Can Family Dollar Earnings Bounce Back?

Family Dollar (FDO.DL) will release its latest quarterly report on Wednesday. Shareholders, however, have started the celebration early, bidding up the company's stock in the expectation that Family Dollar earnings will manage to grow even in a somewhat tepid overall economic environment.

As a deep-discount retailer, Family Dollar has emerged as one of the giants in the fast-growing business. But intense competition both from deep-discount rivals and from other retailers seeking to protect their turf has forced the company to work hard to find new growth opportunities and maintain its competitive edge. Let's take an early look at what's been happening with Family Dollar over the past quarter and what we're likely to see in its quarterly report.

Stats on Family Dollar

Source: Yahoo! Finance.

How will Family Dollar fare at earnings time this quarter?
In the past few months, analysts have been quite negative about Family Dollar's earnings prospects, having cut their estimates for the May quarter by $0.15 per share and reducing their full-year fiscal 2013 and 2014 consensus earnings figures by around $0.20 to $0.25 per share. The stock, though, hasn't been affected by those downgrades, with shares rising more than 11% since early April.

Family Dollar rode the wave of deep-discount success for years, making its mark during the recession in 2008 when its stock managed to buck the downtrend that sent most stocks crashing to multi-year lows. But increasingly, Family Dollar has struggled to keep its momentum. Expanding beyond its core product offerings to include items like home goods and clothing hasn't been unambiguously successful, as those areas are already fraught with competition and could threaten margins.

Still, experts like author and Deloitte Services director Michael Raynor believe that Family Dollar stands out from its rivals even in a crowded sector. Raynor noted late last month that despite the higher-cost operations that Family Dollar has compared to other discount retailer rivals, it is still doing better than Dollar Tree (DLTR -0.16%) and Dollar General (DG -0.59%), with advantages in profitability that it's able to generate from handling its bulk inventory well and maintaining pricing power even on low-cost items.

Still, Family Dollar has struggled lately to keep up with Dollar General's rapid pace of growth. With Dollar General having opened more than 2,250 new stores in the past seven years, Family Dollar has to deal with having fewer exclusive markets. That has put the company on the defensive, especially as Dollar General and Dollar Tree have both grown to be much larger than Family Dollar.

After the release of the Family Dollar earnings report, watch to see how the company's management discuss the key strategic areas for its growth going forward. Without a convincing plan to help it keep up with more aggressive rivals like Dollar General, Family Dollar could continue to fall behind in the promising deep-discount retail space.

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