Earnings Preview: Family Dollar

Family Dollar Stores Inc. (FDO), the operator of the self-service retail discount store chain, is slated to report its first-quarter 2011 financial results before the bell on Wednesday, January 5, 2011. The current Zacks Consensus Estimate for the quarter is 61 cents a share. For the quarter, the Zacks Consensus Estimate for revenue is $1,985 million.

Fourth-Quarter 2010, a Synopsis

Family Dollar’s quarterly earnings of 56 cents a share beat the Zacks Consensus Estimate of 51 cents, and jumped 30.2% from 43 cents earned in the prior-year quarter buoyed by healthy sales witnessed in the Consumables categories.

The company posted an 8% year-on-year increase in revenue to $1,956.8 million, which remained in line with the Zacks Consensus Estimate, and reflects sales growth registered across Consumables categories (up 9.8%), Seasonal and Electronics (up 5.7%), Home Products (up 4.9%), and Apparel and Accessories (up 3%). Comps jumped to 6.1% in the quarter.

Management Guided

Management now expects first-quarter 2011 earnings between 55 cents and 60 cents, and fiscal 2011 earnings between $2.95 and $3.15 per share. Family Dollar, which faces stiff competition from Wal-Mart Stores Inc. (WMT) and Dollar General Corporation (DG), now expects a growth of 8% to 10% in net sales for fiscal 2011.

First-Quarter 2011 Zacks Consensus

The analysts covered by Zacks, expect Family Dollar to post first-quarter 2011 earnings of 61 cents a share that remains a penny ahead of the high-end of management’s guidance range. The current Zacks Consensus Estimate reflects a growth of 24.5% from the prior-year quarter’s earnings. The current Zacks Consensus Estimate for the quarter ranges between 58 cents and 65 cents a share.

The current Zacks Consensus Estimate has remained stagnant over the last 30 days with only one out of 23 analysts covering the stock revising the estimate upward, which had no material impact on the consensus. In the last 7 days, no analysts have revised their estimates keeping the consensus unchanged.

With respect to earnings surprises, Family Dollar has topped the Zacks Consensus Estimate over the last four quarters in the range from 1.3% to 9.8%. The average remained at 4.8%. This suggests that Family Dollar has outperformed the Zacks Consensus Estimate by an average of 4.8% in the last four quarters.

Our View

Despite a challenging macro environment, Family Dollar’s strategic initiatives to improve merchandising, marketing and store operations have resulted in sustained growth in the top and bottom lines.

The company’s point-of-sale technology and store realignment initiatives better position it to drive traffic, meet customer-oriented demand and improve in-store shopping experience. Consumers with lower disposable income have been prioritizing their purchases and looking for low-priced options. The company trades in merchandise generally priced under $10.

The effective price management, cost containment, tighter inventory control, private label offering, expanded operating hours and recent merchandise initiatives should drive sales and margin trends. Moreover, in order to enhance its market share, Family Dollar intends to focus on both consumable and discretionary categories.

We remain encouraged by the company’s decision to expand its store base by about 300 with plans to remodel 600 to 800 stores in fiscal 2011. Moreover, Family Dollar’s share repurchase program of $750 million will be accretive to earnings. The company also maintains a healthy balance sheet with cash and cash equivalents of $382.8 million and long-term debt of $250 million at the end of fiscal 2010.

In spite of intense competition and erratic consumer spending pattern, we remain bullish on the stock. Family Dollar maintains a Zacks #2 Rank, which translates into a short-term Buy rating. Moreover, our long-term recommendation on the stock remains Outperform.

FAMILY DOLLAR (FDO): Free Stock Analysis Report

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