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Family Dollar Stores (FDO) Earnings Analysis: Overstatement of Reported net Income?

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FDO vs COST vs S&P500 chart (1 year)Family Dollar Stores, Inc. (NYSE: FDO) and Costco Wholesale Corporation (NASDAQ: COST) both reported their earnings yesterday. Costco stock prices have seen a YTD gain of over 16% while Family Dollar Stores has gained around 8%. Over a one-year period since last October the differences have been even more pronounced (see the chart to the left showing the relative performance of these two stocks against the S&P500). In the past year, the Retail-Discount Stores industry has seen a one-year return of 29.89%. Major players in this industry include Costco and Target. Today we analyze Family Dollar Stores, Inc.'s preliminary financial results for the year ended 2013-08-31 (earnings call transcript). We have also just published our Earnings Analysis of Costco titled Costco (NASDAQ: COST) Earnings Analysis: Faster Growth?

Bonus: Free Fundamental Analysis for Costco Wholesale Corporation. Find out if Costco's returns are sustainable.

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Our analysis is based on Family Dollar Stores, Inc.'s performance over the last twelve months (unless stated otherwise). All analysis are relative to peers (peer list at the end of this post). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Annual (USD million) 2013-08-31 2012-08-31 2011-08-31 2010-08-31 2009-08-31
Revenues 10,391.5 9,331.0 8,547.8 7,867.0 7,400.6
Revenue Growth % 11.4 9.2 8.7 6.3 6.0
Net Income 443.6 422.2 388.4 358.1 291.3
Net Income Growth % 5.1 8.7 8.5 23.0 25.0
Net Margin % 4.3 4.5 4.5 4.6 3.9
ROE % 30.6 35.4 31.0 25.0 21.6
ROA % 12.5 13.3 13.0 12.3 10.6

Valuation Drivers

Family Dollar Stores, Inc.'s current Price/Book of 4.9 is about average in its peer group. FDO's operating performance is higher than the average of its chosen peers (ROE of 30.6% compared to the average of 19.0%) but the market does not seem to expect higher growth relative to peers (PE of 17.9 compared to average of 18.8) but simply to maintain its relatively high rates of return.

The company's asset efficiency (asset turns of 2.9x) and net profit margins of 4.3% are both average for its peer group. FDO's net margin continues to trend downward and is now similar to its five-year average net margin of 4.2%.

Growth & Investment Strategy

Family Dollar Stores, Inc.'s revenues have grown at about the same rate as its peers (9.7% vs. 9.7% respectively for the past three years). Similarly, the stock price implies average long-term growth as its PE ratio is around the peer average of 17.9. The historical performance and long-term growth expectations for the company are largely in sync.

FDO's annualized rate of change in capital of 8.2% over the past three years is higher than its peer average of 4.5%. This investment has generated an above peer average return on capital of 23.4% averaged over the same three years. Evidently, the relatively high capital investment was successful given the relatively strong growth in its returns.

Possible overstatement of its reported net income

Family Dollar Stores, Inc.'s reported net income margin for the last twelve months is around the peer average (4.3% vs. peer average of 3.7%). However, the company has also recorded a relatively low level of accruals (0.3% vs. peer average of 1.5%) which suggests possible overstatement of its reported net income.

FDO's accruals over the last twelve months are around zero. However, this modestly positive level is also less than the peer average which suggests some amount of building of reserves.

Family Dollar Stores, Inc. Trend Charts

Quarterly and Annual Revenues for Family Dollar Stores, Inc. (NYSE: <a class=Quarterly and Annual Net Margin Trend for Family Dollar Stores, Inc. (NYSE: <a class=Quarterly and Annual Accruals Trend for Family Dollar Stores, Inc. (NYSE: <a class=

Peers

The following peer-set was used to analyze Family Dollar Stores, Inc.: Costco Wholesale Corporation (NASDAQ:COST), Target Corporation (NYSE:TGT), Dollar General Corporation (NYSE:DG), Dollar Tree, Inc. (NYSE:DLTR), Big Lots, Inc. (NYSE:BIG) and FRED'S, Inc. Class A (NASDAQ:FRED).

Bonus: Free Fundamental Analysis for Costco Wholesale Corporation. Find out if Costco's returns are sustainable.

Download Now

Relevant articles from our archives:

Costco (NASDAQ: COST) Earnings Analysis: Faster Growth?
Hitting the Wall? Wal-Mart (NYSE: WMT) Earnings Analysis
Earnings Analysis: Dollar General Corp. (NYSE: DG)
Earnings Analysis: Big Lots Inc. (NYSE: BIG)
Earnings Analysis: Wal-Mart Stores Inc. (NYSE: WMT)
Earnings Analysis: Family Dollar Stores Inc. (FDO)

Disclaimer

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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