A Tale of Two Retailers: It Is the Best and Worst of Times

The discount retail industry is going through some tough times, but two realities have emerged: one despair and the other strength. Family Dollar is struggling while Tuesday Morning is thriving.

Apr 10, 2014 at 10:00AM

Sales growth is one of the most important measures of business performance, especially over the long term. There are two ways for a company to grow sales: old stores and new stores. New stores tend to have a rapid period of growth before they stabilize. This is why we favor the growth of stores opened for at least 12 months as this can be a much better indication of potential.

One of the most important metrics followed by the retail industry is same-store sales which specifically tracks the growth of stores that are at least 12 months old. A few months ago I wrote a two part series which compared the same-store sales growth rates of Family Dollar (NYSE:FDO), the other dollar stores, Tuesday Morning (NASDAQ:TUES), Target (NYSE:TGT), and Wal-Mart (NYSE:WMT).

The first part of the series focused on companies with the worst same-store sales growth rates, which were Target, and Wal-Mart. In the fourth quarter that changed to Target, and Family Dollar. So, while Wal-Mart climbed out of the bottom three in the fourth quarter, Family Dollar fell down.

The second part of the article focused on the companies with the best same-store sales growth rates, which were Tuesday Morning, Dollar General, and Dollar Tree. These rankings did not change in the fourth quarter -- these three companies still led in terms of same-store sales growth.

So, while the bottom three companies saw some changes, the top three companies stayed the same. It's worth noting, however, that even though the rankings for the top three stayed the same, same-store sales growth declined by large amounts across the board. Tuesday Morning went from 9.1% to 3.1% while Dollar Tree went from 3.1% to 1.2%.

Why did this happen? Well for starters all retail organizations had a rough winter and most of them were just happy to post positive comp-store sales, but a trend may have begun for small-box retailers as well.

The biggest story of the quarter is Tuesday Morning. The company went from a 9.1% same-store sales growth rate to 3.1%. It may appear as though the company had a bad quarter, but the 9.1% same-store sales growth rate primarily resulted from write-offs and markdowns, which led to quarter after quarter of negative earnings. In the last quarter, however, earnings were actually positive.

Wal-Mart's results came in better than expected as well. Large-box retailers have higher break-even points and therefore they rely more on traffic and higher inventory turnover. When traffic falls, it can drastically hurt these retailers' earnings. This is why Wal-Mart is building 270 to 300 small stores in 2014 -- the move has the potential to boost Wal-Mart into the top three list next year.

Family Dollar's CEO, Howard R. Levine, is also the son of the founder. In January, he let go of Mike Bloom, the COO, blaming him for the decline in same-store sales and poor merchandising as same store sales fell 2.8% for the quarter. Levine provided the following explanation for why he let Bloom go:

Ultimately, Mike and I were not aligned on our merchandising strategy and we decided to make a change. I appreciate Mike's contributions well with Family Dollar and wish him the best in the future.

None of Family Dollar's initiatives provides any hope of a turnaround in the future. Instead of focusing on same-store sales growth, the company has focused on new-store sales growth. Levine made the following promise on the earnings call:

This year we plan to open 525 new stores. New store returns remained strong and initial sales productivity has remained consistent between 85% to 90% of an average store. We believe we can double the size of our chain...

Levine appears to be delusional. All management can do now is hope for a data breach or some other weather-related event to keep the Board off its back. I suspect Family Dollar's fall into the bottom three is not temporary.

Takeaway

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair...   -A Tale Of Two Cities

Indeed, these have been interesting times for the discount retail industry, and some of its participants have been experiencing two different realities.

Family Dollar's management is absolutely delusional, stuck in a belief that the retailer can hide its long-term growth issues by simply opening 525 new stores. Net sales will naturally increase over last year, but the salient number for investors interested in long-term growth is same-store sales.

Target's not far behind Family Dollar in delusion, but Wal-Mart is in a 'spring of hope' with Tuesday Morning. As the two camps fight for market share the distinctions will grow, and savvy investors can look to same-store sales growth for insight into the true nature of long-term growth.

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C Bryant 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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