Earnings Preview: Family Dollar

Family Dollar Stores Inc. (FDO), operator of the self-service retail discount store chain, is scheduled to report its fourth-quarter 2010 financial results on Sep 29, 2010. The current Zacks Consensus Estimate for the quarter is 51 cents a share.

Third-Quarter 2010, a Synopsis

Family Dollar posted better-than-expected third-quarter 2010 results due to robust sales witnessed in the Seasonal and Electronics, Consumables and Home Products categories. The quarterly earnings of 77 cents a share surpassed the Zacks Consensus Estimate by a penny, and jumped 24.2% from $0.62 delivered in the prior-year quarter.

The company posted a 8.4% year-on-year increase in revenues to $1,997 million due to the rise in sales registered across Seasonal and Electronics categories (up 11.3%), Consumables (up 9.1%), Home Products (up 7.1%), and Apparel and Accessories (up 3.4%). Comparable-store sales in the quarter jumped 7%. Management predicted fourth-quarter 2010 comps to increase by 5% to 7%.

Management expects fourth-quarter 2010 earnings between 46 cents and 51 cents a share, and fiscal 2010 earnings between $2.53 and $2.58.

Fourth-Quarter Comps in line

Family Dollar recently reported that comparable-store sales for the quarter climbed 6.1%, within the company’s expectation of growth of 5% to 7%. The company also indicated that fourth-quarter 2010 net sales soared 8% to $1,957 million from $1,811 million in the prior-year quarter. Sales remained strongest in the consumables category.

Fourth-Quarter 2010 Consensus

Analysts expect Family Dollar to post fourth-quarter 2010 earnings of 51 cents a share. The current Zacks Consensus Estimate represents a year-over-year growth of 18.6%. The estimates in the current Zacks Consensus for the quarter range from a low of 48 cents to a high of 53 cents.

The current Zacks Consensus Estimate has remained stagnant over the last 30 days; with only 3 out of 26 analysts covering the stock revising their estimates upward and 3 analysts lowering their estimates. In the last 7 days too, analysts have kept their estimates unaltered, leaving the consensus unchanged.

Earnings Surprise History

With respect to earnings surprises, Family Dollar has topped the Zacks Consensus Estimate over the last four quarters in the range of 1.3% to 4.9%. The average remained at 3.6%. This suggests that Family Dollar has outperformed the Zacks Consensus Estimate by an average of 3.6% in the last four quarters.

Family Dollar in Neutral Lane

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.

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 margins. Moreover, Family Dollar’s point-of-sale technology and store realignment initiatives position it to drive traffic, meet customer 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 the gross margin rate.

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

FAMILY DOLLAR (FDO): Free Stock Analysis Report

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