Family Dollar (FDO) Earnings Preview

Family Dollar Stores Inc. (FDO), the operator of self-service retail discount store chain, is scheduled to report its third-quarter 2010 financial results before the bell on Wednesday. Despite the recent economic distress, the company’s strategic initiatives to improve the merchandising, marketing, and store operations have resulted in sustained growth in the top and bottom lines.

This is evident from Family Dollar’s improved sales results for third-quarter 2010, which ended on May 29, 2010.

Based in Matthews, North Carolina, Family Dollar posted net sales of $1,997 million for the quarter, up 8.4% from the prior-year quarter, driven by comparable-store sales growth of 7%, consistent with the company’s guidance range of 6% to 8%. The company witnessed robust sales during the quarter in the Seasonal and Consumable categories.

Family Dollar, the operator of more than 6,700 general merchandise retail discount stores, now expects third-quarter 2010 earnings near the high-end of the previously provided guidance range of 71 cents and 76 cents a share.

Analysts surveyed by Zacks also expect Family Dollar to post third-quarter 2010 earnings of 76 cents a share. Of the 26 analysts covering the stock, none of the analysts have revised their estimates in the last 30 days. The current Zacks Consensus Estimate represents a year-over-year growth of 22.6%.

With respect to earnings surprises, Family Dollar has topped the Zacks Consensus Estimate over the last four quarters in the range from 3.9% to 5.1%. The average remained at 4.5%. This suggests that Family Dollar has outperformed the Zacks Consensus Estimate by an average of 4.5% in the last four quarters.

We believe that the company’s effective price management, cost containment, tighter inventory control, private label offering, and expanded operating hours should help drive sales and margin trends. Moreover, Family Dollar’s point-of-sale technology and store realignment initiatives position it to drive traffic, meet customer-oriented demand and improve in-store shopping experience.

However, Family Dollar, which operates in the discount retail merchandise sector, faces stiff competition from Wal-Mart Stores Inc. (WMT) and Dollar General Corporation (DG), which will likely continue to weigh on its results.

Moreover, the recent economic downturn has triggered a shift in demand to consumable categories from discretionary categories, which has resulted in an adverse sales mix, as sales of lower-margin consumable merchandise are expected to weigh down on gross margin rate.

Consequently, we prefer to be Neutral on Family Dollar. Moreover, our Zacks #3 Rank, which translates into a short-term ‘Hold’ rating, correlates to our long-term recommendation.

DOLLAR GENERAL (DG): Free Stock Analysis Report
FAMILY DOLLAR (FDO): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis Report
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