Source: Family Dollar

Family Dollar Stores (UNKNOWN:FDO.DL) will report its third-quarter results on Thurs., July 10 following a prominent investor's push for the company's sale. The company has lost much of the competitive advantage it gained during the recession and faces increased competition from Dollar General (NYSE:DG), Dollar Tree (NASDAQ:DLTR), and Wal-Mart (NYSE:WMT).

Will Family Dollar's third quarter prove strong enough to get the company back on track?    

Estimates to beat 
Analysts estimate third-quarter revenue at $2.6 billion with $0.89 in earnings per share. Family Dollar hasn't beaten on either metric for the past five quarters, although it did meet expectations a few times. Family Dollar provided its own outlook during the last report, which included a low-single-digit drop in comparable-store sales and diluted EPS between $0.75-$0.85. 

Shrinking advantage
Family Dollar and the other low-cost stores thrived during the recessions when customers even had to pinch their purses with Wal-Mart's prices. However, their advantage has dwindled as the economy recovers, and Wal-Mart goes on the counterattack with lower prices meant to compete with all of the dollar stores except Dollar Tree -- the only one of the three that actually prices all of its products at one dollar.

Earlier this year Wal-Mart also announced plans to accelerate the openings of its small-format stores, which include the grocery-oriented Neighborhood Market and general-purpose Walmart Express stores. The company doubled the number of small-format stores it planned to open this year to 270 to 300. 

Family Dollar faces competition from both small-format stores. Neighborhood Market poses a threat because consumables remain Family Dollar's strongest growth segment and accounted for 71% of its overall revenue in the second quarter. Note that "strongest" is a relative term, since no segment showed positive growth last quarter but consumables was down the least with a 3.1% drop. 

Icahn's sale demand
Activist investor Carl Icahn wrote a letter last month to Family Dollar CEO Howard Levine in which he urged the immediate sale of the company. Icahn had owned a nearly 9.4% stake in Family Dollar mostly through options, but last week exercised the call to take ownership of those shares. Family Dollar issued a somewhat vague response to Icahn that expressed the company's willingness to explore any routes that could help strengthen its financials. 

Icahn's sale demand focuses more investor attention on the third-quarter earnings release -- particularly when it comes to comparisons to the prior year's quarter and the competition.   

Comparisons to beat
Family Dollar's prior-year quarter included $2.6 billion in revenue -- a 9% year-over-year increase -- and $1.05 in EPS. Comparable-store sales were up nearly 3%. The estimates from analysts and Family Dollar for this year's quarter both came in lower than last year's results. 

How does Family Dollar stack up to the competition?

Dollar General reported first-quarter results early last month in which it missed analyst estimates on both revenue and EPS with $4.5 billion and $0.72, respectively. Comps were up 1.5% and the year-over-year net sales gain was driven by nearly 8% growth in the ever-important consumables category.

Dollar Tree reported first-quarter results in May with an analyst-topping $2 billion in revenue and $0.67 in EPS. Comps were up 2%. Analyst estimates for the second quarter include $2 billion in revenue and $0.64 in EPS.

Foolish final thoughts 
Estimates from analysts and Family Dollar suggest that the third-quarter report will come in weak. The comps drop could pair up with a further drop in consumable sales to spell continued trouble for the business. Underperformance will only pour more fuel on Icahn's push for the company to sell.