics categories.
The company had earlier guided earnings in the range of 65 cents to 73 cents a share for the quarter under review. Management now expects second quarter earnings between $1.10 and $1.18. However, the company reiterated its fiscal 2012 earnings of $3.50 to $3.75.
The current Zacks Consensus Estimates for the second quarter and fiscal 2012 are $1.14 and $3.66, respectively. Following the first quarter results, we could witness a correction in the Zacks Consensus Estimates in the coming days with analysts tweaking their estimations to better align with management’s guidance range.
We observe that Family Dollar’s strategic initiatives to improve merchandising and store operations have aided top and bottom line growth. The company now plans to open 50% more stores in fiscal 2012 compared with the prior year.
Let’s Unveil the Picture
Family Dollar posted a 7.6% increase in revenue to $2,148.3 million from the prior-year quarter, and reflected sales growth across Consumables (up 11.4%) and Seasonal and Electronics (up 5.6%), offset by Apparel and Accessories (down 3.4%) and Home Products (down 2.8%). However, total revenue fell short of the Zacks Consensus Estimate of $2,166 million.
Family Dollar, which faces stiff competition from Wal-Mart Stores Inc. (WMT”>WMT), continues to expect fiscal 2012 net sales to jump by 8% to 10%. We believe effective pricing and inventory management, private label offering, expanded operating hours and merchandise initiatives should drive sales.
The company’s point-of-sale technology and store realignment initiatives better position it to drive traffic, meet customer-oriented demand and improve in-store shopping experience. Consumers with lower disposable incomes are now prioritizing their purchases and looking for low-priced options. The company trades in merchandise generally priced under $10.
Based in Matthews, North Carolina, Family Dollar hinted that comparable-stores sales are on the rise on improved traffic count and increase in average consumer transaction values. Deeper focus on consumables helped Family Dollar to drive business from budget-constrained consumers.
Comps jumped to 4.1% in the quarter compared with 6.3% posted by its rival Dollar General Corporation (DG) in its last reported quarter. Family Dollar had delivered comps growth of 6.9% in the prior-year quarter. Management predicts second quarter comps to rise by 5%, and fiscal 2012 comps to climb between 4% and 6%.
The sales in the quarter were driven by the lower-margin consumables category that registered double-digit sales growth for the fifth consecutive quarter. Given the dismal economy, consumers remain focused on basic necessities, such as food, and with Family Dollar offering low cost options, it remains the choice of shoppers.
The increase in sales of lower margin merchandises weighed upon the company’s gross margin that contracted 70 basis points to 35.3%. Operating margin expanded 20 basis points to 6.3%.
Other Financial Details
Family Dollar ended the quarter with cash and cash equivalents of $103.7 million, total long-term debt of $532.4 million, reflecting total debt-to-capitalization ratio of 31.7% and shareholders’ equity of $1,147.7 million. Capital expenditures for the quarter were $130.9 million. Management continues to anticipate capital expenditures between $550 and $600 million for fiscal 2012.
During the quarter, the company repurchased 0.5 million shares, aggregating approximately $27.4 million. As of November 26, 2011, the company still had $309.9 million at its disposal under its share repurchase program.
Stores Update
During the quarter, Family Dollar opened 101 stores and closed 4 taking the total store count to 7,120. The company also renovated, expanded, or relocated 262 stores. Through fiscal 2012, the retailer plans to open about 450 to 500 new stores and close 80 to 100 stores.
Closing Comment
The economy is still not out of the woods, and consumers will remain cautious on their spending, buying only those things that fulfill their basic needs. Consequently, we could see more competitive pricing and new products to attract shoppers. A trigger in price war will definitely eat away margins, which in turn will affect the company’s results. In order to remain competitive, it is better to try out innovative ways to win the heart of target consumers rather that fading away in an unhealthy contest.
Currently, we maintain our long-term Neutral rating on the stock. Furthermore, Family Dollar shares maintain a Zacks #3 Rank that translates into a short-term Hold recommendation and correlates with our long-term view.
DOLLAR GENERAL (DG): Free Stock Analysis Report
FAMILY DOLLAR (FDO): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis Report
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