How Family Dollar (NYSE: FDO) Thrives in a Tough Economy
Submitted by Investing Daily using the Trefis contributor tool
On April 15, 2009, just as the markets were starting to show signs of life after the 2008 crash, Investing Daily editor Peter Staas took a close look at the retail sector, searching for stocks that could flourish as the recession dragged on. As Staas put it, even though retail stocks had been battered, news of the sector’s demise was “greatly exaggerated.”
One of Staas’s favourites was Family Dollar (NYSE: FDO), the nation’s second-largest dollar store chain. As he pointed out, the company was a recession survivor, having jumped 38.6% in 2008 to become the best-performing S&P 500 stock that year, while the broader index plunged 37.0%. As Staas wrote, the reasons why were straightforward:
“That performance isn’t an aberration. As the economy languishes, increasingly budget-conscious consumers––many of whom previously eschewed shopping at deep-discount stores—have flocked to Family Dollar for everyday items.”
Staas thought the company had a lot more room to grow as it shifted toward consumables, like food, and improved its point-of-sale systems. Since then, the stock has nearly doubled, rising from $33 to its current level of $58.
The Weak Economy Is the Gift That Keeps on Giving for Family Dollar
Three years later, with the economy still in the doldrums, frugal shoppers continue to flock to Family Dollar. The proof was in the record earnings the company reported yesterday—its 16th straight quarter of double-digit EPS gains.
In the quarter ended February 25, 2012, Family Dollar earned a record $136.4 million, up 10.7% from $123.3 million a year earlier. Thanks to its share repurchase program (more on that below), earnings per share jumped 17.3%, to $1.15 from $0.98. That beat the $1.13 a share that the Street was expecting.
Overall sales rose 8.6%, to $2.46 billion. Same-store sales rose 4.5%. Consumables, seasonal goods and electronics posted the biggest gains.
Capital expenditures jumped to $236.3 million from $139.0 million, as the company opened 184 new stores, closed 36 and renovated 342. Inventories rose 15.4%, as Family Dollar continued to add new food items to its selection.
Analysts Divided on Latest Family Dollar Earnings
So is Family Dollar’s run set to continue? As CNBC.com pointed out in “Family Dollar Pits Analyst Bulls Against Bears,” analysts’ opinions on the company’s results largely depended on where they stood on the prospects for the economy as a whole. On the bull side was Meredith Adler, managing director for Barclays, who said:
“The industry is very well positioned right now, and they did an extraordinary job of managing expenses last quarter … I see this company moving into a new phase. They’ve now got some new management, who I believe will help them improve the consistency of performance at the stores, which has probably been their weakest area.”
Adler is maintaining her overweight rating and her $63 price target on Family Dollar.
Analysts on the bear side largely focused on the cutthroat competition in the bargain store space, Family Dollar’s rising inventories and the fact that even though same-store sales rose, they still missed the company’s forecast of 5%.
Also, as Reuters reported in “Family Dollar Edges Past Wall Street Estimates,” same-store sales trailed those of Dollar General (NYSE: DG), which saw gains of 6.5%, and Dollar Tree (NasdaqGS: DLTR), with a 7.3% increase.
Said Brian Sozzi, chief equities analyst at NPG Productions: “I fancy that low-income consumers focused on one-stop destinations to save money will continue to shop with their trusted brands, which in this case is a Dollar Tree or a Dollar General.”
Smart Expansion, Buybacks and Dividend Give Family Dollar Strong Appeal
Still, Family Dollar is much more than simply a bet against the broader economy. As Zacks.com pointed out, “The company’s point-of-sale technology and store realignment initiatives better position it to drive traffic, meet customer-oriented demand and improve in-store shopping experience.”
In the coming months, the company will add popular brands like Red Bull and Maybelline to its lineup. It will also offer more products that encourage repeat visits, like tobacco, shaving cream and magazines. That should help it grow beyond the dollar store space and compete with bigger retailers like Wal-Mart (NYSE: WMT).
Also, unlike its bargain-basement cousins, Family Dollar pays a dividend. Its annual rate of $0.84 yields 1.4%. The company also regularly buys back shares. It repurchased 1.3 million shares in the first half of fiscal 2012, and still has $265.2 million on its current authorization.
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