As Family Dollar Continues to Disappoint, Its Competitors Look Even Better

Family Dollar's second consecutive poor earnings report and store closure announcement send a clear signal that Dollar General and Dollar Tree are hitting the retailer where it hurts.

Apr 12, 2014 at 7:15AM

Several red flags have been popping up for deep-discount retailer Family Dollar (NYSE:FDO). Over the course of the past several months, Family Dollar released two very poor earnings reports, announced the abrupt departure of a key executive with little explanation, and more recently revealed that it will close hundreds of underperforming stores.

Management blamed its operating problems on harsh winter weather and the retailer's promotional activity, as competition has heated up in the dollar-store space. Of course, note that Family Dollar doesn't operate in a vacuum. The other major dollar store chains, Dollar General (NYSE:DG) and Dollar Tree (NASDAQ:DLTR), have had to deal with the same weather and competition and they're doing just fine for themselves. That leads me to believe that Family Dollar has company-specific issues, which is reason to avoid the retailer and consider one of its major rivals instead.

Back-to-back disappointments
Family Dollar has now produced two very poor quarters in a row to start its fiscal year. In January, Family Dollar announced that comparable-store sales, which measure sales at locations open for at least one year, fell by 2.8% in the first quarter. Making matters even more dubious was the ensuing management shake-up. After it released its report, Family Dollar announced that its President and Chief Operating Officer would leave the company to "pursue other interests," without offering any specifics beyond that.

Then, on April 10, Family Dollar announced second-quarter results that were even worse. Same-store sales dropped by 3.8% year-over-year. Profit collapsed by 33% in comparison with the same quarter one year ago.

It's disturbing that the culprits for the first-quarter disappointment, namely harsh weather and an urgent promotional period that carved into margins, accelerated in the second quarter. It's clear that Family Dollar is succumbing to both operational ineffectiveness and an increasingly tough competitive landscape.

In response, Family Dollar said it would close as many as 370 underperforming stores this year, which represents close to 5% of its total store count. Not surprisingly, this will result in an undisclosed amount of job losses. The company will incur at least $85 million in charges in the current quarter related to the restructuring.

Family Dollar's woes stand in stark contrast to the growth that both Family Dollar and Dollar General are exhibiting. The latter two are registering strong same-store sales growth and expanding their store counts, all at Family Dollar's expense.

One chain's trash is another chain's treasure
While Family Dollar's investors are likely disappointed by its results, you won't hear its closest rivals complain. Dollar General grew its same-store sales by 3.3% last year and its EPS rose by 10%. It opened 650 new stores last year. Also, it has even bigger plans for this year. Dollar General plans to open 700 additional stores in 2014.

Dollar Tree's results are equally as impressive as those of Dollar General. Dollar Tree's comparable-store sales rose 2.4% last year after a 3.4% increase for the year before. Going forward, management expects another year of low-to-mid single-digit same-store sales growth this year. Like Dollar General, Dollar Tree intends to expand its footprint. It expects total square footage to grow by 7% this year.

Bottom line: Family Dollar is losing ground
Family Dollar was quick to attribute its poor performance over the last two quarters to harsh winter weather, but that's a weak excuse. Its competitors have to deal with the same weather conditions, and yet both Dollar General and Dollar Tree are thriving. A more likely scenario is that Family Dollar is simply losing customers to its competitors, which are able to offer products at more attractive price points.

Family Dollar's management shake-up and store closure announcement only cloud its outlook even more going forward. There simply isn't any reason for Foolish investors to gamble on its questionable turnaround prospects when its two rivals, Dollar General and Dollar Tree, are performing much better. If you're interested in the dollar-store industry, stick with Dollar General or Dollar Tree.

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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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