Family Dollar Stores: Dog Fight in Grocery Aisle
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Family Dollar Stores (NYSE: FDO) had been the sweet spot for investors. In the dark days of 2008, for example, when the S&P was down 43 percent, Family Dollar was up 44 percent. In some ways, if we look at its 1Q 2012 earnings, which it announced Jan. 5, the taste is still sweet. It beat mean analyst estimates of 67 cents per share with 68 cents per share, up 17.2 percent from 1Q 2011 at 58 cents per share. Profit had increased 11 perecent to $134.9 million. And the economy hasn't recovered enough to fear the new frugality trend among even the middle class will lose much steam.
The challenge, and analysts are registering it in their range of recommendations, reports Zacks Investment Research, is the immediate future. See, already gross margins have shrunk 0.8 percentage points to 35.3 percent, primarily because of rising costs. When expense increases in a low end retailer, worry is appropriate.
But the big question has to do with how it will stand up in the grocery aisle against those 800-pound Foodzillas -- discount retailers Wal-Mart (NYSE: WMT) and Target (NYSE: TGT). That's Family Dollar Stores' direct competition -- not Dollar Tree, Big Lots, and Dollar General -- as it executes its strategy this year to focus more on food. Among other initiatives, it's beefing up offering brandnames like Kraft, General Mills, and Nature Valley. That might be attractive to higher-income shoppers. Given that the Consumer Price Index clocks grocery inflation at speeding to 4.75 percent from 4.25 percent and will continue in a slow-moving economy, that seems smart.
But, is it? To begin with, Family Dollar Stores is late to the concept of providing a large selection of grocery items at a significant discount. Wal-Mart has already dominated this with its Super Centers and Target has gone on to take on Wal-Mart with an experience-economy version of grocery merchandising, including fresh produce. Through word of mouth and mouse, as here in Consumerist.com, bargain shoppers compare prices between the two giants. Can Family Dollar provide the incentive, such as enough loss leaders, for the frugal influencers to expand the focus to it? Those influencials are getting more influential with every post on the Internet, and include the Mommy Bloggers such as Heather Armstrong. Remember it was a battle for the big boxes to change consumer habits from going to supermarkets to them. The category of food is inherently conservative. Americans are risk-resistant about what we put into our mouths. That's why established food brands do so well for so long.
Add to that the retail reality that the grocery niche is continually in flux, as Supermarket News describes. Kroger (NYSE: KR) has made inroads duking it out with the steep discounters. Wal-Mart and Target have the resources to stay in that competitive arena with ongoing strategic and tactical shifts. Does Family Dollar?
Or the more central question is, should it should be playing in that sandbox in a serious way at all? Observing traffic at dollar stores in the New Haven metro area, I have seen the most purchases in non-food staples, ranging from buck-a-bottle laundry detergent to seasonal sundries.
The Motley Fool owns shares of Wal-Mart Stores. janegenova has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.