Where Does Family Dollar Stand Going Into Earnings?

Heading into earnings, the future of Family Dollar seems bleak. With Carl Icahn pushing for a sale of the business to a rival like Dollar General amid poor expectations for the quarter, will Family Dollar be hit hard, or can the business prove Icahn... and analysts... wrong?

Jul 9, 2014 at 12:30PM


Source: Wikimedia Commons

Heading into earnings on July 10, some investors are probably kicking around what to do with Family Dollar (NYSE:FDO). However, Carl Icahn isn't likely to be one of them. After he disclosed his 9.4% stake in the discount retailer after the market closed on June 6, the shares of the company have done quite well and currently sit 9% above their closing price that day. According to sources, Icahn wants to see Family Dollar sell itself immediately to a competitor like Dollar General (NYSE:DG), but is it possible that the business may show him in this upcoming earnings release that the situation isn't all that bad?

Icahn isn't happy, but he is hopeful!
While many investors like Warren Buffett like to buy into a strong, healthy enterprise at a discount and see the company do well over the long run, activist shareholders like Icahn prefer to buy into a troubled business with the goal of maximizing shareholder value. In the case of Family Dollar, Icahn believes the best way to create this value is to sell the chain lock, stock, and barrel.

The big reason behind his decision to press for a sale is that the business has significantly lagged rival Dollar General. In 2013, Family Dollar reported sales per square foot of $189, 14% less than the $220 per square foot reported by Dollar General. Admittedly, the disparity is better than the 19% spread five years ago when Family Dollar had sales of $158 per square foot versus Dollar General's $195, but even faster growth in this category doesn't seem to do the business justice in Icahn's eyes.

(sales/sq. foot) 2013 2012 2011 2010 2009 Change
Family Dollar $189 $181 $174 $165 $158 19.6%
Dollar General $220 $216 $213 $201 $195 12.8%

Sources: Family Dollar and Dollar General

This, combined with a 2013 net profit margin of 4.3% compared to Dollar General's 5.9%, and a 40% increase in sales from $7.4 billion to $10.4 billion at a time when its rival grew its top-line performance by 48% from $11.8 billion to $17.5 billion, suggests that Family Dollar hasn't been doing enough to keep up with the competition. While it's possible that Family Dollar could see its fortunes improve through less extreme measures than a sale of the business, a sale would create immediate value and would allow the acquirer an opportunity to see both sales and margin improvement.

But is action needed? Heck yes!
In the event that management can start showing some strong results, the business could avoid a further push for its sale. Unfortunately though, this doesn't appear likely any time soon. For the upcoming quarter, analysts expect Family Dollar's profitability to decline with sales growth at a snail's pace.


Source: Family Dollar

If analysts are correct, Family Dollar will report revenue of $2.62 billion. This will represent a 2% improvement compared to the $2.57 billion management reported for the same quarter last year but can't come anywhere near what Mr. Market is anticipating for Dollar General. For the current quarter ending in July, analysts believe Dollar General will see its sales jump 9% from $4.39 billion to $4.77 billion as higher comparable-store sales and an increased store count positively impact the retailer.

  Forecasted Last Year's
Revenue $2.62 billion $2.57 billion
Earnings per Share $0.89 $1.05

Source: Family Dollar

From an earnings standpoint, the situation looks even direr. For the quarter, analysts expect Family Dollar to report earnings per share of $0.89. This represents a 15% drop compared to the $1.05 per share management reported for the same period a year earlier and will result from soaring costs. To put this into perspective, Mr. Market believes Dollar General will see its rising sales accompanied by an 8% improvement in profit per share from $0.77 last year to $0.83 this year.

Foolish takeaway
Currently, there's not too much Icahn can do about Family Dollar. Although he is one of the company's largest shareholders, his ownership stake cannot hit 10% or greater because of a one-year shareholder rights plan put into place by the company's management that makes it nearly impossible to conduct a takeover. This means that he will have to win over the company's management team or other large shareholders if he insists on pursuing his plans any further.

Alternatively, if Family Dollar does pull off a miracle and significantly tops forecasts, it's possible that Icahn will change his approach to the business. But given its performance in recent years and its expected decline in profitability, this seems unlikely. For this reason alone, the Foolish investor should be cautious, but not necessarily pessimistic about the retailer. In the event that business improves, or if management becomes more receptive to some major changes, meaningful upside could await investors.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Daniel Jones 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information