This Discount Retailer is soaring; but its Reputation is taking a Hit

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This week Family Dollar Stores (NYSE: FDO) released its earnings for the fourth quarter, and as expected the company beat Wall Street estimates. As it enjoys quarter after quarter of profits, it should be addressing the growing negative sentiments coming from people in the communities where it is deriving most of its revenues.

Complaints from consumers in these areas are twofold. They are trying to improve business corridors by attracting upper scale retailers, restaurants and so forth; and Family Dollar stores do little to enhance their efforts.  Also, Family Dollar is saturating their communities with stores, sometimes with two or three within a three mile radius, hurting property values.

Those opposed to more Family Dollar stores in their areas have vented their concerns and frustrations by protesting. In Florida, business owners in a historic district near Tampa are complaining that the discount retailer has no place in the area. They’ve been trying to revitalize the neighborhood, so the last thing they want to see is Family Dollar throwing up a store next to them. Furthermore, business owners and residents contend that Family Dollar does a poor job in keeping its stores up to par. They complain that the stores are not properly maintained, and can become eye sores.

A main beef from residents in communities where the stores are located has to do with market saturation. Take for example, Atlanta, where Family Dollar last month broke ground on another store. This is great, but it’s the fourth store in the same zip code for this particular area. An organized group in Florida called says there are five Family Dollar stores within 2.5 miles of a proposed new store. That takes market saturation to a whole new level.

Community activists and residents counter arguments that the additional Family Dollar stores being built represent economic development by saying this is not the type of economic development they want. There is also the unfortunate issue of race; some point to Family Dollar having a penchant for choosing to locate its stores in predominantly African-American neighborhoods. They do not like this at all, and claim the stores drive down their property values.

Family Dollar has responded to the criticism by saying it strives to bring value to neighborhoods through the low-cost products it sales. But no matter; its strategy for choosing where to locate stores is proving to be quite profitable.

Although critics say the stores are not needed in their areas, based on the sales numbers many shoppers don’t have a problem with them. Net sales for the fourth quarter rose almost 11% to $2.36 billion compared to the fourth quarter of 2011.

Also, it seems the continued store openings are not adversely affecting the company’s operating margin. In 2012, the company’s operating margin strengthened to 7.5%, from 5.2% in 2008. The operating profit was $700 million, which was up from $350 million in 2008.

For fiscal 2012, net income was up 10.5% to $429.4 million. This helped to boost earnings per share to $3.64 from $3.12 in 2011.

As far as concerns that the stores are not properly maintained, Family Dollar is trying to do something about that. Capital expenditures, which include renovations, rose significantly to $603 million. A large part of that money is also going toward opening new stores.

Family Dollar’s competitors include Dollar General (NYSE: DG)Dollar Tree and Big Lots. Except for Big Lots, all of these companies have seen their net incomes rise over the past five years, despite the struggling economy. While they may be opposed, I think their growth stems from them being needed – shoppers want convenience and low prices, which these chains offer.

Like Family Dollar, these chains face the same criticism. One difference relates to their response to them. For example, over the summer Dollar General backed off of plans to build a store in Mississippi after residents opposed it. The company, which has the largest market cap of the three, said it didn’t want to build in an area where it was not wanted.

As these chains compete to increase profits and market share, they must be cognizant of opposition. For Family Dollar, these outcries are growing louder. The company is not slowing its rate of opening new stores, but this kind of negative attention from the communities it is profiting from can’t be ignored.

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