Is It Time to Sell This Stock?

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It's been a crazy time for this dollar retailer's stock. A not-so-great quarter, a crash in share price, a few downgrades, an upgrade...whew! What does the future hold for this company? Let us see.

The quarter that was

In its second quarter results, Family Dollar Stores (NYSE: FDO) reported year-over-year increases in revenue and income. At approximately $2.9 billion, net sales rose 17.7% from the same quarter last year.

The highest sales were generated in the consumables segment, which is also the largest segment, contributing 69.5% to net sales. The segment saw 26.6% year-over-year growth, mostly driven by increases in tobacco, cosmetics and food-product sales.

Comparable-store-sales were up by 2.9% due to greater consumer traffic and higher average-transaction values. The company has gained considerable market share in consumables over the past few quarters.

Net income for the quarter totaled $140.1 million. Diluted income came in at $1.21 per share, as opposed to $0.16 in the year-ago period. With 126 new stores and 159 expansions or renovations, the company significantly added to its store network this quarter.

Despite showing growth in revenue and income, the company missed analyst expectations for earnings per share by $0.01. As a result, shares of Family Dollar fell by more than 10% after its results were declared.

Upcoming

For the third quarter, the company expects the trends in sales and margins from the most recent two quarters to continue. As compared to earnings of $1.06 per share last year, the company expects diluted earnings to be in the range of $0.98 to $1.08 in the third quarter of 2013. For the fourth quarter, earnings are expected to be in a range of $0.85 to $0.95 per share.

For the full year, same-store sales are expected to rise by 3% to 4%, with earnings per share in the range of $3.73 to $3.93. Family Dollar plans to open nearly 500 new stores in the period.

What to expect

Family Dollar's peers Dollar General (NYSE: DG) and Dollar Tree Stores (NASDAQ: DLTR) have yet to report their earnings this season. The last quarter was successful for both companies, and they are both optimistic about the current period. 

Take Dollar General, for instance. Last quarter, the company reported record sales of $16 billion. Net income saw a 24% year-over-year growth. For the current quarter, analysts expect the company to post positive growth. Its net sales are expected to grow by 8.8% year-over-year, while earnings per share are expected to rise by $0.08 to $0.71 per share. 

In its last quarter, Dollar Tree also saw customers respond in record numbers. The company recorded a 15.4% increase in sales with a whopping 26.3% year-over-year increase in earnings per share.

For its current quarter, the company expects sales to be between $1.8 billion and $1.9 billion. Earnings per share are expected to be between $0.53 and $0.58. Analyst estimates for its earnings per share are $0.57, while revenue is expected to grow by 8.3%. 

Not to worry?

That Family Dollar's recent earnings numbers weren't as strong as expected is attributable to low and cautionary consumer spending. But with the economy recovering, consumer spending is sure to improve in the quarters to come.

The stock may have been downgraded by Goldman Sachs and Citigroup, but I still believe that this stock is better than the others in its market and that it has a lot of potential. For starters, the company enjoys a higher brand loyalty as opposed to other dollar stores, thanks to its innovative use of social media avenues.

Secondly, Family Dollar is preferred by many as it accepts all manufacturers' coupons, thereby increasing its customer base. Thirdly, as opposed to Dollar Tree, Family Dollar offers flexible pricing and has a much larger network of stores.

Further, it offers a greater variety of consumables as compared to its peers. Finally, Family Dollar, unlike its competitors, pays dividends. Its current dividend yield is 1.7%.

After all, it isn't for nothing that Deutsche Bank upgraded this one to 'buy.'


Sonam Chamaria 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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