When the times get tough, the tough get going. So goes the old idiom, which certainly applies to Family Dollar
The bargain retailer recently posted a 14% year-over-year increase in net income for the first quarter of fiscal year 2010. More importantly, first-quarter sales jumped 3.9%, and increased customer traffic at its stores led to a same-store-sales gain of 2.4%. These results show that for the right business, the consumer wasn't out on sabbatical during this recession.
The performance has helped send Family Dollar's stock up nearly 11% so far this year. However, since the market's March 9th lows, the stock is losing to the S&P 500 by about a 65% margin. This occurred in spite of mid-single-digit sales increases over the last year that would make Wal-Mart Stores
The more investors fear the economic climate, the more they like Family Dollar. This situation may be the polar opposite of what you'd expect, but it makes sense for deep discount retailers such as Family Dollar, Dollar General
This makes a decision to invest in Family Dollar somewhat confounding. If the economy continues to improve, why would you want to own the stock? Let's take a look at a list of pros and cons you should consider before coming to a conclusion.
- High profitability for a retailer, as evidenced by high ROA and ROE with increasing operating margins.
- It sells everything from Hawaiian Punch to Huggies at low, low prices!
- The economic downturn has made saving money the hottest thing since boy bands, and Family Dollar is a good place to shop in order to save money.
- Solid free cash flow growth combined with little debt relative to equity and shareholder friendly management means that Family Dollar returns its earnings to shareholders through dividend payments and share repurchases, with the possibility of both growing in the future should the company's success continue.
- As the economy recovers, some of Family Dollar's current customer base may move on to higher-end retailers such as Whole Foods
- The retail sector is very competitive, and Family Dollar has to compete with retailer brawlers the likes of Wal-Mart and Target.
- Family Dollar doesn't do online shopping! As Amazon.com
(NASDAQ:AMZN)has revolutionized online purchasing, this may seem odd to some. However, management seems to have a solid reason for this, saying that shipping costs for its low-price items could easily double costs.
For those investors who are bearish on the near-term future of the economy, Family Dollar should be a strong consideration for your portfolio since the company does well during downturns and returns cash to its shareholders.
More Foolishness on Family Dollar:
Gerard Torres does not own shares in any of the companies mentioned in this article. Wal-Mart is a Motley Fool Inside Value pick. Amazon.com and Whole Foods Market are Stock Advisor recommendations. The Fool disclosure policy can win a game of Connect Four in only three moves.