Is Family Dollar in Trouble?

Family Dollar is struggling to survive against fierce competition from Wal-Mart, activists demands, and unfavorable macroeconomic conditions.

Jun 25, 2014 at 9:00AM

Shares of discount retailer Family Dollar (NYSE:FDO), which operates a chain of more than 7,900 general merchandise retail discount stores in the U.S., are up more than 20% in the past month. The company's stock moved up considerably after investor Carl Icahn, famous for his activist style, disclosed a massive stake in the consumer goods retailer early this month.

According to Icahn, Family Dollar is the best buy among dollar stores. This view is quite different from other investors who underweight the whole dollar store sector on the back of increasing competition from warehouse clubs and traditional retail players such as Wal-Mart (NYSE:WMT), which is trying to capture market share from the smaller-store segment via its Neighborhood Markets and Wal-Mart Express formats. Family Dollar may already be seeing some effects of the fierce competition as the company announced in its most-recent quarter that comparable store sales decreased 3.8%. Is Family Dollar in trouble?

Amazing Prices

Source: Family Dollar

Disappointing earnings
The company has missed estimates for earnings-per-share and revenues for the past three quarters. Its operational problems, weak top-line, and decreasing earnings have made the company a ripe target for activist takeover. 

On April 10, Family Dollar announced that comparable-store sales decreased 3.8% in the second quarter of fiscal 2014. Net sales decreased 6.1% to $2.7 billion, and gross profit--roughly 33% of net sales--also decreased 6.7% to $902.3 million. More importantly, as hedge fund analyst Karthik Srinivasan from Briargreen Capital noted, inventories --up 2.1%-- raised at a much faster pace than same-store sales; this suggests that the company is facing operational issues. 

Fierce competition
Note that these numbers were particularly worrying if we consider that in the holiday season, sales usually pick up. However, the holiday season effect was clearly not enough to offset macro-economic pressure, fierce competition, and harsh weather.

In particular, competition from Wal-Mart's small-format stores may be contributing significantly to Family Dollar's sales decrease. The giant retailer had roughly 407 small-format stores in January 2014, and it plans to open 200 new small stores this year, including Wal-Mart To Go, a convenience store that will sell only fresh food, prepared meals, and a few general merchandise and seasonal items. 

Source Walmart

Source: Wal-Mart

Although Wal-Mart's latest interest in going small isn't good news for Family Dollar, the strategy is consistent with consumers preferences. In large cities, consumers appear to prefer small stores that are easy to find where they can access fresh produce, meats, and dairy, as well as a pharmacy.

From now on
Aware of the struggles of Family Dollar, CEO Howard Levine decided to change the company's pricing strategy based on price reductions and discounts. This was done in order to adopt an "everyday low price" model that is favored by competitors Wal-Mart and Dollar General. Family Dollar also plans to scale back store expansion and adopt a small-store format. 

It's too early to know if Levine will succeed in causing a turnaround. Note that changing a pricing strategy involves various risks. The most worrying risk is the possibility of turning off loyal customers. For example, J.C. Penney did a similar change in pricing last year, losing various loyal customers. 

Foolish takeaway
Family Dollar has missed earnings consensus for the past three quarters, on the back of unfavorable macroeconomic conditions and fierce competition from Wal-Mart. To improve its top line, CEO Howard Levine is adopting a pricing system similar to Wal-Mart; this could turn off loyal customers, however. Despite the various struggles, though, there's still plenty of value in this company. It has a solid brand. Its cash/investment ratio has been positive for the past three years. It has increased its store count from 6,655 stores in 2009 to 7,916 in 2013. Aware of this, activist investors such as Carl Icahn are going long Family Dollar and are demanding that the company be put up for sale immediately.

Leaked: This coming device has every company salivating
The best investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not just how we buy goods, but potentially how we interact with the companies we love on a daily basis. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns, you will need The Motley Fool’s new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.

Victoria Zhang 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers