On Dec 31, 2013, we reiterated our long-term recommendation on department store retailer, Family Dollar Stores Inc. (FDO) with a target price of $68.00. This was based on company’s better-than-expected fiscal fourth-quarter 2013 results, along with strategic and store expansion endeavors. However, lower discretionary sales due to the sluggish macroeconomic environment and stiff competition is a near-term threat to this stock’s performance.
Why the Reiteration?
Family Dollar’s commitment towards better price management, cost containment, effective inventory management, private label offering, expanded operating hours and merchandise initiatives are likely to drive sales and margin trends. Moreover, in order to increase market share, the company intends to focus on consumables as well as discretionary categories.
Also, the company’s sustained focus on category management, price optimization, merchandise financial planning and assortment planning to optimize merchandising and supply chain processes are commendable. These measures help to mitigate inventory risks and adapt to the changing preferences of consumers.
Family Dollar, which competes with Dollar General Corp. (DG) and Dollar Tree, Inc. (DLTR), is also accelerating its pace of store openings. Family Dollar opened 500 stores and renovated, expanded, or relocated 830 stores during fiscal 2013. Through fiscal 2014, the retailer plans to open about 525 new outlets and renovate, expand, or relocate 850 stores.
Further, strong performance of the consumables category helped Family Dollar to post robust fourth-quarter fiscal 2013 results. Both the top and bottom line improved significantly year over year However, while the top line fell short of the Zacks Consensus Estimate, the bottom line easily surpassed the same.
On the flip side, discretionary sales are likely to remain under pressure because of the higher payroll taxes, soft job market, the present political gridlock and other macroeconomic factors. Further, the company’s expansion in the geographies where it already serves could boomerang leading to cannibalization. Further this Zacks Rank #4 (Sell) stock hinted that comparable-store sales in the first quarter of fiscal 2014 are expected to face tough consumables comparisons.
Other Stocks to Consider
Other better ranked stock in the retail space includes The TJX Companies, Inc. (TJX), which carries a Zacks Rank #2 (Buy).
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