Family Dollar Stores Earnings Preview: Competitive Threats From Wal-Mart, Macroeconomic Issues In Focus

Family Dollar Stores FDO will report its second quarter financial results on Thursday, April 10, before the market open. The company is expected to earn $0.90 per share on $2.77 billion of revenue.

The last time Family Dollar reported its earnings was on January 9. The company earned $0.68 per share, missing the consensus estimate by one penny. Revenue also came short at $2.5 billion, missing the consensus estimate of $2.51 billion.

Shares fell sharply on January 9 as investors were not pleased with Family Dollar's guidance. Management sharply cut its forecasted second quarter earnings per share to a range of $0.85 to $0.95 versus the consensus estimate at the time of $1.21. The company also cut its full year 2014 earnings per share expectations to a range of $3.25 to $3.55, also below the consensus estimate at the time of $3.98.

During the first quarter conference call, Family Dollar's CEO Howard Levine said that the company has strayed from its core strategy of serving its value-conscious consumer.

Family Dollar faces potential headwinds as Wal-Mart continues to offer glimpses to its small-store formats, which would compete directly against Family Dollar, and the entire Dollar store industry.

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Analysts at Credit Suisse wrote a research report detailing how Wal-Mart should acquire Family Dollar, but Wal-Mart swiftly shut down any possibility of that happening.

On January 16, analysts at Raymond James downgraded Family Dollar to Underperform from Market Perform based on a deteriorating outlook for same-store sales growth and profitability over the next few years.

Investor sentiment turned further negative when Dollar General reported a disappointing fourth quarter result on March 13 where earnings per share of $1.01 came in a penny below the consensus estimate and revenue of $4.49 billion fell short of the consensus estimate by $130 million.

Dollar General also issued soft guidance, which sent many of the Dollar store stocks lower on March 13.

Deutsche Bank: Bar already low

Paul Trussel, research analyst at Deutsche Bank believes that Family Dollar's revised earnings per share forecast already factors in a combination of unfavorable weather, increased competition and company investments that negatively impact results.

Trussel believes that Family Dollar will continue operating in an environment where its core consumers are “still constrained” despite a recent review at the company's top level to improve operations, execution and financial performance.

However, Trussel noted that the company has made some moves at its C-level which are a step in the right direction.

Family Dollar recently promoted Jason Reiser to Chief Merchandising Officer who has implemented some new positive initiatives including a major food reset with an additional 400 products and a price reduction on 1,000 items.

The company is also working towards improving its supply chain management in hiring Brian Hancock, a former President at Martin-Brower Company, the largest supplier of food and materials to McDonald's and served as Vice President of Global Supply Chain for Whirlpool.

Trussel is projecting Family Dollar to report an earnings per share “towards the upper-end of $0.85 to $0.95 guidance” and $2.77 billion in sales.

Shares are Hold rated with a $61 price target.