It's a familiar game. Beat estimates, stock goes up. But when you beat estimates by a good 10%, shouldn't your stock move more than 5%? That's the question the gift-horse-mouth-looking types who hold Family Dollar (NYSE:FDO) might be asking themselves today.

My advice? Be happy for what you're getting.

Yes, Family Dollar did a good job this quarter. Without the $0.18-per-share litigation charge, it would have earned $0.53 a stub, a lot more than the $0.48 analysts expected, and a good 10% more than the shareholders' bottom line last year -- which was also $0.48. It came atop a 9% overall revenue increase, but only a 3.2% increase in same-store sales.

Here's how the margin picture would have shaken out without the litigation charge.

Q2 2006

Q2 2005


Gross Margin




Op. Margin




As you can see, the firm held the line up top but didn't do as well further down. Management and the press coverage are talking up the "cooler" efforts, food offerings designed to bring shoppers in more frequently, but I admit I'm less enthused.

I like Family Dollar just fine. And when I'm stuck in, say, Middle-of-Nowhere, Mo., I shop there. I can see the need for a store like this one, which is similar to Dollar General (NYSE:DG) and Dollar Tree (NASDAQ:DLTR). That means it's not really in competition with Wal-Mart (NYSE:WMT), though in urban areas, it might have to fend off the likes of Walgreen (NYSE:WAG).

But with some 6,000 stores of its own, and the many thousands its competitors run, I have serious doubts about the scope of Family Dollar's future growth. That means mid-single-digit comps are carrying the burden here, and frankly, the stock looks overpriced for that. My fairly generous valuation model makes it as much as 20% overpriced today. Just what kind of growth is the Street expecting? In the end, this is the kind of business where moderate savings don't usually pass to the shareholder but to the consumer, as everyone rushes to be the low-price leader.

That's why I think this is a fine business to watch, but do as Family Dollar shoppers would: Buy only when you get a good deal. Somewhere in the $22 range looks like a good place to start.

Family Dollar is a Motley Fool Stock Advisor recommendation, and Dollar Tree is a Motley Fool Inside Value pick. You can see why with a free trial of either.

At the time of publication, Seth Jayson had no positions in any company mentioned. Fool rules are here.