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Tickers in this Article: FDO, DLTR, ROST, FRED
Family Dollar Stores Inc. (FDO), the operator of self-service retail discount store chains, posted third-quarter fiscal 2013 earnings of $1.05 per share that beat the Zacks Consensus Estimate by a couple of cents but fell by a penny from the prior-year quarter. The earnings however, came near the higher-end of the previously provided guidance range of 98 cents to $1.08 per share.

Consumables category was the driving factor behind the better-than-expected results but the discretionary sales remain a drag in the quarter. Further, management hinted that discretionary sales would remain under pressure as the customers remain cautious on account of higher payroll taxes and soft job market. Moreover, this Zacks Rank #4 (Sell) stock also narrowed its earnings outlook.

Let’s Dig Further

Family Dollar posted a 9% increase in revenue to $2,573.5 million from the prior-year quarter, and reflected sales growth across Consumables (up 14.8%), partially offset by Apparel and Accessories (down 8.9%), Home Products (down 2.1%) and Seasonal & Electronics (down 0.5%). However, total revenue fell short of the Zacks Consensus Estimate of $2,601 million.

The strength witnessed in the Consumables category came on the back of robust growth across tobacco, food, and health and beauty aids.

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 incomes are now prioritizing their purchases and looking for low-priced options.

Based in Matthews, North Carolina, Family Dollar hinted that comparable-stores sales are on the rise on improved traffic count and increase in average consumer transaction value. Deeper focus on consumables helped Family Dollar to drive business from budget-constrained consumers. Comps jumped 2.9% in the quarter compared with a growth of 5% in the prior-year quarter.

The sales in the quarter were driven by the lower-margin Consumables category, which now accounts for 72.5% of third-quarter fiscal 2013 sales compared with 68.9% in the prior-year quarter. Consequently, the increase in sales of lower margin merchandises weighed upon the company’s gross margin that contracted approximately 110 basis points to 34.7% during the quarter under review. Higher inventory shrinkage and increased markdowns also hurt the margins. For fiscal 2013, management expects gross margin to remain under pressure.

The economic recovery is still patchy, and bargain hunters are going from one shop to another to grab the best deal, with their primary focus being on consumables.

Other Financial Details

Family Dollar ended the quarter with cash and cash equivalents of $123.5 million, total long-term debt of $516.4 million, reflecting a total debt-to-capitalization ratio of 25.3%, and shareholders’ equity of $1,521.1 million. Capital expenditures for the first-nine months of fiscal 2013 were $599.7 million. Management anticipates capital expenditures between $750 and $800 million for fiscal 2013.

Stores Update

During the quarter, Family Dollar opened 129 new outlets and closed 3 locations taking the total store count to 7,801. The company also renovated, expanded, or relocated 228 stores. Through fiscal 2013, the retailer plans to open about 500 new stores and close 30 to 50 stores.

Strolling Through Guidance

Management now expects earnings in the band of 82 cents to 87 cents a share for the fourth quarter of fiscal 2013. For fiscal 2013, Family Dollar now projects earnings in the range of $3.77 to $3.82 per share. The company had earlier forecasted earnings between $3.73 and $3.93 per share.

The current Zacks Consensus Estimates for the fourth quarter and fiscal 2013 are 84 cents and $3.77 per share, respectively.

Management now projects comparable-store sales increase of 2% for the fourth quarter, but maintained the growth guidance of 3% to 4% for fiscal 2013.

Closing Comment

The economy is still not completely out of hibernation and consumers will remain cautious on their spending, buying only those things that fulfill their basic needs. Consequently, we could see more competitive pricing and new products to attract shoppers.

A price war would definitely eat away margins, which in turn would affect the company’s results. In order to remain competitive, it would be better to try out innovative ways to win the heart of target consumers.

Other stock worth considering in the retail-discount industry, include Dollar Tree, Inc. (DLTR), Fred's, Inc. (FRED) and Ross Stores Inc. (ROST), all of which hold Zacks Rank #2 (Buy).

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