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Is Family Dollar Ready For A Turnaround?

August 04, 2014 | About:
Suravi Thacker

Suravi Thacker

1 followers

Dollar stores are in merriment as people look for such deep discount stores in order to keep their budgets under check. Therefore, retailers such as Dollar General (DG) are witnessing gains. However, Family Dollar Stores (FDO) is not one of them. It is having a tough time in attracting customers and boosting revenue.

Its recently reported third quarter results were mixed, wherein its top line was ahead of expectations and the bottom line failed to meet it. This led to a decline in its share price. Let us get into the details.

Driven by consumables

Revenue jumped 3.3% to $2.66 billion, over last year. It came in ahead of analysts’ expectations of $2.61 billion and was largely driven by growth in the Consumables category, which makes 73.3% of total sales. The Consumables segment registered a growth of 4.4% over last year because of growth in the frozen food segment, tobacco and refrigerated products segment. Hence, it was able to attract budget constrained customers for their daily necessities.

Further, Apparel and Accessories segment grew 2.1% and Seasonal & Electronics segment was up by 1.6%. However, the Home Products segment was down by 1.6%, partially offsetting the increase in other categories. The dollar store retailer also added 111 new stores during the quarter, while it closed 3 existing stores. Also, it renovated and relocated 266 stores during the period.

Family Dollar’s same store sales decreased 1.8% due to a drop in customer transactions. Nonetheless, it was partially offset by an increase in transaction value.

The company’s results get bitter as we move to the bottom line. Earnings dropped 33% to $0.85 per share from $1.05 per share, in the prior year. Also, it failed to meet the estimate of $0.89 per share. This is mainly due to restructuring costs which the company is incurring because of its efforts to make the business more profitable. Moreover, increased markdowns and higher sale of low margin consumables resulted in a gross margin decline of 40 basis points to 34.3%.

On the other hand, peer Dollar General’s latest quarter reported a 6.8 % surge in the top line, driven by same store sales growth of 1.5%. Also, its bottom line rose to $0.72 per share from $0.67 per share in the previous year’s quarter. One of the key drivers for the company was its Consumables category and higher store traffic, which boosted its revenue.

The restructuring efforts

The management is taking measures to restructure its business in order to control costs. It has reduced its employee count and will close about 370 underperforming stores, which should help in saving costs. Also, it will slower the speed of new store openings and become more rational about it. It plans to open a total of 525 new stores and close 400 stores in fiscal 2014. Further, it plans to add 350 to 400 stores in fiscal 2015.

Moreover, it has reduced prices for 1,000 basic items in its stores, which should attract budget strapped customers to its stores. In fact, it plans to add value based products and invest $50 million every year for this. Family Dollar will also extend its cooler facilities and add products such as wine and beer to lure customers.

Finally

Although Family Dollar is being unable to register a decent quarter and outpace its industry peers, its efforts look interesting. Its restructuring measures and plans for next year should help the company witness growth. Further, it is mainly because of restructuring costs that the retailer is unable to register earnings growth. Once everything is settled, things should start falling into place. Till then, investors should watch this dollar store closely and wait for the right opportunity.


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