An increase in the consumer spending in the U.S. has resulted in good days for the retailers, as they witnessed higher demand as consumers splurge their money. Also, lower gasoline prices have resulted in further relief. However, there are some companies who fail to benefit from this uptrend. They continue to struggle due to increased competitive pressure and inability to attract adequate customers.
Family Dollar Stores (FDO, Financial) is the company I am talking about. The retailer is undergoing a very difficult phase, wherein it plans to finally give up to its rivals. Its recently reported quarter was a lackluster one, wherein both the top line and the bottom line missed the Street's estimates.
An overview of the quarter
Revenue for the quarter surged 2.3% to $2.56 billion, over last year. This was slightly lower than the analysts' estimate of $2.57 billion. The top line increased because of certain factors, one of them is the addition of 59 stores during the quarter, which contributed the revenue base. Also, the retailer relocated, expanded and renovated 178 stores, in order to make the stores better and attractive.
But the company registered a decline of 0.4% in comparable store sales as there was a drop in the number of transactions as well as the value of average transactions. However, sales improved in the month of December as comp sales rose 1.2%, driven by higher store traffic.
The bottom line of the company was disheartening. Earnings dropped 47% to $0.44 per share, as compared to the previous year. The analysts were expecting a bottom line of $0.62 per share. Earnings were affected by Family Dollar's new pricing strategy as well as by a shift to lower margin products, such as tobacco and other food products. Thus, margins shrank to 33.4% from 34.3% in the prior year.
Digging deeper
The consumables category makes 75.8% of the total revenue. Thus, it has grown from a contribution of 74.9% in the last year. Sales of consumables grew 3.5% during the quarter and were driven by demand for frozen food and tobacco. Demand for seasonal products and electronics also increased 2.5%.
However, sales of home products dropped 4.8% during the quarter. Discretionary item sales fell 1.3%, as people were less willing to spend on such products.
Nonetheless, the company has undertaken various measures which should help it grow. For instance, it has reduced the pace of new store openings and wants to open it more cautiously. Also, it has lowered its spending on technology.
Family Dollar's recently taken restructuring measures include reducing prices of 1000 basic items, adding value-based products, controlling costs and closing some of the underperforming stores. These efforts should be beneficial in the future.
To end up with
Although it is in a bad state, the restructuring measures of the retailer look quite interesting. In addition to its efforts to reduce the product prices, it has undertaken various initiatives to enhance its store productivity. This should attract customers and make them visit its stores. However, one should be cautious about putting its money in this company until it shows clear signs of a recovery.
