UPDATE: Sterne Agee Initiates Family Dollar Stores with Neutral, Positive Opportunities Exists
In a report published on Wednesday, analysts from Sterne Agee initiated coverage for Family Dollar Stores (NYSE: FDO) with a Neutral rating and $62 PT.
In the report lead analyst, Charles Grom commented that, "While we've been big supporters of the dollar store arena since the Great Recession of 2008, we're a bit more guarded on the sector today – six points. First, collectively speaking, the space is much more over-owned today by the Buy Side, particularly relative to 7-8 years ago. Second, with the economy gradually recovering and unemployment improving (albeit slowly) – we think the risk of trade- up is higher today than at any point in recent memory. Third, by 2017 there will be a four million person reduction in SNAP beneficiaries vs. 2012 (to 43 million) with another 8 million drop by 2022. Said differently, over the next ten years, there could be a 25% reduction in the program versus the 80% increase seen from 2007 to 2012. Fourth, the big three dollar store players will add 1,400 new stores (in total) in the U.S. in '13 – one new location every 6 hours! – heightening cannibalization risk and softer new store productivity as the space grows to approximately 24,000 locations. Fifth, over the past year we've observed more promotional activity (e.g., more circular activity at FDO and $5 off $25's at DG) than we normally prefer to see. Sixth, post Wal-Mart's (WMT - $75.94 – Not Rated) negative 1.4% comp in 1Q, we believe the risk of heavier price investments is heightened, which could force the dollar players to react – negatively impacting merchandise margins in the process."
Family Dollar Stores closed on Wednesday at $59.94.
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