Is Family Dollar on the Wrong Path?

The dollar-store business is hurting in this recovering economy, but management may not be doing everything it can to get back on track.

Apr 16, 2014 at 9:02AM

Dollar stores thrive in many economic scenarios, but the current situation doesn't play favorably. Family Dollar's (NYSE:FDO) recent results support the theory that the market has little sympathy. What's perhaps more troubling, though, is that Family Dollar seems to be hit harder than its dollar-store peers. The company could be benefiting from at least some industry trends -- tobacco products, frozen and prepared foods, etc. -- yet something isn't translating to the consumer. Is Family Dollar simply a victim of the times or is there more to the story?

Bad path
With same-store sales tumbling nearly 4% and adjusted sales dropping roughly $11 million, Family Dollar analysts and investors (not to mention management) were left with little to rally behind for the company's fiscal second quarter.

Matching the poor numbers was management's frightening statement: "We are taking immediate, strategic actions to improve our performance." While any action should be warmly received, it appears as though the company was caught by surprise with its below-average results. Harsh winter weather, the favorite phrase of the season for every retailer with a physical storefront, certainly played a role in impacting the company's sales, yet it cannot be held ultimately responsible for the poor results. Competitor Dollar Tree, for example, posted December same-store sales gains of 4%. Dollar General achieved positive same-store sales growth for its fourth quarter, and tacked on 550 new stores.

Family Dollar is getting ready to close down some of its stores as part of its plan to get back on track. Instead of building out the aforementioned high-growth products, such as cigarettes and chewable tobacco, along with perishable items (a strategy that Dollar General is proving quickly successful), management is moving toward slashing prices on 1,000 items and cutting costs with layoffs. The company sees $40 million to $45 million in annual operating-profit efficiencies, beginning the third quarter of the current fiscal year.

Cost-cutting is a necessary evil, but is this the way to get the company back in the competition?

No-man's-land
At the right price, Family Dollar has the long-term tailwinds to be a buy today, but the company doesn't seem to trade at a meaningful discount to both its intrinsic value and that of its peers. The stock has a forward P/E of 16 times and an EV/EBITDA of 8.25 times. Better-performing Dollar General trades at 14 times earnings with an EV/EBITDA of 9.38 times (reflecting its hefty debt load). Dollar Tree trades at 14 times as well, and holds an EV/EBITDA of 9.4 times.

So, the continuing operations at Family Dollar appear to be at a slight discount to peers, though not meaningful enough to justify a value-oriented turnaround investment. Without much visibility for an improved business in the coming terms, Family Dollar just isn't an appealing investment today.

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