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Family Dollar Posts Strong Earnings, Guidance Panned
Family Dollar Stores (NYSE:FDO) posted terrific third-quarter earnings, with revenue up 8% and income up nearly 20%, but the stock was dropped as earnings guidance for the fourth quarter was lowered.
IN PICTURES: 4 Biggest Investor Errors
Earnings Hot Streak
Family Dollar has consistently posted year-over-year same-quarter earnings gains.This trend continued in its third quarter. Earnings per share were 77 cents, compared to 62 cents Q3 last year. Net income rose to $104.4 million, up from $87.7 million. Revenue rose to $1.997 billion from $1.843 billion. Same store sales rose by 7% in the quarter. The same store sales for June, which will be included in the fourth quarter, rose by 5.5%. This, along with the lowered Q4 guidance to 43-51 cents a share, down from 53 cents, and full year guidance between $2.53-2.58 is what the market focused on, as it drove the stock down more than 6% on the news.
Good Times Over?
The market has always read Family Dollar, Dollar General (NYSE:DG), 99 Cents Only Stores (NYSE:NDN) and Dollar Tree (Nasdaq:DLTR) as recession wonders, at best.The dollar stores have a stated drive to make their customer gains from the recession more permanent, though the Street isn't buying it yet. Critics might read the lowered guidance as well as the slight slip in sequential quarter-to-quarter sales from the second quarter to the third as evidence for their negative argument.
The Dollar Store's View
The dollar stores don't interpret the numbers that way. Family Dollar cites the largely continued increases in several quarters for its revenues and earnings.The company also cites shift of customer behaviors to "buying close to need," another way of describing deep bargain shopping, which the dollar stores feel will allow them to retain new customers.
Recovery? Double-Dip?
As the economy meekly emerged from recession earlier this year, the dollar stores continued to make business gains. Now that there is fear of a double-dip recession, the Street also fears a retail slowdown.This is projected for department stores, but the market has treated Family Dollar stock as if that slowdown will affect the dollar stores as deeply or more.
Other Dollar Stores
As for other dollar stores, an Investor's Business Daily article had a glowing article on Dollar Tree. It reported strong business fundamentals as well as the stock's positive relative performance during the market correction, with the suggestion of a possible new upward move in the offering. Thus far, Dollar Tree still has strong upcoming earnings estimates. The same holds true for Dollar General and 99 Cents Only Stores. While investors should watch for possible downward sales and earnings revisions, it's more important to ultimately watch the longer term results.
The Bottom Line
We still think Family Dollar and the other dollar stores have a better future ahead in an economic recovery than in times past.The slightly lowered earnings guidance obscures the good earnings Family Dollar and its peers will have going forward. Family Dollar, Dollar General and Dollar Tree all produce strong annual free cash flow. Family Dollar produced nearly $375 million in FCF last year, which is on par with larger discounters such as Big Lots (NYSE:BIG) and BJ's Wholesale (NYSE:BJ). Long-term fundamentals still look good for Family Dollar, so the stock getting knocked down provides a buying opportunity for value. (To learn more, check out Free Cash Flow: Free, But Not Always Easy.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: 4 Biggest Investor Errors
Earnings Hot Streak
Family Dollar has consistently posted year-over-year same-quarter earnings gains.This trend continued in its third quarter. Earnings per share were 77 cents, compared to 62 cents Q3 last year. Net income rose to $104.4 million, up from $87.7 million. Revenue rose to $1.997 billion from $1.843 billion. Same store sales rose by 7% in the quarter. The same store sales for June, which will be included in the fourth quarter, rose by 5.5%. This, along with the lowered Q4 guidance to 43-51 cents a share, down from 53 cents, and full year guidance between $2.53-2.58 is what the market focused on, as it drove the stock down more than 6% on the news.
Good Times Over?
The market has always read Family Dollar, Dollar General (NYSE:DG), 99 Cents Only Stores (NYSE:NDN) and Dollar Tree (Nasdaq:DLTR) as recession wonders, at best.The dollar stores have a stated drive to make their customer gains from the recession more permanent, though the Street isn't buying it yet. Critics might read the lowered guidance as well as the slight slip in sequential quarter-to-quarter sales from the second quarter to the third as evidence for their negative argument.
The dollar stores don't interpret the numbers that way. Family Dollar cites the largely continued increases in several quarters for its revenues and earnings.The company also cites shift of customer behaviors to "buying close to need," another way of describing deep bargain shopping, which the dollar stores feel will allow them to retain new customers.
Recovery? Double-Dip?
As the economy meekly emerged from recession earlier this year, the dollar stores continued to make business gains. Now that there is fear of a double-dip recession, the Street also fears a retail slowdown.This is projected for department stores, but the market has treated Family Dollar stock as if that slowdown will affect the dollar stores as deeply or more.
Other Dollar Stores
As for other dollar stores, an Investor's Business Daily article had a glowing article on Dollar Tree. It reported strong business fundamentals as well as the stock's positive relative performance during the market correction, with the suggestion of a possible new upward move in the offering. Thus far, Dollar Tree still has strong upcoming earnings estimates. The same holds true for Dollar General and 99 Cents Only Stores. While investors should watch for possible downward sales and earnings revisions, it's more important to ultimately watch the longer term results.
The Bottom Line
We still think Family Dollar and the other dollar stores have a better future ahead in an economic recovery than in times past.The slightly lowered earnings guidance obscures the good earnings Family Dollar and its peers will have going forward. Family Dollar, Dollar General and Dollar Tree all produce strong annual free cash flow. Family Dollar produced nearly $375 million in FCF last year, which is on par with larger discounters such as Big Lots (NYSE:BIG) and BJ's Wholesale (NYSE:BJ). Long-term fundamentals still look good for Family Dollar, so the stock getting knocked down provides a buying opportunity for value. (To learn more, check out Free Cash Flow: Free, But Not Always Easy.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Greg Sushinsky
Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
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