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Family Dollar Troubled by Stiff Competition, Tight Spending

Zacks Equity Research

Family Dollar Stores Inc.’s (FDO) troubles continue, as it delivered another dismal quarterly performance. The fourth-quarter fiscal 2014 earnings of 73 cents a share missed the Zacks Consensus Estimate of 77 cents, and plunged 15.1% from 86 cents earned in the prior-year quarter. Management blamed the quarter’s debacle on stiff competition and cautious consumer spending.

This is the fourth consecutive quarter that Family Dollar has missed the Zacks Consensus Estimate. In the trailing four quarters, the company lagged the Zacks Consensus Estimate by an average of 5.8%. Moreover, the company’s cautious commentary regarding first-quarter fiscal 2015 also alarmed the analysts covering the stock.

The estimates for Family Dollar have been portraying a downtrend since its fourth-quarter results. It seems that these analysts have become less constructive on the stock's future performance. This is evident from the movement witnessed in the Zacks Consensus Estimate that tumbled 5.7% to $3.13 for fiscal 2015 and 9.6% to $3.29 per share for fiscal 2016 in the past 30 days. The company’s Zacks Rank #5 (Strong Sell) also reflects the pessimism surrounding its future performance.

Management also expects gross margin to remain compressed due to increased sales of low-margin consumables and soft sales of discretionary products. The same trend was witnessed in the fourth quarter, wherein gross margin declined 120 basis points year over year to 33.3%.

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To bring itself back on the growth trajectory, this self-service retail discount store chain had earlier announced a slew of measures to improve its operational and financial performances. Family Dollar has been in troubled waters for some time now. A tepid economic recovery and heightened competition from other big brick-and-mortar retailers along with online giants have affected its profitability.

We believe that the company’s merger with Dollar Tree, Inc. (DLTR) would help it to emerge from troubled waters. Earlier, the company had rejected Dollar General Corporation’s buyout offer on grounds of difficulty to win over antitrust regulatory concerns.

Favorably Ranked Stocks

Stocks worth considering in the retail sector include Burlington Stores, Inc. (BURL), sporting a Zacks Rank #1 (Strong Buy) and Ross Stores Inc. (ROST), carrying a Zacks Rank #2 (Buy).

Read the Full Research Report on FDO
Read the Full Research Report on DLTR
Read the Full Research Report on ROST
Read the Full Research Report on BURL


Zacks Investment Research