If you can't beat 'em, join 'em. That's the latest strategy from Family Dollar Stores (UNKNOWN:FDO.DL) in response to Dollar Tree Stores (NASDAQ:DLTR) kicking its wannabe-dollar-store butt. As the two dollar stores move in opposite directions financially, Family Dollar Stores has thrown in the towel in light of its bad quarterly results. It has decided to do what obviously works: Act more like a dollar store.
The bitter cold results
On April 10, Family Dollar Stores reported fiscal second-quarter results. Calendar-adjusted net sales were basically flat with a slight rise of 0.4%. Calendar-adjusted same-store sales inched up 1%. Calendar-adjusted diluted earnings per share plunged 28% to $0.87.
The company blamed in part "adverse winter weather," although that only cost the company $0.05 per share, it estimated, still leaving a $0.23 shortfall compared to last year. Howard Levine, chairman and CEO, also blamed "a more promotional competitive environment and a more financially constrained consumer."
A financially constrained consumer?
While that excuse is an easy pill to swallow with most retailers these days, the dollar stores are supposed to be the place where cash-strapped consumers show up to save money. Bob Sasser, CEO of Dollar Tree, put it well on the last conference call. He stated,
The Dollar Tree model is now more relevant than ever providing extreme value to customers while recording [a] record level of earnings. Customers know that even in a difficult economy at Dollar Tree you could still splurge as everything is only a dollar.
Dollar Tree believes its dollar stores benefit from these budget-constrained times. Sasser also said,
"I think there is obviously going to be more pressure on that and really just the anxiety of the uncertainty of the future and all that remains a real strain on the family's budget, our job at the Dollar Tree is to be part of the solution."
Join the solution, Family Dollar!
Dollar days are back
Levine admitted that despite the various challenges Family Dollar faces, the management team holds itself accountable for its weak results. First thing Family Dollar is doing is slashing prices on more than "1,000 basic items." You might not know this, but Family Dollar isn't an "everything for $1" store like Dollar Tree. While it sells many items for $1 or less, it also has a large variety of items for more than $1, such as a line of $5 toys. Slashing the more expensive items is a step more in the direction of its Dollar Tree rival.
In terms of merchandise, both chains are noticing food sales are the strongest when it comes to sales growth. In Family Dollar's last quarter, calendar-adjusted sales for non-consumables dropped negative by 4.2% yet popped 3.4% positive for consumables. Family Dollar recently announced the addition of more than 400 new food items while scrapping some non-consumable items to make shelf space for more food.
Meanwhile, Dollar Tree has already been rolling out freezers and coolers across the country at its stores in order to expand its food offerings; it is seeing success. Family Dollar is apparently witnessing this and is jumping on the grub-wagon.
Also in a move that should help align its same-store sales numbers closer to Dollar Tree's, Family Dollar will be closing 370 of its stores. These stores on average had an 8% decline in same-store sales, causing a material drag on the company's overall results. The company believes the move will result in an increase of between $40 million and $45 million in annualized operating profit.
During the question and answer session, Levine gave a bit more detail. He said that it is "all about us getting back to what I think is just so important to the Dollar channel and having competitive prices every day." He feels the company "lost its way" in terms of price perception. He added,
It's not necessarily one where we are undercutting competition. It is really coming down and meeting the market on about 1,000 items in our assortment today.
His most revealing statement about aligning the company in the direction of Dollar Tree came when he said,
"That magical $1 price point that has been so important to us over the years is hard to find sometimes. We will be getting back to try to drive that more in to our stores, not just during the holiday but year round."
Dollar channel. Price perception. Meeting the market. Not undercutting competition. Magical $1 price point. Are you noticing where Family Dollar is heading? Hello, Dollar Tree. Family Dollar is slowly becoming a real store again. Watch out.
Foolish final thoughts
Based on analyst estimates, Family Dollar trades at a forward P/E of 16 based upon its current share price and estimated earnings per share of $3.49 for the FY ending August 2015. This is not currently as favorable as Dollar Tree that trades at a forward P/E of 14 assuming estimated EPS of $3.63 for its FY ending January 2015.
If Family Dollar is successful in its transformation, look for analysts to either raise estimates or for Family Dollar to beat them. If so, Family Dollar may ultimately prove to be the better bet over Dollar Tree for Fools looking for some speculative growth and value.