Earnings Review: Dollar Store Roundup
Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Family Dollar (NYSE: FDO) recently reported disappointing first-quarter results as margin pressure hurt the retailer’s bottom-line. The company also gave a weaker-than-expected profit outlook for the second quarter, sending shares down sharply in early trading.
Q1 Earnings
For the first quarter ended November 24, 2012, the Matthews, North Carolina-based company reported net sales of $2.42 billion, representing an increase of 12.7% over the same period in the previous year. Analysts had forecast first-quarter net sales of $2.38 billion.
Comparable store sales for the quarter rose 6.6%, above the company’s forecast of an increase of 4% to 6%.
Family Dollar’s sales for the quarter rose as the company added more everyday items such as cigarettes and other tobacco products, soft drinks, gift cards and magazines. The move helped in bringing in more traffic. However, it also hurt the company’s bottom-line during the quarter as these items have a lower margin.
Family Dollar’s gross margin for the quarter fell from 35.3% to 34.1% in the first quarter of fiscal 2013.
The retailer reported first-quarter profit of $80.3 million, or $0.69 per share, compared to a profit of $80.4 million, or $0.68 per share reported for the same period in the previous year. The increase in profit on a per-share basis was due to a reduction in outstanding shares in the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012. Family Dollar’s first-quarter profit fell significantly short of the consensus forecast of $0.75 per share.
Family Dollar Chairman and CEO Howard R. Levine said that early results from the company’s sales-driving initiatives exceeded expectations in the first quarter, resulting in more gross margin pressure than anticipated. Levine said that this mix pressure, combined with expected headwind from insurance expenses, resulted in earnings that were at the low end of the company’s guidance.
Outlook Disappoints
Family Dollar’s outlook for the second quarter and fiscal 2013 has also fallen short of expectations. Also, the company’s comparable store sales during December, which includes the crucial holiday shopping season, have been disappointing.
Levine noted that the holiday shopping season proved to be more challenging than the company expected as customers faced increasing financial uncertainty. Indeed, consumer confidence was dented during the crucial holiday shopping season by concerns over the fiscal cliff. According to Levine, comparable store sales rose around 2.5% in December. Despite the challenges, Levine expects that the investments made by Family Dollar in traffic-driving categories will continue to build sales momentum through January and February. However, the focus on traffic-driving categories will put pressure on margins.
For the second quarter of fiscal 2013, Family Dollar expects comparable store sales to rise between 4% and 5%. Earnings for the quarter are expected to be between $1.18 per share and $1.28 per share.
For the full fiscal year, Family Dollar expects earnings to be between $3.95 per share and $4.20 per share, down from previous forecast of $4.10 to $4.40 per share. Full year earnings forecast are also short of consensus estimate of $4.24 per share.
Challenges Lie Ahead for the Retailer
While Family Dollar’s focus is on bringing in more traffic, the strategy will negatively impact the company’s bottom-line. In addition, December sales have been weak due to the fiscal cliff concerns. While lawmakers reached a partial deal earlier this week, there are still unresolved issues such as long-term spending cuts and debt ceiling. As a result, the macroeconomic environment will continue to remain uncertain and this will likely hurt consumer confidence in the next few months.
How Competitors Have Performed Recently?
Family Dollar’s rival Dollar General (NYSE: DG) reported its most recent quarterly results (Q3) in December. Dollar General’s same store sales for the quarter ended November 2, 2012 rose 4%, while total sales improved 10.3%. The company’s operating profit for the quarter rose 16%, while adjusted earnings per share for the quarter rose 26% to $0.63 per share.
Chesapeake, Virginia-based operator of discount variety stores, Dollar Tree (NASDAQ: DLTR), had reported its most recent quarterly results (Q3) in November. Dollar Tree’s consolidated net sales for the quarter ended October 27, 2012 rose 7.8% to $1.72 billion, while comparable store sales for the quarter rose 1.6%. The company’s adjusted earnings per share for the quarter rose 18.6% to $0.51 per share.
Stock Takes a Hit
Family Dollar’s weaker-than-expected earnings outlook sparked a sell-off in the company’s shares in early trading today. At last check, Family Dollar shares were trading more than 13% lower at $55.21.
Family Dollar has fallen below some key technical levels as a result of the sell-off today. The stock has support at around $53.03, which also the stock’s 52-week high.
Valuation
Family Dollar is currently trading at a P/E ratio (ttm) of 15.76, compared to Dollar General’s 14.78 and Dollar Tree’s 15.46, and well below the industry average of 21.45. The stock currently has a dividend yield of 1.50%.
In terms of valuation, Family Dollar looks reasonable at current level. However, the company is expected to face margin pressure as it focuses more traffic-driving categories. In addition, the company’s December same-store sales have been disappointing. Given these factors, I am bearish on Family Dollar.
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