Dollar stores have been one of the safest investment havens after the Great Recession since cost-constrained customers shifted to these stores to save their pennies. As a result, dollar stores became increasingly popular and they have witnessed growing sales. However, one player in the space seems like it has bucked the trend as it has witnessed difficult times. Family Dollar Stores (NYSE:FDO) is undergoing a tough phase, and it recently registered lackluster second-quarter results that came in below analysts' estimates, sending its share price downwards.
A host of factors resulted in revenue dropping 6.1% from the year-ago quarter to $2.72 billion. Colder weather conditions and heavy snow led to store closures and higher maintenance costs which hampered both the top line and the bottom line of the retailer. Moreover, people shopped less as they preferred to stay home in such bad weather. Also, other players offered more promotions, and this affected sales at Family Dollar's stores.
Same-store sales, which exclude the effect of store openings and closures, also declined by 3.8% during the quarter. This decrease mainly resulted from the drop in the number of transactions at Family Dollar's existing stores, and it was partly offset by a higher transaction value.
The company witnessed a decrease in demand for discretionary items. Nonetheless, the refrigerated food and tobacco segment provided a point of relief as sales for such products increased. As a result, sales in the consumables segment increased by 0.4% over last year on a comparable basis.
Earnings plunged 34% from the prior year's quarter to $0.80 per share. Lower sales and higher costs weighed on the company's bottom line. Additionally, higher sales of consumables, which have lower margins, led to gross margin shrinkage of 20 basis points.
Along with the problems mentioned above, some macroeconomic issues affected Family Dollar's sales. For instance, the expiration of unemployment benefits for 1.4 million people in the U.S. last year led to lower demand. Also, the government cut food stamp benefits. Hence, consumers became unwilling to spend, and this resulted in lower demand.
However, the retailer's peers have been able to overcome these problems to post great numbers. Dollar General (NYSE:DG) reported its quarterly results last month, and its revenue jumped 6.8% over the prior-year period to $4.49 billion. Same-store sales growth of 1.3% drove this revenue growth as both the average transaction value and the number of transactions increased. Dollar General's bottom line also surged to $1.01 per share from $0.97 per share in the year-ago period.
However, even Dollar General witnessed gross margin shrinkage of 60 basis points to 31.9% for the quarter. More sales of consumables and an expanded offering of perishable food items pushed margins lower. Therefore, revenue from the consumables segment rose 8.5% over the year-ago quarter to $3.3 billion.
Family Dollar also faces stiff competition from other retailers such as Wal-Mart (NYSE:WMT), so it has resorted to offering lower prices. Wal-Mart has also started to offer its products in smaller packages, which makes purchases more convenient for its customers as they don't have to shell out a large chunk out of their pockets at one go. Moreover, Wal-Mart is expanding its presence in urban areas by opening a number of small-format stores there. This makes its stores more accessible to people and they also cost less to operate because of their limited size. This shows that Wal-Mart can grab customer attention in various ways.
Tough road ahead
Family Dollar plans to take some initiatives to reduce its costs. It plans to cut jobs and close stores which are not performing well. The retailer will close down 370 stores during the current fiscal year.
Additionally, the company will lower the prices of 1,000 basic items in its stores, which should attract more customers. Through these measures, Family Dollar plans to boost its sales and save about $40 million to $45 million per year.
However, job cuts and store closures will add restructuring costs, which the company expects will total $85 million and $95 million for the last two quarters of fiscal 2014. Moreover, the dollar store operator will slow down with its new store additions. After targeting 525 new stores during fiscal 2014 the retailer estimates that it will open 350 to 400 stores in fiscal 2015.
Summing it up...
Family Dollar is definitely undergoing a difficult phase, which is evident from its weak quarterly numbers. It also faces stiff competition from other industry players which have been able to perform much better. Moreover, the retailer's restructuring efforts will affect its results in upcoming quarters so the company provided a weak outlook. Hence, it is prudent to stay away from this dollar store until it shows signs of recovery.
Pratik Thacker has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.