It's been interesting watching the events in the retail world this year. Retailers at the two extremes of the budget/premium spectrum have recorded strong sales, but those in the middle have struggled to stand their ground.
Luxury retailers such as Tiffany (NYSE: TIF ) and Coach (NYSE: COH ) have performed remarkably well as high-end consumers have shown the willingness to spend on niche products. Meanwhile, discounters such as Dollar General (NYSE: DG ) andTarget (NYSE: TGT ) have benefited as budget-conscious consumers hunt for cheaper offerings.
For discounter Family Dollar (NYSE: FDO ) , the story has been more or less the same – higher sales on ultra-discount offerings. Let's take a closer look at Family Dollar's fundamentals and see what it has planned up ahead.
Income matters
Family Dollar's five-year annual revenue growth rate stands at 6%, whereas in the last 12 months, its revenues have grown by 8.4%. This acceleration has been fueled by higher customer traffic and also an increase in average customer sales. The company saw strength in its consumables and home product categories in the latest quarter.
Family Dollar is expanding its store count as part of a longer-term plan to increase revenue. The company opened 206 stores in the last three quarters and plans to add another 94 by the end of the year.
Family Dollar's trailing operating margin has improved to 7.4% from 5.7% in 2006. So even as the economy shows no real signs of revival, the company has managed to increase its profitability.
Balancing it out
The company's debt-to-equity ratio has increased to 46.4% from 17.6% a year ago. This figure has risen as total debt has more than doubled to $548.5 million in the same period. This has been fueled by higher investment in store openings and remodeling efforts. But the company has also been buying back shares, lowering its equity. Considering the company's recent performance, the debt load is more than manageable.
Once these expansion efforts take flight, I expect the company to start churning cash once again. Investors should pay attention.
Value and returns
With a forward P/E of 15.6, Family Dollar looks like a decent bet compared to its closest peers. 99 Cents (NYSE: NDN ) has a P/E of 18.0, whereas Dollar Tree (Nasdaq: DLTR ) has a P/E of 17.2. With its solid performance and future growth plans, Family Dollar seems like a good buy.
It yields 1.4%, and with a payout ratio of just 21.5%, there's plenty of room for bumping that dividend.
The Foolish bottom line
Family Dollar has performed well during the recession and in the face of high gas prices and looks set to carry the performance forward. When a company starts to attract the attention of investors such as Bill Ackman and Nelson Peltz, it's hard to ignore it. What do you think?
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