Family Dollar's CEO Is Telling You to Invest in These Brewers

With a large chunk of the U.S. population considered low-income, Family Dollar CEO Howard Levine's observation about buying practices is worth noting for investors seeking value.

Jul 18, 2014 at 4:30PM

Family Dollar (NYSE:FDO) CEO Howard Levine made news last week when he insisted that America's low income consumer has not benefited at all from the economic recovery, and that this population may have actually taken a step back. Nonetheless, his statements following the company's fiscal third-quarter report and a large beer and wine rollout is very telling for companies like Molson Coors Brewing Co (NYSE:TAP) and Anheuser-Busch InBev SA (NYSE:BUD).

The action behind Levine's words
Family Dollar has remained challenged for several quarters, and it just recently announced plans to close 370 underperforming stores throughout the U.S. During its last quarter, the company's comparable sales fell nearly 2%, so by closing those underperformers, hopefully the company can return to growth and find sustainable margins.

Yet, given Levine's comments about low-income consumers, it's no surprise the company has remained challenged. However, large investor Carl Ichan insists management is to blame, and that product mix has held the company back.

Albeit, Levine and Icahn are likely both correct, which is why Levine is making some changes, hoping that by selling beer and wine, Family Dollar's sales will see a boost. Already, the company has been testing beer and wine, and it saw its best-ever sales during the July 4th holiday. This prompted the company to roll out its beer initiative at a faster rate, hoping to hit all stores by 2015 instead of 2016.

Why are beer and wine the answer(s)?
Unfortunately, there is no logical way to explain why beer and wine sales would catapult sales for Family Dollar. However, a good explanation can be seen in the company's fiscal third-quarter conference call, where overall sales were obviously weak, yet Family Dollar noted that tobacco sales saw especially high demand.

Tobacco and alcohol go hand in hand, and in the stock market, we call companies who specialize in these products, "sin stocks." Hence, the fact that tobacco sales remain strong despite Family Dollar's low-income consumer's economic troubles insinuates that this population continues to buy these particular products despite the fact that prices for tobacco products continue to rise throughout the country.

Also, with such high demand for these goods despite this challenging environment for low-income consumers, Family Dollar might in fact see a fundamental boost, or at least some stability from adding beer and wine to its inventory.

So, where's the investment value?
Nonetheless, there are still a lot of questions surrounding Family Dollar, but Levine's comments combined with the company's actions to rollout beer is worth noting, and it is an interesting socioeconomic observation.

Levine's focus on tobacco and alcohol might resurrect Family Dollar, but given the broad demand from all social and economic classes, beer and wine companies remain strong investments, with Levine's comments serving as additional proof.

In an economy that has clearly recovered but remains challenging for many, beer and wine remains one industry that's strong throughout, and is also a good secular investment while the markets sit at all-time highs. Anheuser-Busch and Molson Coors are among the leaders in this space.

Anheuser-Busch remains one of the biggest names in the alcohol industry, and in the beverages industry for that matter. While its sales to U.S. retailers dropped 2.6% in the last quarter, the company's volume rose more than 2%. Moreover, emerging markets remain a growth driver for the company, with China seeing 9% growth in the first quarter. Albeit, Anheuser-Busch is a large and growing beverage company that's outperforming its broader industry with a dividend yield of 3.4%.

Molson Coors operates differently than its much larger peer, as the company's revenue growth is not nearly as impressive, but cost-cutting measures have driven profitability significantly higher. Not to mention, Molson Coors' operating margin of just 12.3% is only one-third of that of Anheuser-Busch, implying the potential for much higher profits in the future. With a dividend of 2%, it too remains a solid investment option looking ahead as consumers continue to buy beer and wine.

Foolish thoughts
Retail as an industry is tough, and while the consumer has shown a tendency to be quite fickle in search of the best deal, alcohol and tobacco are two categories where consumers aren't afraid to bust out their wallets.

For investors, this fact is worth celebrating, and Anheuser-Busch along with Molson Coors are two of the best names in the space, serving as a safe investment looking ahead.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Molson Coors Brewing Company. 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.

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Jun 12, 2015 at 5:01PM

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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.

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