Family Dollar Says the Economy Hurt It -- Say What?

This excuse from Family Dollar is a tough pill to swallow.

Nickey Friedman
Nickey Friedman
Jul 31, 2014 at 9:59AM
Consumer Goods

Source: Wikimedia Commons.

On Family Dollar Stores' (UNKNOWN:FDO.DL) third-quarter conference call, CEO Howard Levine stated, "While our long-term positioning in growth prospects remains strong, our results continue to be pressured by [a] difficult competitive economic environment." It's normally easy to accept the excuse that the economy is hurting retailers, but when you look at competitors Dollar Tree Stores (NASDAQ:DLTR) and Dollar General (NYSE:DG), it doesn't seem to add up.

Problems with the core consumer
Family Dollar reported its fiscal third quarter on July 10. Sales did rise by 3.3% to $2.66 billion, but same-store sales slipped 1.8%, and adjusted earnings plunged 19% to $0.85 per diluted share. In contrast, Dollar Tree and Dollar General have been seeing positive growth lately.

In the earnings release, Levine stated, "Our results continue to reflect the economic challenges facing our core customer and an intense competitive environment." On the conference call, he further detailed who the core customer is: "Our core low-income customers continue to deal with elevated unemployment levels, cuts to government benefits, and volatility in energy prices, and they are tightly managing their spending as a result." 

It sounds reasonable, but Dollar Tree attributes its success to the very same thing that Family Dollar claims is hurting it. Maybe Dollar Tree will do a better job running Family Dollar now that it's in the process of acquiring it. 

Source: Wikimedia Commons.

Low income is Dollar Tree's friend
CEO Bob Sasser of Dollar Tree has been explaining for several quarters that more and more people are turning to Dollar Tree due to their constrained budgets.

These discount variety stores in general attract lower-income people in the first place; so the logic here is that the more people are feeling thin in the wallet, the more they'll ditch other retailers and pop into the dollar stores.

Dollar Tree's last quarterly results seem to reflect this reality. Sales jumped 7.2%, same-store sales lifted 2%, and earnings bumped up 13.6% per diluted share.

Sasser during the conference call said that with a "worried and concerned consumer," the company is well positioned for success.

Dollar General expanding its army
Meanwhile, Dollar General continues its march. Its last quarterly report marked the 25th straight quarter of positive same-store sales gains. Sales popped 6.8%, same-store sales nudged up 1.5%, and earnings leaped 7.5% per diluted share.

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Rick Dreiling, CEO of Dollar General, said sales have gained momentum since the quarter ended. The company guided for total sales growth to jump between 8% and 9% this fiscal year, same-store sales growth of between 3% and 4%, and earnings per diluted share growth of between 8% and 9%.

It doesn't sound like the economic pressure is affecting Dollar General too badly. Dollar General is arguably the closest competitor to Family Dollar, more so than Dollar Tree, which strictly has a $1 maximum price point.

Source: Wikimedia Commons.

During the conference call, Dreiling explained further: "What affordability means to our customer today is a trade-off between price and quality that best fits their budget. At times, she is showing a greater willingness to compromise on quality or functionality to get a lower price point to stretch her money."

Foolish takeaway
In light of the results and comments from Dollar Tree and Dollar General, Family Dollar's excuse about the economy just doesn't pass the sniff test. If Dollar Tree management is able to run Family Dollar as successfully as they have run their own company, we could see some exciting growth numbers in the quarters and years ahead.