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Family Dollar Facing Exogenous Threats
Posted by: Victor Selva (IP Logged)
Date: March 25, 2014 05:37PM

Family Dollar Stores Inc. (FDO) operates a chain of general merchandise retail discount stores, providing consumers with a selection of merchandise in neighborhood stores. The company’s merchandise assortment includes Consumables, Home Products, Apparel and Accessories, and Seasonal and Electronics.

Macroeconomic Factors

Family Dollar offers general merchandise in four categories--consumables, home products, apparel and accessories, and seasonal and electronics--and sells merchandise at prices from under $1 to $10. The focus is on customers that earn less than $40,000 per year. This target people are often dependent on government assistance and are regular users of discount coupons. The firm operates in the highly competitive discount retail merchandising sector facing great competition from Wal-Mart (WMT) and Dollar General (DG). Macroeconomic factors are hurting Family Dollar performance. The company´s customers remain sensitive to interest rate, fuel and energy costs, credit conditions and unemployment levels. All of them could potentially affect the consumer spending. Comparable-store sales fell 2.8%, and are expected to decline in the low-single digit range during the Q2 FY 14

Growth Catalysts

Commitment towards better pricing and cost effective strategies should drive sales and margin trends in the near future. The company added about 500 new private brand consumables SKUs (stock keeping units) in fiscal 2013 and plans to add 200 more in fiscal 2014.

Analyst Recommendation

The firm is currently Zacks Rank # 3 - Hold, and it also has a longer-term recommendation of “Underperfom”. For investors looking for a better ranking, Burlington Stores, Inc. (BURL) could be an option.

P/E, Earnings and ROE

In terms of valuation, the stock sells at a trailing P/E of 15.5x, trading at a discount compared to the industry. Earnings per share (EPS) decreased in the most recent quarter compared to the same quarter a year ago and missed the Zacks Consensus Estimate by a penny.

Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased when compared to the same quarter one year prior. Let´s compare the current ratio with the peer group in the next table:

Ticker

Company Name

ROE (%)

FDO

Family Dollar Stores

27.74

BIG

Big Lots, Inc.

23.36

PSMT

Pricesmart, Inc

17.52

TJX

TJX Companies

52.01

As we can see, the firm has a higher ROE than Big Lots, Inc. (BIG) and Pricesmart, Inc. (PSMT) but far less than the one from TJX Companies (TJX).

Final Comment

As outlined in this article, the company underperforms in its Q1 fiscal 2014 results, where the rate of growth has decelerated. Macroeconomic trends won´t change immediately and this constitute a major risk. On the other hand, we think Family Dollar can benefit from the pricing and cost effective strategies.

According to Yahoo! Finance, the estimated one-year target share price is $60.95, so if you buy shares at current market price ($58.51), your return from price appreciation would be 4.2%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of 31 cents per share each quarter, totalizing $1.24 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on an investment for a stock, and in this case is 1.8%. So the total expected return for investing in Family Dollar is 6%.

Hedge fund gurus have also been active in the company in Q4 2013. Gurus like Jim Simons (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Eric Mindich (Trades, Portfolio) have invested in it.

Disclosure: Victor Selva holds no position in any stocks mentioned.




Guru Discussed: Eric Mindich: Current Portfolio, Stock Picks
Jeremy Grantham: Current Portfolio, Stock Picks
Stocks Discussed: FDO, WMT, DG, BIG, PSMT, TJX,
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