Family Dollar Stretches Credulity

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Boy, it seems just about everyone is eager for that $500 handout the government is about to distribute to jump-start the economy! Not only has discount chain Family Dollar (NYSE: FDO) said it expects the effects of the so-called stimulus package to trickle down to its bottom line, but companies from J.C. Penney (NYSE: JCP) to General Motors (NYSE: GM) are also counting on that check to boost business.

In fact, according to PNC Financial Services, about 35% of business owners expect to see some benefit from the stimulus package. At least J.C. Penney is realistic in believing that any benefit will be short-lived. Just how far do executives think we can stretch a dollar these days?

If Family Dollar's earnings are any indication, not that far at all. The discount retailer reported a top-line decline of 5.9% for the second quarter, and net income 30% below last year's results, albeit with an extra selling week last time. But after a dismal first quarter in which margins contracted, the chain is calling for a 1.2% to 7.4% drop in fiscal 2008 earnings.

In tough economic times, you try to get the most bang for your buck. While rock-bottom prices drive consumers to Family Dollar and rivals Wal-Mart (NYSE: WMT), Fred's (Nasdaq: FRED), and Big Lots (NYSE: BIG), that target demographic also feels the pinch the worst.

While it's considered a "dollar store," many of Family Dollar's price points well exceed that threshold, unlike a 99 Cents Only (NYSE: NDN) store. "Premium-priced" items, including electronic goods, had been the key to the company's growth, but for the second quarter, sales of such items declined by 11% over the year-ago quarter.

With food and gas costs increasing rapidly, many consumers may contemplate spending their rebate for everyday expenses. But for investors' sake (and the company's), let's hope taxpayers end up cashing in their stimulus check for discretionary items at Family Dollar's stores.

For related articles:

• Family Dollar's No Discount
• Bleak News From Fred's
• Big Lots Profits, No Big Deal