Family Dollar Earnings Fall - Analyst Blog

Family Dollar Stores Inc. FDO posted second-quarter fiscal 2014 earnings of 80 cents a share that missed the Zacks Consensus Estimate of 90 cents, and plunged approximately 34% from $1.21 delivered in the prior-year quarter. Management blamed the quarter's debacle on harsh weather conditions that resulted in shuttering of stores, disturbance in the delivery of merchandises, and increase in utility and store maintenance costs.

Consequently, Family Dollar announced slew of measures to improve its operational and financial performances. Management intends to reduce prices of 1,000 basic items, optimize cost structure by lowering the headcount, closing of about 370 underperforming outlets and being more rationale on new store opening to reap higher return on investment.

Management hinted that employee reduction and shuttering of stores are projected to generate $40 million to $45 million of annualized operating profit benefit, commencing from the third quarter. We believe only time will tell how far management would be success in their endeavors to bring the company back on the growth trajectory.

The company's proposed initiatives provided cushion to this Zacks Rank #4 (Sell) stock, as shares rose 1.5% or 87 cents to $59.94 during pre-market trading hours, despite disappointing results.

Coming back to the quarter, comparable-store sales for this Matthews, North Carolina based company fell 3.8% due to decline in customer transactions, partly offset by rise in average consumer transaction value.

Let's Dig Further

Family Dollar, which competes with Dollar General Corp. DG, posted a 6.1% decrease in net sales to $2,716.6 million from the prior-year quarter, reflecting sales decline across Consumables (down 3.9%), Home Products (down 12.6%), Apparel and Accessories (down 11.3%) and Seasonal & Electronics (down 9.8%). However, total revenue fell short of the Zacks Consensus Estimate of $2,789 million.

Excluding the extra week in the prior-year quarter, net sales would have jumped 0.4%. The strength witnessed in the Consumables category compared to others came on the back of robust growth across refrigerated and frozen food and tobacco. Strong focus on consumables helped Family Dollar to drive business from budget-constrained consumers.

The economic recovery is still patchy, and bargain hunters are going from one shop to another to grab the best deal, with their primary focus being on consumables. Consumables category, now accounts for 71% of second-quarter fiscal 2014 sales compared with 70% in the prior-year quarter.

Gross profit dipped 6.7% to $902.3 million, whereas gross margin contracted 20 basis points to 33.2%. The lower-margin carrying consumables items and increase markdowns were partly offset by higher markups, lower freight charges and fall in inventory shrinkage. Management anticipates gross margin to shrivel during fiscal 2014.

Family Dollar stated that operating profit for the quarter came in at $140.3 million down 35.4% year-over-year, while operating margin contracted about 230 basis points to 5.2%.

Other Financial Details

Family Dollar ended the quarter with cash and cash equivalents of $157.2 million, total long-term debt of $500.4 million, reflecting a total debt-to-capitalization ratio of 23.7%, and shareholders' equity of $1,607.4 million. Capital expenditures for the first-half of fiscal 2014 were $219.7 million. Management now anticipates capital expenditures between $450 million and $500 million for fiscal 2014.

During the first half, Family Dollar bought back approximately 1.8 million shares for an aggregate amount of $125 million and paid dividend of $59.5 million. As of Mar 1, 2014, the company still had $245.8 million at its disposal under its share repurchase authorization.

Stores Update

During the first half, Family Dollar opened 244 new outlets and closed 22 stores taking the total store count to 8,138. The company also renovated, expanded, or relocated 319 stores. In fiscal 2014, the retailer plans to open about 525 new stores and close 400 stores. The company anticipates opening 350 to 400 outlets in fiscal 2015.

Strolling Through Guidance

Family Dollar now projects earnings in the band of 85 cents to 95 cents a share for the third quarter and between 75 cents and 85 cents for the fourth quarter. For fiscal 2014, the company envisions earnings in the range of $3.05 to $3.25 per share.

The current Zacks Consensus Estimates for the third quarter and fiscal 2014 are 98 cents and $3.40 per share, respectively. We could witness a downward trend in the Zacks Consensus Estimate in the coming days.

Management forecasts a low-single-digit decline in comparable-store sales during the third quarter. For the fourth quarter, comparable-store sales are expected to be flat to up marginally. For fiscal 2014, the company projects a low-single-digit jump in net sales, while a low-single-digit decline in comparable-stores sales.

Closing Comment

The economy is still not completely out of hibernation and consumers will remain cautious on their spending, buying only those things that fulfill their basic needs. Consequently, we could see more competitive pricing and new products to attract shoppers. A price war would definitely eat away margins, which in turn would affect the company's results. In order to remain competitive, it would be better to try out innovative ways to win the heart of target consumers.

Other stock worth considering in the retail industry, include Macy's Inc. M and American Apparel, Inc. APP all of which hold Zacks Rank #2 (Buy).