Family Dollar (FDO.DL) reported sales growth even as earnings per share fell amid a tough operating environment and ongoing merger preparations. The company expects to close on a takeover offer proposed by Dollar Tree (DLTR -1.87%) within the next few quarters. The merger-related restructuring charges and fees hurt the company's bottom line, but earnings fell even after adding back those expenses. Here's what it could mean for shareholders.
A look at the numbers
Family Dollar's revenue grew 4.5% in the fourth quarter despite a modest 0.3% increase in comparable-store sales. Still, comparable sales growth is an improvement over prior quarters; even with positive comparable sales growth in Q4, full-year comparable sales declined 2.1%. Earnings per share declined to just $0.30 in the quarter, but was $0.73 after adjusting for restructuring charges and other expenses – a 15% decline from the same quarter last year and 5% lower than consensus estimates.
However, not all of the restructuring expenses can be tied directly to the merger. The company recorded restructuring expenses for the closure of 375 underperforming stores in the quarter, including $10.4 million in inventory writedowns as the stores liquidated merchandise.
Investors should expect the pain to continue into fiscal 2015. CEO Howard Levine remarked, "We anticipate that the first quarter will be our most challenging quarter of fiscal 2015, but we expect momentum will build as we move through the rest of the year."
Management declined to give earnings guidance for fiscal 2015 since it expects to merge with Dollar Tree before the end of the year.
What to make of it all
Family Dollar is an interesting stock to consider because it is performing worse than its peers, but is in the midst of being acquired. Although short-term stock movements should not concern long-term investors, shareholders should not be surprised if Family Dollar's earnings miss has little or no effect on its stock price. The ongoing merger discussions are likely to have a bigger impact on shareholders' returns than one quarter's financial results.
If Family Dollar merges with Dollar Tree, shareholders will receive $59.60 in cash and the equivalent of about $14.90 paid in Dollar Tree shares. Family Dollar's stock price is about $78 per share, so a little less than one-quarter of the consideration paid to shareholders comes from the combined entity. As a result, Family Dollar investors may be just as concerned about Dollar Tree's results, which were better than Family Dollar's in the third quarter.
Even so, Levine's warning about first-quarter weakness could be a sign of things to come for the discount category. The company continues to battle through a difficult competitive environment, which is made worse by stagnant wages among its customer base. Competitive pressures caused gross profit as a percentage of sales to decline 1.2 percentage points compared to Q4 2013. If these pressures continue into 2015, holders of the post-merger stock may receive a lower return.
On the other hand, the combination with Dollar Tree could ease competitive pressures as the company builds a larger store base to compete with Dollar General (DG -1.15%) and fend off Wal-Mart (WMT 0.05%). The combined company will have more than 13,000 stores in the U.S. and Canada, leapfrogging Dollar General as North America's largest discount chain. The additional scale – and operating synergies with Dollar Tree – could help boost Family Dollar's bottom line.
Family Dollar's fourth quarter was not as impressive as analysts expected, but that may not matter much. Management says the company is committed to merging with Dollar Tree, so the cash compensation and future operating performance of the combined company has a bigger say on shareholder returns than one or two bad quarters. As a result, Family Dollar's fourth quarter will remain a footnote as the company prepares to merge and create the nation's largest discount chain.