Will This Company Help You Earn More Dollars?

Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Retail industry players who had been enjoying good consumer demand have ultimately started feeling the pinch of prevailing economic conditions. Customers are very calculative about their spending, pushing holiday retail sales to their lowest growth since 2008. Moreover, Hurricane Sandy played a crucial role in restricting people from spending.

Retail numbers have been quite disappointing during the holiday season as customers got highly budget conscious. This led to a remarkable fall in sale of discretionary items. These typical problems were seen in Family Dollar’s (NYSE: FDO) recent quarter. Although the quarter was a mixed one, there were some key indicators to be noticed for the year.

The Details…

There has been a shift of customer’s interests towards basic necessities only. People have become even more stringent with their buying habits, which were evident in Family Dollar’s sales for the quarter. The consumables, which make most of the retailer’s universe, witnessed stellar growth with a whopping increase of more than 18% in revenue. Increased demand for basic items and increases in average transaction size of the customers drove revenue higher by 12.7%, clocking $2.41 billion.

Efforts Paid Off…

There were various other factors which played a very important role in driving the company’s top line. Firstly, Family Dollar added cigarettes as well as other tobacco products to its product portfolio which helped in adding to its revenue. In fact, the benefits of adding the product led Dollar General (NYSE: DG), an arch rival, to expand its offerings to cigarettes. Dollar General recently announced its plans to include cigarettes which are expected to boost its revenue. In its latest quarter, even Dollar General witnessed great growth in its consumables segment and plans to focus on its even more.

However, Family Dollar not only added tobacco products, but also products such as health drinks and other gift items which brought in more revenue.

The discount retailer’s strategic initiatives included a number of marketing efforts. The company’s increased promotions stirred demand, especially because of attractive pricing. In the current economic situation, price plays a key role. It prices most of the items for $1 which lures customers into its stores.

Even Dollar Tree (NASDAQ: DLTR) works on the same strategy and offers many items for $1 or less which makes it competitive as against its peers. In fact, Dollar Tree also focuses on promoting its consumables category since it fetches more revenue and perpetual demand. Dollar Tree recently announced its plans to expand one of its distribution centers by another 400,000 square feet. The center, which supplies products to 11 states, will expand the company’s capacity in a large manner.

In the toys segment, Family Dollar offered most of the branded products for $10. Even Dollar General has been eyeing this segment with great discounts for purchases above a certain amount. Competition in this segment is becoming even more interesting.

Family Dollar did not limit its initiatives to its products and pricing only. It focused largely on expansion as well. The company added 125 new stores during the quarter along with a wide variety of private label offerings. Private label products fetch higher profits and leads to higher margins. Hence, this will act as a cushion to declining margins due to addition of low profit products such as cigarettes.

The Road Ahead…

The discount retail industry has been experiencing difficult days solely because of the ongoing problems. Additionally, payroll tax increase will also put pressure on the sale of luxury items. Hence, the discretionary category will continue to be a laggard. However, efforts made by dollar stores have been instrumental in driving their performance. Strategies such as expansion, ramped up promotions, and new product additions might help Family Dollar to overcome the difficult time.

Though consumables have led to shrinking margins, addition of private labels might help compensate it in future. However, points such as a dull future and low consumer demand cannot be ignored. Hence, staying on the sidelines and waiting for the right time will be a prudent thing to do.

 

 


justhimanshu has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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