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Why You Might Want to Bail on Family Dollar

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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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Read/Post Comments (3) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 18, 2014, at 8:18 AM, Njancek wrote:

    Funny, last week it was why Family Dollar was the best bang for your buck.

    A week before that, it was how Dollar Stores were "up and rising."

    Before that, Top 10 Things to Buy from the Family Dollar.

    And a week before that, some other article that I said there would be all these articles. I love this :3

  • Report this Comment On January 18, 2014, at 11:49 AM, amatt0238 wrote:

    At local Family Dollar stores, people have to wait in long lines because they are too cheap to hire enough people to staff the stores. So you have the manager and one cashier. Some of the stores are filthy. I walked into one the other day and it smelled awful, like a sour mop!, They work people like slaves for as close to nothing as they can pay them, they don't train people to move from cashier to assistant manager. If they stay there past 90 days they give them a a key. When they get tired of them, they accuse them of stealing and fire them. I don't know about other areas, but here in Jacksonville, they are awful. The regional and district managers are just as bad. They will fire a whole staff of people claiming that because they are stealing, is the reason for the store's high "shrink" or inventory loss, but they leave the manager in place --really! This company is not a good company to work for at least not the way it is currently structured. I have been spending more of my money with Dollar General and will continue to do so.

  • Report this Comment On January 19, 2014, at 2:22 AM, craigfrombuffalo wrote:

    Family Dollar and Dollar General are not dollar stores no bargains just convenience . and they are a house of cards using investors money to open stores and fudge profit margin if you want real deals look for a local or independent store that offers real bargains on closeout merchandise in BUFFALO we have SHOPPERS CHOICE its the best in the business

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Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

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