Here Come the Consumers

Distressed, underemployed consumers are still flocking to Family Dollar (NYSE: FDO  ) stores to take advantage of its rock-bottom prices. But the discount retailer isn't letting its guard down.

Back in October, the company was taking measures to keep its momentum going. By scaling back on its discretionary inventory, it risked forgoing sales of higher-margin items to make more room for consumables. And at the same time, management aimed to bolster top-line growth by accepting food stamps and credit cards at more of its stores.

Three months later, it's clear that something's working. The company raked in more than $1.82 billion in its first quarter -- up 4% from last year's quarter -- and same-store sales were up 2.4%. Although revenues didn't grow as much as the company had originally anticipated, margins improved nicely, resulting in solid bottom-line growth. Net earnings were 14% higher at $67.6 million, but they grew nearly 17% on a per-share basis after the company spent $25 million on stock repurchases over the quarter.

A value investor's dream?
The results sent shares soaring yesterday, but is Family Dollar a clear buy? Take a look at how its current valuation compares with other retailers.

Company

Price-to-Earnings Ratio

Expected (5-Year) Earnings Growth

BJ's (NYSE: BJ  )

14.3

10.3%

Big Lots (NYSE: BIG  )

            14.0

13.0%

Family Dollar

14.7

12.8%

Dollar Tree (Nasdaq: DLTR  )

15.5

14.2%

Wal-Mart (NYSE: WMT  )

            15.4

11.8%

Target (NYSE: TGT  )

17.5

13.9%

Costco (Nasdaq: COST  )

            24.1

13.2%

Source: Yahoo! Finance.

It's not an easy call. On one hand, you could say that it's relatively undervalued -- but not by much -- based on other earnings multiples in the discount-oriented retailer niche. As a strict value play, I think Family Dollar has some good prospects. Its balance sheet is healthy, and the stock sports a dividend yielding 1.8% at recent price levels. It's not an incredible bargain, but you may want to pay up for quality. And if you're looking for an earnings growth play, Family Dollar has a proven knack for surprising analysts. So you could also make a legitimate case from that standpoint.

If it were my decision, I would base it on how I see the consumer behaving over the next decade. And I tend to believe that people will continue to penny-pinch their way into the next economic cycle. So while Family Dollar isn't a clear bargain -- and it's not a clear growth play -- if you do some soul-searching and your own due diligence, you may find that it's a good fit for your portfolio.

I won't pay you a dollar for your thoughts ... but I'm still interested. Get the discussion going in the comments section below.

Costco and Wal-Mart are Motley Fool Inside Value recommendations. The Fool owns shares of Costco, which is also a Stock Advisor choice. Try any of our Foolish newsletters free for 30 days

Fool contributor Chris Jones doesn't own shares of any company mentioned in this article, nor is he short anything. The Motley Fool's disclosure policy is free to a loving home.


Read/Post Comments (0) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1079313, ~/Articles/ArticleHandler.aspx, 10/2/2014 10:45:26 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement