Deep-discount chain Family Dollar (NYSE:FDO) will report third-quarter 2007 financial results on Thursday, June 28.

What analysts say:

  • Buy, sell, or waffle? Like the eclectic assortment of goods found in a Family Dollar store, analysts also have a variety of opinions about the chain. Nine say buy, nine rate it a hold, and three urge a sell.
  • Revenues. Sales are forecast to increase 5.6% to $1.66 billion.
  • Earnings. Profits are expected to rise 11% to $0.41 per share.

What management says:
While analysts once again had to scale back estimates as the quarter progressed and Family Dollar provided its monthly same-store sales updates, it looks like the deep discount chain still fell short of expectations as it reported sales would come in at $1.66 billion. That's still more than 5% greater than last year and comps actually were on the rise. Profits may continue to be pressed, however, from rising costs, particularly legal expenses. The company just settled a class action lawsuit related to its stock options granting program and will record charges of $5.7 million that had not been planned for. Also, the chairman and CEO, president, a director, and a company executive will relinquish more than 200,000 stock options as part of the settlement.

What management does:
Last quarter Family Dollar was able to offset higher markdown costs by increasing sales of prepaid services, better purchase markups, and lower levels of shrink. The push for tighter margin consumables will put pressure on margins, though it may ultimately help drive sales higher. Overall for the quarter, comps were barely higher, rising 0.9% -- though in May they were 2.5% higher. This suggests that as the quarter progressed sales were improving and perhaps will lead to a stronger fourth quarter.

Margin

02/06

05/06

08/06

11/06

03/07

Gross

33%

33%

33.1%

33.4%

33.5%

Operating

5.7%

5.8%

5.9%

6%

6%

Net

3.1%

3.1%

3.1%

3.1%

3.5%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Second in store count size only to going-private Dollar General (NYSE:DG), Family Dollar may be able to generate more sales in the future as its rival slows down its store expansion plans. It might also help Dollar Tree (NASDAQ:DLTR), which is about half the size of Family Dollar, and the much smaller Fred's (NASDAQ:FRED). Coupled with Family Dollar's urban presence, which the company feels brings it much closer to the demographic that uses its stores most, Family Dollar hopes to put the options backdating issue behind it and has announced a 5 million share buyback program to help boost shareholder value. However, at current valuations there's still no discount being offered in Family Dollar's price.

Related Foolishness:

Family Dollar has earned a two-star rating from Motley Fool CAPS, the new investor intelligence community. You can add your voice to the stock rating service by joining today. It's free!

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.