Why You Might Want to Bail on Family Dollar

While dollar stores like Dollar General and Dollar Tree Stores rack up sales growth, Family Dollar Stores is quickly falling behind.

Jan 18, 2014 at 7:00AM

Dollar stores in the United States seem to have the wind at their backs. Tepid growth in the labor market and the frustratingly slow economic recovery in the United States means many consumers are scaling back their spending habits. As a result, it seems dollar stores should have plenty of reasons to succeed. Unfortunately, Family Dollar Stores (NYSE:FDO) completely fell flat in the first quarter.

Adding to investor woes is that the problems afflicting Family Dollar appear to be company-specific and are not seen across the entire dollar store industry. As a result, investors may want to ditch Family Dollar for one of its better-performing rivals.

No hiding a bad quarter
Metrics deteriorated across the board. Family Dollar managed a 3.2% net sales increase, but comparable-store sales, which measure sales at locations open at least one year, fell 2.8% in the first quarter. This compares very poorly to the results from other dollar stores. Dollar General (NYSE:DG) generated 4.4% same-store-sales growth and 10.5% growth in net sales. Quarterly earnings increased 19%, and to celebrate its financial windfall, management announced an additional $1 billion share repurchase authorization.

Likewise, Dollar Tree (NASDAQ:DLTR) grew same-store sales and net sales by 3.1% and 9.5%, respectively, in its last quarter. Its diluted earnings grew nearly 14% as opposed to the same quarter last year, excluding a one-time gain in the third quarter of fiscal 2012.

For Family Dollar, making matters even more dubious was the ensuing management shake-up. After reporting, Family Dollar announced its President and Chief Operating Officer will leave the company to 'pursue other interests'.

Its President and COO departing, as well as its poor results compared to its competitors, makes it seem like Family Dollar's problems are not an industrywide issue. Unfortunately, conditions aren't expected to improve in the near future.

Outlook leaves a lot to be desired
In addition to falling short in the first quarter, the rest of the year isn't expected to be much better. Family Dollar lowered its full-year net sales guidance to a low-to-mid single digit increase. The company now warns that comparable-store sales may decrease slightly this year, as compared to previous expectations for a low-single digit increase.

Not surprisingly, this will significantly drag down Family Dollar's earnings both in the upcoming quarter and in 2014. Earnings in the second quarter are expected to clock in at $0.90 per share, lower than consensus analyst estimates. And, Family Dollar lowered its full-year earnings guidance from $3.97 to $3.40 per share.

Family Dollar is a cheap stock -- for a reason
Family Dollar was forced to turn very promotional to keep sales afloat, which pressured margins in the last quarter. Furthermore, its best-selling category was consumables, which includes foods and tobacco. These are not core products for Family Dollar, and they aren't what the company counts on for the bulk of its sales. More broadly, Family Dollar reported decreased customer transactions and a decrease in average customer transaction value.

It's clear that Family Dollar is losing traffic to its competition. Admittedly, it's a cheap stock, but there are reasons for that. It holds a trailing valuation multiple lower than both Dollar General and Dollar Tree. And, it's the only stock of the three to be cheaper than the broader market as well. But it appears that Family Dollar is justifiably cheap. Same-store growth is decelerating, and isn't expected to meaningfully pick up for the remainder of the year.

Family Dollar is the only one of the three major dollar stores to pay a dividend, but its 1.6% yield is little consolation. Major fundamental concerns more than outweigh Family Dollar's dividend and cheap valuation. There are better options for your investment dollar.

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Bob Ciura 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.

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