"Penny for your thoughts?" is a pretty old saying. These days, "after inflation" (another popular saying), those thoughts probably cost a dollar. But today's thoughts on Motley Fool Stock Advisor recommendation Family Dollar (NYSE:FDO) and its fiscal Q2 2006 earnings report, due out tomorrow, are free for the taking.

(Then again, "you get what you pay for," so don't forget to do your own due diligence.)

Wall Street Wisdom:

  • General consensus. Seventeen analysts follow Family Dollar. "Five of them call the stock a buy, one rates it a sell, and all the rest counsel holding it." And if that sounds familiar, it should. With the exception of the total analyst count, it's exactly true of competitor Dollar General (NYSE:DG). Makes you wonder just how much cutting and pasting these analysts get to do on their buy recommendations.
  • Revenues. The analysts expect Family Dollar to report 9.5% more sales tomorrow than it did a year ago. $1.74 billion is the target.
  • Earnings. Flat profits are predicted -- $0.48 last year, $0.48 again tomorrow.

Margin watch:
Family Dollar's margins remain under pressure, having fallen across the board over the past 18 months. The culprits are mainly the usual suspects: high gas prices that the company must pay to ship its goods, and a "challenging economic environment" for Family Dollar customers (read: "high gas prices") that necessitated price markdowns. This is probably more of an excuse than a reason, since dollar stores should be able to increase sales during challenging economic environments. The good news is that last quarter, gross margins ticked up both sequentially and year over year, pulling the rolling gross margin upwards.

Margins %

8/04

11/04

2/05

5/05

8/05

11/05

Gross

33.8

33.5

33.2

32.9

32.9

33

Op.

7.7

7.2

7

6.3

5.9

5.7

Net

4.9

4.6

4.4

4

3.7

3.6
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish lookout:
You've probably heard about the slew of lawsuits being filed against everyone from private employers to the U.S. government, with "managerial" employees demanding payment for "overtime." Well, earlier this month, Family Dollar lost one of those lawsuits at the trial court level. The company plans to take a $25 million to $45 million charge to earnings as a result, and we should see that show up tomorrow. However, "final verdicts" at trial aren't really final in the U.S. The company can and will appeal the trial court's decision, and won't have to part with any actual cash until its appeals have been exhausted or a settlement has been reached.

Further good news is that the company's comparable-store sales are accelerating upwards. For the year, they've been up 3.1%; for the second quarter alone, 3.2%; and in the month of February, 4.4%. If the company can increase its margins, or even stabilize them, that kind of growth should drive profits up once more.

Fool contributor Rich Smith does not own shares of either company named above.