Can Family Dollar Earnings Hold Off Dollar General's Growth?

Family Dollar (FDO.DL) will release its quarterly report on Wednesday, and with economic concerns starting to rise in light of the government shutdown, dollar-store retailers might end up being big winners again as they were in 2008. Yet despite expectations that Family Dollar earnings will grow, Dollar General (DG -3.04%) has been aggressively expanding to boost its store count, and Dollar Tree (DLTR -3.29%) and other competitors will also stake their claim in the lucrative retail niche.

Last quarter, Family Dollar met the challenge from Dollar General and its other peers, managing to push ahead in the increasingly crowded dollar-store space. This time around, the biggest question Family Dollar faces is whether it can accelerate its success without running straight into its rivals' expansion plans. Let's take an early look at what's been happening with Family Dollar over the past quarter and what we're likely to see in its report.

Stats on Family Dollar

Source: Yahoo! Finance.

Will Family Dollar earnings break the dollar mark soon?
Analysts have grown less excited in recent months about Family Dollar earnings, cutting a penny per share from their August-quarter estimates and more than 1% from their full-year fiscal 2014 expectations. That hasn't held the stock back, though, with gains of 12% since early July.

Family Dollar's previous quarterly report shows some of the success and concerns that the retailer has experienced lately. A 2.9% rise in same-store sales combined with 129 new stores produced a 9% overall revenue bump. Yet the strength in revenue came at the expense of profit margins, as the company's gross margins eroded by more than a full percentage point. Dollar Tree managed to raise its profit margins, posing a troubling sign for Family Dollar.

The big reason for Family Dollar's margin erosion is its increasing reliance on consumable products like food and tobacco. Family Dollar gets more than two-thirds of its sales from consumables. Dollar Tree, by contrast, weighs in at just over half or total revenue. The products enjoy high popularity among customers, but they come with special expenses like refrigerators and freezers and don't provide the same ability for markups as other goods.

Some analysts have argued that rather than fighting among themselves, dollar retailers should team up against Wal-Mart (WMT 1.00%) and its much larger threat to the deep-discount model. As Fool contributor Ted Cooper suggested last month, Dollar General would make a particularly interesting partner for Family Dollar, as a merger would avoid the necessity for the two retailers to expand willy nilly to hold their ground against each other. Instead, a combined Family Dollar and Dollar General could expand at a more reasonable pace and avoid any need to consolidate relatively new stores later. As Wal-Mart's Neighborhood Market stores have demonstrated, the retail giant is looking to create footprints that compete more directly against dollar stores.

In the Family Dollar earnings report, watch to see whether the consumables trend continues, and also pay attention to more strategic decisions concerning expansion and product selection. As Dollar General keeps ramping up its store count, Family Dollar will need to keep pace in order to avoid losing position in the industry.

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