Recently opening its 8,000th location, Family Dollar (FDO.DL) reported impressive headline sales figures, even in the face of flat comparable sales growth. The company and its peer dollar store giants have had impressive runs over the past few years, with the Great Recession driving price-conscious consumers into the stores -- some for the first time. Going forward, though, Family Dollar faces the common situation of a seemingly fully valued stock price coupled with the task of continuing an impressive growth run. Is Family Dollar still a good deal for your portfolio?
Cheap wins
For the recently ended fiscal fourth quarter, Family Dollar saw record sales of $2.5 billion -- a 5.8% increase from the prior year. On the bottom end of the income statement, the company benefited from a $5 million accounting adjustment, though when excluded, earnings still climbed more than 14% to $0.86 per share. As mentioned, same-store sales growth was flat for the quarter.
Similar to most retailers in recent periods, management cited a greater-than-expected struggle with a tepid consumer-spending environment. Shortly following, though, the company announced it had gained market share and improved margins, along with concluding a year in which it opened 500 new stores. In the coming year, management plans to open an additional 525 stores.
For the full year, the company saw sales rise 11.4% to more than $10 billion and adjusted diluted EPS gains of 4.4%. Same-store sales grew 3%.
Looking ahead, management expects $3.80 to $4.15 in EPS. In the year-ago quarter, the company earned $3.83 per share.
What it means
Given that Family Dollar was still able to drive top-line sales and earnings higher in the face of serious macroeconomic headwinds, investors should take comfort in the operating business. The market reacted negatively to earnings, but that is to be expected of the short-term-oriented estimates. Regarding valuation, the understanding is that you are paying for the more than 1,000 new stores coming online through fiscal 2013 and 2014.
Family Dollar trades at more than 15 times forward earnings and has an EV/EBITDA of 9.2 times. For comparison, Dollar General trades at a lower forward P/E (15.17 versus 15.46) but has a higher trailing EV/EBITDA --10.59 times. Dollar Tree, likely the fastest grower (and helped by the recent addition of tobacco products), is the most expensive of the bunch.
With the three companies competing very closely, this business is on a quest to deliver the most value to penny-pinching shoppers. The products are largely the same, and price is king. As all three continue to build out their store footprints, the race for market share could intensify -- resulting in more markdowns and margin pressure. The dollar businesses may also see increased pressure from the retail overlord: Wal-Mart. The company has made greater efforts lately to provide bottom-price items and smaller-format shops to its customers.
In isolation, Family Dollar is an attractive growth business. But given the tight margins and increasing pressure from outside businesses, it's nerve-wracking to pay a relatively high earnings multiple for it. Investors confident in the longevity of dollar store growth, though, may find this retail discounter compelling.
