Do Family Dollar Earnings Matter With Icahn in the Wings?

On Thursday, Family Dollar Stores (FDO.DL) will release its quarterly report, but many shareholders are paying much more attention to potential mergers and acquisitions activity than they are to the dollar store's profitability. Yet even as billionaire investor Carl Icahn urges a sale that could possibly lead to Family Dollar and Dollar General (DG 0.82%) merging, it's still important to see whether Family Dollar earnings stand up to Dollar General, Dollar Tree (DLTR -1.23%), and other players in the dollar-store arena.

Family Dollar was once a darling of the deep-discount space, challenging bigger retail giants by offering even more inexpensive goods in more convenient venues. But tough competition among dollar stores has left Family Dollar facing tough times. Can the company recover on its own, or is Carl Icahn's proposed sale of the company truly the best result for investors? Let's take an early look at what's been happening with Family Dollar over the past quarter and what we're likely to see in its report.

Stats on Family Dollar

Source: Yahoo! Finance.

Can Family Dollar earnings start growing again?
In recent months, investors have dramatically reduced their views on Family Dollar earnings, cutting about 10% from their May-quarter estimates and about 7% to 8% from their full fiscal year projections. The stock has jumped recently, though, climbing 13% since early April in response to Icahn's interest in the company.

Family Dollar's fiscal second-quarter results in April showed the difficulty the dollar-store chain has had in dealing with competition. The company reported a 6% drop in total revenue from the previous year's holiday quarter, as same-store sales sank 3.8%, and Family Dollar cited high frequencies of promotions and bad weather as holding back its results. In response, the retailer took dramatic action to shore up its profitability, implementing cost-cutting measures that include layoffs and closing 370 stores that aren't performing up to par. By contrast, Dollar Tree and Dollar General saw their comps stay positive, albeit with Dollar Tree posting a slower growth rate than in previous quarters.

Source: Family Dollar.

Yet the big news for Family Dollar came in June, when Carl Icahn disclosed a 9% position in the dollar store's shares. Icahn believes the stock's price made it a good value, and he urged the company to consider efforts to boost the value of Family Dollar shares. One of the suggestions Icahn made was to look at a potential merger with Dollar General, taking advantage of each other's growth plans while helping to avoid cannibalizing each other's business opportunities.

Still, Family Dollar has some other options at its disposal. Some believe retail giant Wal-Mart would make a good acquirer for the dollar-store chain, as it would bolster Wal-Mart's already-stated strategy to increase the number of smaller stores in its network. Moreover, with relatively little geographical conflict between Family Dollar's store locations and Wal-Mart's, the combination could minimize potential cannibalization between the two companies' sales. Perhaps in order to stave off Icahn's aggressive moves, Family Dollar adopted a poison pill plan.

Another problem with a Dollar General merger comes from the fact that Dollar General CEO Richard Dreiling announced he would resign within the next year. That could make it difficult for Family Dollar to negotiate a merger even if both parties were otherwise interested, as dealing with two major strategic challenges at the same time could be too much for Dollar General to take on.

In the Family Dollar earnings report, watch for signs of how the company is working with Icahn and whether executives are considering Icahn's suggestions. The longer this goes on, the more likely it is that Family Dollar will find its own path forward rather than going the M&A route. Earnings do matter, but they'll take a back seat to the Icahn controversy in the short run.

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