Family Dollar Perplexes Its Shareholders

Source: Family Dollar

After Family Dollar (FDO.DL) reported revenue and earnings for the third quarter of its 2014 fiscal year on July 10, its shares remained virtually unchanged. Even though it reported lower-than-expected earnings, the discount retailer's sales growth left Mr. Market feeling neutral about the company's operations. In light of these developments, should the Foolish investor entertain the idea of owning the company, or would Dollar General (DG 0.24%) make for a better stock?

Mixed results leave investors pondering what to do next!
For the quarter, Family Dollar reported revenue of $2.66 billion. This came in 3.5% higher than the $2.57 billion that management reported in the year-ago period, as the company's top line outpaced the 2% growth to $2.62 billion that analysts expected. According to the company's earnings release, its rise in revenue was driven by an almost 6% jump in store count to 8,246 locations from 7,801 in the year-ago quarter. This was, however, somewhat offset by a 1.8% drop in comparable-store sales compared to what management saw in the year-ago period.

Source: Family Dollar

While the top-line performance may have impressed some shareholders, the lackluster earnings reported by management seem to have offset any potential enthusiasm. During the quarter, Family Dollar earned $0.71 per share. This came in 32% below the $1.05 per share that management reported for the third quarter of last year, and the company's bottom line came in meaningfully lower than the $0.89 per share that analysts expected.

Source: Family Dollar

Even though it benefited from higher sales, Family Dollar also reported that its cost of goods sold rose from 65.3% of sales to 65.7% and its selling, general and administrative expenses jumped from 27.4% of sales to 28.9%. While the increase in the company's cost of goods sold resulted from an $1.5 million inventory writedown, the rise in its selling, general, and administrative expenses stemmed from deleveraging effects related to Family Dollar's lower comparable-store sales.

Is Dollar General a better buy?
The past five years have been very kind to Family Dollar. Between 2009 and 2013, the discount retailer saw its revenue climb an impressive 40% from $7.4 billion to $10.4 billion. In its most recent annual report, the company attributed this to an aggregate rise of 24% in comparable-store sales. This also benefited from a 19% increase in store count from 6,655 locations in 2009 to 7,916 at the end of the company's 2013 fiscal year.

FDO Revenue (Annual) data by YCharts

Although Family Dollar's performance during this five-year period has been strong, rival Dollar General's top-line growth came in even stronger. During this time-frame, the company's revenue shot up 48% from $11.8 billion to $17.5 billion. In its annual report, management attributed Dollar General's rising sales primarily to its aggregate comparable-store sales increase of 32%, but the business also benefited greatly from a 26% rise in store count from 8,828 locations in 2009 to 11,132 at the end of 2013.

Looking at profits, the picture is even more favorable for Dollar General. Over the past five years, the company's net income skyrocketed by 202% from $339.4 million to $1 billion. While some part of this improvement came from the company's revenue growth, the Foolish investor should keep in mind that its selling, general, and administrative expenses decreased from 23.2% of sales to 21.1% and its interest expense fell from 2.9% of sales to 0.5%, and these made up the disparity between its top- and bottom-line growth.

FDO Net Income (Annual) data by YCharts

Family Dollar also posted noteworthy growth during the past five years, but nowhere near that boasted by Dollar General. Between 2009 and 2013, the company's net income rose 52% from $291.3 million to $443.6 million as higher sales were accompanied by a decline in the company's selling, general, and administrative expenses from 28.7% of sales to 27.6%.

Foolish takeaway
Based on its recent earnings release, it's difficult to tell what the future holds for Family Dollar. While its higher-than-expected sales growth is encouraging, the fact that its comparable-store sales and earnings declined suggests that the picture isn't terrible but is certainly far from great.

Moving forward, it will be interesting to see what happens with the company, but a safer prospect for the Foolish investor might be Dollar General. In addition to the better top- and bottom-line results it has seen in recent years, it trades at 16.3 times forward earnings and this is far cheaper than Family Dollar's 20.2 to 20.9 range given management's full-year earnings forecast of $3.07 to $3.17.