Is Family Dollar Too Expensive?

How do this dollar-store retailer's prices compare to Dollar General's and Wal-Mart's -- and how do the companies' stocks stack up for investors?

Jan 12, 2014 at 4:35PM

Discount retailer Family Dollar Stores (NYSE:FDO) seems to be imploding. The Matthews, N.C.-based discounter was already lagging rivals Dollar General (NYSE:DG), Dollar Tree, and Wal-Mart Stores (NYSE:WMT), and now it seems to have fallen into greater despair.

In trouble
Family Dollar's just-released first-quarter results were not pretty. Revenue increased just 3.2% to $2.5 billion, but net income was down to $78 million in the quarter from $80.3 million in the prior-year period. While these numbers might not suggest that Family Dollar is in a precarious position, a 2.8% drop in same-store sales and a tepid outlook for the current fiscal year will remove any doubts.

Moreover, Family Dollar's president and chief operating officer, Michael Bloom, resigned recently after what seems like a fallout with Howard Levine, the CEO. According to Levine, "While we've made some progress during Mike's tenure, we weren't happy with our financial results. Ultimately, Mike and I were not aligned on our merchandising strategy and we decided to make a change." 

While rival dollar stores have been seeing an increase in traffic, Family Dollar is going the opposite way. In its last-reported quarter, Dollar General's same-store sales grew 4.4%, while revenue and net income grew in double digits. Also, in what was considered to be a weak quarterly performance, Dollar Tree managed to post same-store sales growth of 3.1%. 

Family Dollar struggled as lower-income customers looked to stretch their budgets. According to The Wall Street Journal, more than 50% of Family Dollar's customers receive some kind of government assistance. But now, high unemployment levels, higher payroll taxes, and reductions in government assistance programs have created more pressure on these lower-income customers.

Tough times ahead
Family Dollar employed a strategy of offering discounts on certain items and made up for those discounts by raising the prices of other items. However, this strategy hasn't worked quite well since shoppers are looking for everyday low prices rather than discounts on select items. Moreover, Family Dollar also had to incur costs in printing circulars to promote the discounted items, apart from spending effort on rearranging stores to better highlight them. 

Clearly, Family Dollar's strategies have failed to attract shoppers on a budget, and the competition is eating its lunch. As such, the company now expects its same-store sales to decline in low-to-mid single digits in the upcoming quarters. Additionally, Family Dollar trimmed its guidance for fiscal 2014, lowering the earnings-per-share range to $3.25-$3.55 from the former $3.80 -$4.15. 

Now, Family Dollar is looking to arrest the decline by looking to lower overall prices. However, there is no instant relief in the cards since rivals are probably better positioned. According to a Kantar Retail Survey, Dollar General is the least expensive place to shop, with an average basket price of $28.70 --  7.4% cheaper than Family Dollar, which was third in the survey with an average basket price of $30.81.

Dollar General has a network of more than 11,000 stores, and it plans to increase its store base by another 27% in the future. So, a combination of low prices and an increasing network of stores can make life difficult for Family Dollar going forward.

Then there's Wal-Mart, which was just behind Dollar General in the Kantar survey with an average basket size of $28.82. Going forward, Wal-Mart can make things more difficult for Family Dollar as it expands its neighborhood market stores. Wal-Mart plans to increase the number of its smaller stores by around 75% in the next year or so, and it is also testing the Express format, its smallest store concept. Thus, like Dollar General, Wal-Mart is also a big threat for Family Dollar going forward with its low prices and wide network.

The takeaway
Family Dollar's strategies have failed to click in a difficult retail environment. Management expects same-store sales to go south in the future and has also reduced its earnings forecast for the fiscal year, which should be a good enough reason for investors to question holding Family Dollar shares.

Make your dollars go further for the future
In our special report "Your Essential Guide to Start Investing Today," The Motley Fool's personal-finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

Fool contributor Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers