It's been a tough couple of years for Motley Fool Stock Advisor selection Family Dollar Stores
However, the signs aren't entirely obvious. Yes, sales were up 9.5% for the quarter, but net income declined 5.5% as an increase in selling, general, and administrative expenses outweighed a slight improvement in gross margins and the aforementioned sales increase. Part of the SG&A increase was due to the expensing of stock options for the first time. Because the company executed a large share repurchase in October to retire 6% of its shares, however, earnings per share did not decline like net income did and remained flat with last year's $0.32 figure.
It's worth taking another look at that share repurchase, because I think it was a solid decision. The company funded its 6% share repurchase with debt. This isn't all that uncommon, but it does mean we need to pay attention to what the debt cost the company versus the potential return on repurchasing shares. In this case, the shares were purchased at $19.97 -- about 18% below today's share price -- and the debt was financed at below 5.5%. The earliest any of the $250 million in debt comes due is 2011, which is a fairly low bar for the company to clear and still leaves the company with a fair amount of financial flexibility, considering its current cash on hand and the cash flow available to cover its interest payments. Given the low valuation of its shares at the time of the repurchase and the business' adequate cash flow to fund the debt, I think taking on some debt for a share repurchase was a smart choice.
Oh, yes -- exactly what are the signs that things at Family Dollar are improving? How about the fact that same-store sales were up by 3%? Although store traffic was down 2.1%, the average purchase was up 5.1%. Things are not perfect, but there are at least some positive trends in place, and I think that's a large reason why the stock was up by more than 5.5% today.
Today, Family Dollar is reasonably priced at approximately 19 times trailing earnings, and management expects that EPS will fall between flat and 7% growth in fiscal 2006. This forward earnings guidance isn't bad, considering that it includes the impact of stock option expensing. However, today's stock price is a 15% premium from where Tom Gardner recommended Family Dollar just a few months ago.
As you look at Family Dollar and its valuation, it's important to consider that the company has plenty of competition from Dollar General
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