Why This Dollar Store Isn’t Worth Your Dollar

Of the major dollar-store chains, Family Dollar Stores (NYSE: FDO  )  is likely to be the biggest disappointment of 2014. The speculated buyout hasn't, and likely won't, come to fruition. Family Dollar continues to search for new ways to differentiate itself from other major dollar stores, namely Dollar Tree Stores (NASDAQ: DLTR  ) and Dollar General (NYSE: DG  ) .

As mentioned, Family Dollar was the topic of a potential buyout back in August of last year. Billionaire Nelson Peltz tried to purchase the company two years ago, and in July a standstill agreement with Peltz ended. As a result, options prices suggested record takeover speculation in August, according to Bloomberg. Various private equity names were floated as suitors, as well as major rival Dollar General. Yet, despite the argument that there would be various cost synergies between Family Dollar and Dollar General, the fact that Family Dollar's margins and cash flow continue to deteriorate has kept Dollar General away.  

Family Dollar is already disadvantaged enough, but given its key customers are susceptible to economic conditions, available credit, and unemployment, a rebounding economy in 2014 would spell bad news for all major dollar stores.

Family Dollar's management team guided comp-store sales to be down in the single digits for the fiscal first of quarter 2014, and they believe the next few quarters will be tough, in part due to economic pressures, but more so because of internal missteps. For instance, inventory has been on the rise and turnover is down.

Family Dollar's gross margin for the trailing-12 months is at the lowest it's been in the last decade, at 34.2%. There's a lot of execution risk to get that back up, which includes relying more on private labels. However, as mentioned, one of the biggest issues is its management problems. Management turnover was in the high 30% range last quarter, up from the mid-20% range year over year, suggesting morale is quite low at the company.

Family Dollar is outgunned
Dollar Tree is the smallest of the major dollar stores. Meanwhile, Dollar General is the dollar-store leader, and it continues to succeed with its expansion. Either one of these dollar stores appears to be a better bet than Family Dollar.

Over the last three months, Family Dollar's fiscal 2014 earnings-per-share estimates have moved down from $4.13 to $3.98. The stock still trades with a 1.5 PEG, the highest among its peers, whereas Dollar General's and Dollar Tree's are both at 1.2.

In the most recent quarter, Dollar General managed to post same-store-sales growth of 4.4% year over year, crushing the likes of Dollar Tree and Family Dollar in their respective quarters. In addition, all the major dollar stores have been adopting consumables, so Family Dollar will not get any major advantages with its consumable/refrigerated adoption.

Although Family Dollar was a first adopter of tobacco products, Dollar General has since moved to offering tobacco in its stores and is seeing great success. That's because it's not just tobacco sales that the company is seeing a rise in, but the fact that customers are coming in to buy tobacco and end up shopping for other items.

In more recent news, Family Dollar's earnings announcement from this week showed that earnings and sales missed during fiscal 1Q 2014. In addition, it lowered fiscal 2Q EPS guidance to $0.85-$0.95, compared to consensus of $1.21. The company also noted that its President and COO, Michael Bloom, was leaving the company to pursue other opportunities. 

Bottom line
Family Dollar has a number of headwinds that should make it the poorest performer of the major dollar stores, one of the biggest being the amount of competition in the market, not to mention its own internal struggles. The company went through a major product-offering restructuring back in 2012, and management has not been very receptive. However, Dollar General, the dollar-store leader, appears to be quite a solid investment, with plans for continued store growth in 2014.

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Read/Post Comments (13) | Recommend This Article (14)

Comments from our Foolish Readers

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  • Report this Comment On January 10, 2014, at 12:58 PM, suezq wrote:

    I was an employee at Family Dollar for 3 years. I had never worked retail before but had a lot of experience in different areas of employment. This company expects their store managers to work 70 hours a week while being paid a salary of 52 hours per week. Corporate will send an email in the middle of the week saying that the payroll budget must decrease so cut 10 hours (example) from the rest of the week. That means you have to take hours away from a cashier who is paid hourly and work the shift yourself. So management is running the register, putting up stock and helping customers while in the store alone. And because Family Dollars tend to place store is lower income neighborhoods theft is high. So said managers get in trouble for not putting up enough stock, high theft and poor customer service. Bonuses are based solely on shrink numbers but they refuse to prosecute theft of any kind and everyone in the neighborhood knows this and the store becomes the "five finger" discount store! And as the article states turnover is a huge problem. In my particular location I had at least 9 store managers in a 3 year period (only 2 remain with the company) and over 30 store employees that consisted of assistant managers and cashiers. I have not idea why I stayed so long but it definitely was a learning experience as what NOT to do when running a company.

  • Report this Comment On January 10, 2014, at 6:45 PM, Thallas wrote:

    I worked at Family Dollar as an assistant manager for about a year and a half, and can attest to what suezq posted about the policies of Family Dollar. If you are a manager, you work a lot by yourself, and if you were to follow their policy to the letter you have to stay in sight of the registers at all times...this equals out to being able to front face a few aisles, and some of the clothing but 3/4 of the store is outside of that area, and trying to stock anything means you have to leave sight of the registers to retrieve a uboat of stock. You cant have more than the uboat you are currently working so multiple trips to the stock room to get more uboats each time you are breaking a rule, heaven forbid upper management stop by and you don't say Hello to them upon entering or its immediate grounds for dismissal. I was laughing when Family Dollar was on Undercover Boss and the lady from the Upper Peninsula of Michigan was telling the CEO how she worked a lone a lot.

  • Report this Comment On January 10, 2014, at 7:56 PM, Dansea4 wrote:

    I worked for Family Dollar here in northern NH for 7 years! Guess that makes me a long timer. For 6 1/2 years I was an assistant manager. I had never worked retail before and it really opened my eyes. Because our prices were low and we were located downtown, we had lots of customers. Unfortunately, not all of them paid for the items they left the store with. Because we had a high loss, the company sent the loss prevention guy to our store. He began by accusing us (the store employees) of stealing $38,000 of merchandise. I can say that none of us was a thief. While he was in the store, someone stole a boom box! But he still didn't believe us. I told him that if he was so sure I had stolen something to arrest me and take me to the police station. From there, I would call my lawyer and file a suit against FD for false arrest. He left. But that is the way this company treats its employees. I worked 7 Thanksgiivings in a row at straight pay $8.50 an hour. Not once did the District Manager or VP send a Thank you. When I hear people bad mouth Walmart, I have to laugh. Most Walmarts have dozens of employees. There were times when as Manager of the Day, I had to run register for 4-5 hours, do paper work, unload the weekly truck (22,000 pounds), deal with nutty customers and the shoplifters, stock shelves, etc. When I asked for a raise, I was asked why I thought I deserved one! In those seven years, I had 5 managers. Finally, had had enough and I got done due to injury. Best move I ever made.

  • Report this Comment On January 10, 2014, at 8:39 PM, oldmutt1949 wrote:

    I feel sorry reading the accounts of these managers and believe they have a strong case for a class action law suit.

    Company management that threatens, intimidates employees, causing mental and emotional abuse, violates minimum wage standards, accuses employees of theft all the while demanding they work slave hours should be sued out of business and the sooner the better.

    If the company is too cheap to install security cameras to protect against shop lifters and protect employee they need to go.

  • Report this Comment On January 10, 2014, at 10:12 PM, nesst wrote:

    Its incorrect and even silly to compare Dollar Tree to the other two stores. Dollar Tree is a true dollar store that charges exactly ONE dollar for every item in the store.

    The other two are DISCOUNT stores that have items in varying prices ranges from $1 to $10 or even $15 dollars apiece.

    The different pricing structure means different range of merchandise and different competitors:

    FD and DG carry many items that are also carried at supermarkets and box stores, so they have more competition for those items.

    On the other hand, they can raise prices when costs go up, while Dollar Tree cannot.

    This makes for an entirely different business model, with different strengths and weaknesses. This requires different management strategies across the board.

  • Report this Comment On January 10, 2014, at 10:38 PM, rdogg9900 wrote:

    I worked at Family Dollar for 3 years in Greensboro, NC, starting off as a highly paid assistant.. in respect to what assistants made at Dollar Tree, Dollar General, and other Family Dollars made at the time. I eventually became a Store Manager when the 1 I had transferred to a new store. I was supposed to have 2 weeks to find an assistant to take my place. 2 days after I was told I was getting a promotion, they came to me and said.. change of plans, you have 2 days to find an assistant, we are going forward this week. I worked 80 hours a week for my first 2 weeks, not working more than that solely because other store managers felt bad and loaned me their assistants for a shift or 2. After I found an assistant I still worked 60-65 hours a week at my store and others. I stepped back down and co-managed 2 stores with another manager, becoming hourly again, still working 60 hours, but making overtime. My first paycheck back as an assistant was $10 more than I had made as a Store Manager working 60-80 hours a week.

  • Report this Comment On January 10, 2014, at 11:59 PM, ScamuelJones wrote:

    Compared to Dollar General and Dollar Tree (I shop at all three!), Family Dollar Stores are poorly organized, dirty and unkept and higher priced on many comparable articles! I concur with this article! Family Dollar is pathetic compared to the other two!

  • Report this Comment On January 11, 2014, at 3:33 AM, Fuzzybear84 wrote:

    I shop only at Dollar Tree. Their stores are always clean and tidy. The people are friendly. In the area where I live there was a Family Dollar that lasted maybe 2 years. There was also a Dollar and ETC. that was like Family Dollar and Dollar General. Not actually true dollar stores. That went out of business too. If we go shopping in another town I always look to see if there's a Dollar Tree. If so, I just have to stop and look around.

  • Report this Comment On January 11, 2014, at 12:13 PM, SweetBetsy wrote:

    Long time ago a church lady made a nasty comment to me about "You smokers." Her husband and she owned a chain of gas stations that sold cigarettes. I wish I had had said in a funny way, "Well, maybe you should insult the people who sell cigarettes to the smokers." Anyone investing in stocks of such stores that sell tobacco, especially dollar stores, is an unethical exploiter of the poor.

  • Report this Comment On January 11, 2014, at 4:45 PM, TheMoogly wrote:

    I buy my shampoo from Walmart for $1.50 for 15 ounces. I can get it at the local dollar store for $1....for 10 ounces. The only value I find at dollar stores is epoxy, the kind that glues itself shut after 2 uses. I spend $1 for epoxy at the dollar store and throw away 80 cents worth instead of spending $5 and throwing away $4.75.

  • Report this Comment On January 11, 2014, at 4:58 PM, bcweir wrote:

    If you really want to see some fun at a dollar store, walk in with an empty backpack on your back and walk PAST the cash registers.

    Last time I did that, the staff went nuts! Seriously! You'd have thought I was caught trying to set fire to the place.

    I was told to empty my backpack, my pockets, etc.

    They would have stripsearched me if they thought they could get away with it.

    No other retailer treats people this way. I get better products AND better treatment from Wal-Mart and Target any day of the week.

    Reason enough to stay out of these stores.

  • Report this Comment On January 12, 2014, at 1:49 AM, jimmymob wrote:

    when are these foolish blog writers going to get facts straight and actually visits these stores???? Dollar General and Family Dollar stores are not dollar stores like Dollar tree, they are just mini walmarts.

  • Report this Comment On January 12, 2014, at 11:53 AM, srv2963 wrote:

    Pretty much everything you can get at family dollar you can get anywhere else for much cheaper!!! at times they have items like paper towels, laundry soap, on sale but overall its not a store i would shop at.

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