Family Dollar Hit on Earnings

Hit hard by lackluster revenue and profits, shares of Family Dollar declined 3% on Apr. 10. Now that the company trades at a discount to its previous value, should investors jump in or would an investment in Dollar General, Dollar Tree, or Five Below be better?

Daniel Jones
Daniel Jones
Apr 14, 2014 at 3:30PM
Consumer Goods

File:Family Dollar, Madison.JPG

Source: Wikimedia Commons

April 10 was a terrible day for investors in general, with the S&P 500 falling a disastrous 2%. While index fund investors had a bad day, shareholders of Family Dollar (UNKNOWN:FDO.DL) fared even worse. After Family Dollar reported revenue and earnings that fell shy of analysts' expectations, the discount retailer's shares dropped more than 3% to close at $57.17. In light of the company's poor results and in spite of fear spreading across the market, does Family Dollar remain an interesting prospect or should investors look to Dollar General (NYSE:DG), Dollar Tree (NASDAQ:DLTR) or Five Below (NASDAQ:FIVE) for gains?

Family Dollar had a terrible quarter!
For the quarter, Family Dollar reported revenue of $2.7 billion. This represents a 6% drop from the $2.9 billion that the business reported for the year-ago quarter and it came up short of the $2.8 billion that investors hoped to see. In its release, the company attributed its falling revenue to a 3.8% decline in comparable-store sales, driven largely by inclement weather and poor promotional activities. Despite this, however, its sales would have risen 0.4% if it weren't for the extra week of operations which were included in its quarter last year but not this year.

In terms of profits, Family Dollar performed even worse. For the quarter, management reported earnings per share of $0.80. This was 12% below the $0.91 per share that Mr. Market had forecast and a whopping 34% miss from the $1.21 per share the company reported for the year-ago quarter.

  Actual Forecast Last Year's
Revenue $2.7 billion $2.8 billion $2.9 billion
Earnings $0.80 $0.91 $1.21

This resulted from lower sales but it can also be chalked up to poor weather (which accounted for $0.05 of the miss this quarter) and the $0.07 per share that the company earned last year from its extra week in operation. With the exclusion of these variables Family Dollar's earnings per share only fell 25%, with this mostly due to expense deleveraging and a higher mix of low-margin products sold.

In response to these poor results, management announced plans to close approximately 370 of the chain's retail locations. This will decrease the business's store count from 8,138 to 7,768 but it should be more than offset by the addition of 525 new stores in areas that management believes could be more profitable.

How does Family Dollar stack up to its peers?
Over the past four years, Family Dollar has done pretty well for itself. Between 2010 and 2013, the company's revenue soared 32% from $7.9 billion to $10.4 billion while its net income increased 24% from $358.1 million to $443.6 million. In its most recent annual report, management attributed the rise in sales to an aggregate jump in comparable-store sales of 19%, combined with a 17% increase in the number of locations in operation.

FDO Revenue (Annual) Chart

FDO Revenue (Annual) data by YCharts

While Family Dollar's performance has been respectable, it pales in comparison to those of its peers. Over a similar time-frame, Dollar Tree's revenue rose 33% from $5.9 billion to $7.8 billion, just slightly more than that of its rival, but its net income skyrocketed 50% from $397.3 million to $596.7 million. Just as with Family Dollar, Dollar Tree's jump in sales stemmed from a 19% aggregate improvement in comparable-store sales in conjunction with a 22% increase in locations in operation.

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Dollar General fared even better during this period, with revenue rising 34% from $13 billion to $17.5 billion while net income increased 63% from $627.9 million to $1 billion. According to management, the company's success came about because of a substantial 20% jump in comparable-store sales, combined with a 19% jump in store count.

FDO Net Income (Annual) Chart

FDO Net Income (Annual) data by YCharts

Finally, we arrive at Five Below. With a market cap of $2 billion, Five Below is a decent-sized company but it is just a fraction of the size of Family Dollar at $6.5 billion. Because of this size, the company is at a competitive disadvantage against its peers, but it has far greater growth prospects if management is successful in fighting off its rivals. This success reflects in the company's performance in recent years.

Between 2011 and 2014, Five Below's revenue jumped 172% from $197.2 million to $535.4 million, while its net income increased a jaw-dropping 359% from $7 million to $32.1 million. Like its larger peers, the company benefited from a higher store count and a greater level of comparable-store sales. However, because of its size, these factors were on a whole other level than those of its rivals. Over the past four years, Five Below's store count rose 114% while its comparable-store sales increased 39%.

Foolish takeaway
Based on the data provided, Family Dollar has had a nice run but it looks like the company has hit a bump in the road. If management is capable of overcoming its challenges, the business will likely continue its amazing growth. However, the Foolish investor should keep in mind that other players out there have been even more successful lately. Among these, Dollar General seems to be the most solid play for investors who are looking for a market leader, but Five Below is an interesting prospect for the Foolish investor who's on the lookout for faster growth.