Food Fight! Why Family Dollar Stores Is Joining In

Maybe Family Dollar Stores (NYSE: FDO  ) is tired of getting beat up by rival Dollar Tree Stores  (NASDAQ: DLTR  ) . Every quarter Dollar Tree brags up a storm in its earnings release and on its conference call about how well it's doing, while Family Dollar keeps making excuses.

Back in January, Family Dollar CEO Howard Levine stated, "We have a great business model and ample growth opportunity, and I know we can do better." Now, Family Dollar Stores is stepping up to the plate: the dinner plate.


Source:  Family Dollar Stores

Chew on this
On April 1, Family Dollar Stores announced a significant expansion of its food assortment with more than 400 new items at each of its stores. To help promote the idea of purchasing food at Family Dollar, the company brought up celebrity chef Pat Neely. Family Dollar added a contest that includes making a meal for a family of four using just $15 and ingredients purchased only at Family Dollar.

The goal here is to overcome the negative stigma attached to dollar stores and food quality. By having a well-respected chef who is an author and television personality, and then running the contest, Family Dollar hopes to prove the idea that gourmet meals can be prepared for the entire family on a low budget without the use of the grocery store.

Dollar Tree eating Family Dollar's lunch
While Family Dollar has been blaming things such as "a more promotional competitive environment and a more financially constrained consumer" for its deteriorating same-store sales results, Dollar Tree has been embracing this macroeconomic reality.

Source: Wikimedia Commons

Dollar Tree's same-store sales have been continually growing instead of shrinking. According to Bob Sasser, Dollar Tree's CEO, the challenging economic environment is resulting in more business, not less. He stated, 

More customers are shopping Dollar Tree, responding to our incredible values and convenient shopping experience. Our inventories are fresh and our stores are full of exciting merchandise for the [s]pring season.

When Sasser said Dollar Tree's "inventories are fresh," he may have meant that literally. Dollar Tree refers to its food items as "consumables." On the third-quarter conference call, Sasser stated,

The nature of the economy [has] more people needing more [of] the consumable product[s] and seeing Dollar Tree as the place to shop. They continue to do that. But also we rolled out more consumable product over the last several years.

Food sales are helping the chain achieve record revenue.

Dollar Tree has been busy installing freezers and coolers to expand its variety of food offerings. Last year it installed freezers and coolers at 608 stores, bringing the total count up to 3,157. Dollar Tree plans to add them to another 300-plus stores this year in addition to most of the new stores it opens.

Source: Family Dollar Stores

Chow time for Family Dollar too
Since food sales are working so well for Dollar Tree as it rapidly expands, it makes sense for Family Dollar to step up its game as well. Consider this: In the first quarter ended Nov. 30, Family Dollar saw sales of non-consumables decline by almost 1%, while the consumable-only category leaped by 4.7%. The company said this was "driven primarily by strong growth in refrigerated and frozen food, health aids, and tobacco."

For the most recent quarter ended March 1, it was similar. Calendar-adjusted sales for non-consumables plunged by 4.2%, while those of consumables jumped upward by 3.4%. Once again refrigerated and frozen food were the first two items named by the company as being primarily responsible for the strong growth.

Family Dollar is adding "key national brands" that it believes will drive traffic, awareness, and loyalty. Some of the non-consumable shelf space will be scrapped to make room for the new food items. Apparently food is Family Dollar's bright spot and will be a key mutual weapon in the fight with Dollar Tree.

Foolish final thoughts
Based on estimated earnings per share of $3.49 for the fiscal year ending August 2015, Family Dollar Stores trades at a forward P/E of 16. This is not currently as favorable as Dollar Tree, which trades at a forward P/E of 14 assuming estimated EPS of $3.63 for the FY ending January 2016.

Levine stated on the most recent conference call,

We have a number of stores that are great food stores, almost acting as a small grocery store in some of the communities and are probably underspaced in what we offer in terms of food.

It sounds like Family Dollar knows what it's doing when it comes to all things edible and may be finally ready to hone this strength and fight back against Dollar Tree. Fools should watch and see if same-store sales trends reverse due to the expanded focus on food sales. If so, EPS may come in better than analysts expect and make Family Dollar the more favorable bet.

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