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.

The best option for your money in 2014
There’s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

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.

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