Family Dollar Downgraded

We recently downgraded our recommendation on Family Dollar Stores Inc. (FDO), the operator of self-service retail discount store chains, to Neutral with a price target of $46.00, following lower-than-expected first-quarter 2011 results. Earlier, we had an Outperform rating on the stock.

Family Dollar’s quarterly earnings of 58 cents a share missed the Zacks Consensus Estimate of 61 cents, but jumped 18.4% from 49 cents earned in the prior-year quarter. Family Dollar also hinted that gross margin will remain under pressure in the coming quarters. Gross margin contracted 10 basis points to 36% during the quarter under review.

Following lower-than-expected results, we are witnessing a correction in the Zacks Consensus with analysts adjusting their estimates to better correlate with the company’s performance. In the last 30 days, 16 out of 27 analysts covering the stock lowered their estimates for the second quarter, and 15 analysts snipped their estimates for fiscal 2011. However, 2 analysts increased their estimates for second quarter and 3 analysts raised their projection for fiscal 2011, in the last 30 days.

Consequently, the Zacks Consensus Estimate for the second quarter dipped by 4 cents to 95 cents and for fiscal 2011 it again dropped by 4 cents to $3.12.

Management now expects second-quarter 2011 earnings between 92 cents and 97 cents a share translating into a growth of 13.6% to 19.8%, and fiscal 2011 earnings between $3.08 and $3.23, reflecting an increase of 17.6% to 23.3%.

Despite a challenging macro environment, the company’s strategic initiatives to improve the merchandising, marketing, and store operations have resulted in sustained growth in the top and bottom lines.Family Dollar, which faces stiff competition from Wal-Mart Stores Inc. (WMT) and Dollar General Corporation (DG), forecasts fiscal 2011 sales to jump by 8% to 10%.

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

Currently, we have a ‘Neutral’ rating on Family Dollar. Moreover, the Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation, correlates with our long-term view.

FAMILY DOLLAR (FDO): Free Stock Analysis Report

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