Can This Dollar Store Turn on a Dime?

Family Dollar Stores (NYSE: FDO  ) shares have been sliding recently, with the stock down 6.5% in the last three months. Moreover, the latest news wasn't good. Recent results saw the company lower full-year earnings estimates, and the departure of president and COO Michael Bloom isn't exactly what investors needed to hear right now.

In addition, Family Dollar continues to underperform its rivals Dollar General (NYSE: DG  ) and Dollar Tree Stores (NASDAQ: DLTR  ) , while end-market conditions for the dollar stores remain challenging, as lower-income groups in the US are not proportionately benefiting in the recovery. Can Family Dollar turn things around? And is it now the value play in the sector?

Family Dollar disappoints
Key points from the first-quarter earnings report:

  • Comparable same store decrease of 2.8% vs. guidance for a low-single digit decline
  • Earnings per share of $0.68 vs. guidance for $0.65-$0.75

While the results were not particularly bad, there were some significant downgrades in its full-year guidance to August 2014.

Full Year 2014 Guidance At Q4 2013 At Q1 2014
Net Sales mid-single digit increase low-to-mid single digit increase
Comparable-Same-Store Sales

low-single-digit increase

low-single-digit decline
Net Store Openings 445 445
Gross Margin expansion flat
Capital Expenditures $550 million to $600 million $450 million to $500 million
Share Repurchases $100 million $250 million
Earnings Per Share $3.80-$4.15 $3.25-$3.55

Source: Company Presentations

Guidance for net sales, comparable-same-store sales, and gross margin was lowered, but store expansion plans were kept consistent. In addition, don't assume that the lower capital expenditures guidance was an adjustment to the company's weakening performance. Rather, it's more reflective of a change in how its new stores are being financed. In the words of CFO Mary Winston, more 'build-to-suit' financing structures are being used compared to 'fee-development' financing.

This implies reduced capex but increased leasing activity. Eagle-eyed readers will note that share-repurchase plans have gone up by $150 million. All told, Family Dollar's outlook worsened, and it seems to be rewarding investors with share repurchases partly funded by reducing capex. Meanwhile, it's likely to be increasing leasing debt in order to continue to fund a store expansion program.

Whether this is a wise strategy or not will be determined by the success of its readjustment plans for 2014, which involve things like:

  • A renewed focus on everyday low pricing
  • A pallet-delivery program to increase supply chain efficiency
  •  Store layout refreshes
  • Adjusting marketing strategy to increase traffic to the stores
  • Continuing to invest in the new store program

What went wrong?
To understand the reasons behind the plans, it's best to look at what has been going wrong. In discussing the departure of Bloom, Family Dollar's CEO Howard Levine declared that:

"[W]e 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."

Family Dollar's merchandising strategy has undergone some changes in recent years. For example, in the summer of 2012, the company underwent a significant program of adding 1,000 new items, including tobacco, and making store-layout changes. According to Levine, the changes had positive effects on traffic and spending but also resulted in "significant margin pressure, higher store manager turnover, increased shrink and lower inventory productivity."

Some of these effects can be seen in the following graph:


Source: company presentations.

In response to these issues, the company limited changes in consumable categories and store layouts in 2013. The end result is that the first significant changes in its consumable categories took place in the recent quarter; 18 months after the changes in 2012.

Dollar Tree and Dollar General doing better
Essentially, the dollar stores generate traffic via consumables sales and then hope to increase margins by selling discretionary items. As a consequence, the delay in changing its consumable categories has hurt Family Dollar while the retailer has also struggled to generate growth in its discretionary sales. In fact, Family Dollar's traffic slowed "particularly in November and December[,]" while its non-consumable sales (25% of total sales) only rose 1% in the last quarter.

This is in contrast to rival Dollar Tree, which managed to generate positive comparable sales for every month in the last quarter. On its conference call, Dollar Tree's management stated, "So what you saw beginning in [the second quarter of] this year was a little bit of a shift, with the non-consumables growing a bit faster than the consumables."

Moreover, in contrast to Family Dollar, Dollar Tree grew comparable-same-store sales by 3.1% in the last quarter "driven by increased consumer traffic."

Meanwhile, in its last quarter, Dollar General managed to generate "strong customer traffic growth throughout the quarter[,]" partly thanks to the addition of tobacco. Dollar General also grew its non-consumable sales for the second quarter running and reported positive results in its seasonal and home categories.

The bottom line
Family Dollar's performance in 2013 wasn't great, but there is a case for the stock to be a good value proposition. Dollar stores aren't going away anytime soon, and if the company gets its merchandising and layouts right, then there is no reason why consumers won't come back. It's not rocket science.

However, the commitment to rolling out new stores at the same pace is somewhat concerning, considering that the management has enough on its plate in reenergizing the business. Foolish investors might want to be a little patient before piling in. It's one for the monitor list. 

To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.


Read/Post Comments (2) | Recommend This Article (2)

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 22, 2014, at 12:38 PM, badeconomy wrote:

    Dollar Tree has the best management and business model. The traffic at dollar tree is growing quarter after quarter. The customer loyalty is tremendous. Historically management has done a great job dealing with challenges and from all indications current quarter looks great for dollar store.

  • Report this Comment On January 22, 2014, at 7:36 PM, craigthephil wrote:

    Family Dollar is a misleading name for this store. I went in one day to buy what I thought would be a $1.00 pair of reading glasses. To my surprise, as my purchase was rung up, the amount came to over $12.00. Stunned, I said, "Why so much? Aren't the glasses only a $1.00?" I was told that the glasses were $12.00. That is when I realized that Family Dollar was not a dollar store. I told them I was not interested in the purchase and drove to a Dollar Tree outlet and purchased the same glasses for only a buck.

Add your comment.

DocumentId: 2803418, ~/Articles/ArticleHandler.aspx, 4/24/2014 5:58:26 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement