Another Value Play Opens up in Retail
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Sometime last month, discount retailer Dollar Tree (NASDAQ: DLTR) was feeling satisfied after releasing an impressive quarter. But a light outlook for the ongoing quarter soured the sweet taste of estimate-topping results, sending shares down. That time, I told you why the drop in the stock was an opportunity for value hunters. And it indeed turned out to be a value deal.
Dollar Tree has gained 12% since then and in my opinion would go on to do better for an umpteen number of reasons I outlined in my post. In case you had sold Dollar Tree then or decided against buying the stock, I understand you might not be very happy with yourself. But another such opportunity has come knocking on the door.
What happened?
Discount retailer Family Dollar’s (NYSE: FDO) third quarter results narrowly missed estimates. If that wasn’t enough, the company said that it might miss estimates again in the current quarter and also for the full year. The consequence – it was punished by Mr. Market.
So what?
If one were to stack up a list of stock price declines induced by panic and myopic vision, Family Dollar’s recent drop would probably make its way into the list. With a network of more than 7,000 stores spread across 45 states and a range of offerings, Family Dollar is a well-known discounter that caters to the low and middle income strata of the society.
Hence, the products sold in its stores find favor the budget conscious. And as the economy is not in the pink of health nowadays, Family Dollar will probably continue doing well. It has performed decently over the last few years, posting double digit earnings growth for more than six years now. It has continued the trend and grew earnings by 16% in the previous quarter, with analysts expecting its mid-teen earnings growth to continue moving forward.
Keeping such possibilities in mind, Family Dollar’s drop opened up a tremendous value play. The company is highly focused on multiplying its top line and earnings power with a number of strategies and expansionary plans. Let’s glance through them and check out some of the reasons why this member of the Dollar family can turn out to be a winning pick.
Growing more
Family Dollar, like other dollar stores, has a varied assortment of products in its stores. It focuses across a wide range of offerings such as food, health and beauty items and apparel among others. The company’s consumable items have been a driving force behind its rock solid performance so far and it is doing more to expand this segment.
Family Dollar is looking to expand coolers in around 1,400 of its stores going forward. It already initiated a cooler expansion program in the third quarter that covers 700 stores. This initiative should help Family Dollar sell more food at its stores. In addition, Family Dollar is growing its food products portfolio and added 250 new items in the previous quarter.
The Redbox runner
And then there are Redbox kiosks from Coinstar (NASDAQ: CSTR). Early in June, Family Dollar announced that it has partnered with Coinstar and will roll out its kiosks where shoppers can rent DVDs, games and Blu-ray discs. This deal is a win-win situation for both companies. Coinstar will get a huge number of locations where it can easily find a large number of shoppers. With rentals beginning at $1.20, Coinstar will see a better stream of revenues courtesy of Family Dollar.
On the other hand, Nick Mitchell, analyst at Northcoast Research, is of the opinion that the Redbox kiosks will result in windfall gains for Family Dollar. According to him, Redbox is capable of contributing $50 million in revenue annually if kiosks are spread across 80% of its stores, contributing another 15 cents toward earnings.
The takeaway
Stocks of discount retailers have followed similar trends this earnings season. I had told you earlier in the post about how Dollar Tree has staged a comeback. Similarly, Dollar General (NYSE: DG), had posted a brilliant quarter last time around but its shares failed to record gains on the news of a secondary offering. But the company has done well ever since and has gained 10% in three weeks since it released earnings.
Many on the Street panic when there’s even an iota of bad news about a stock. But it’s the smart investors who take the opposite side of the transaction and reap rewards in the long run. And going by Family Dollar’s business and its prospects, I won’t be surprised at all if value investors have the last laugh once again.
TechJunk13 has no positions in the stocks mentioned above. The Motley Fool 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. If you have questions about this post or the Fool’s blog network, click here for information.
