Even after an extra week of post-Thanksgiving sales and ramping up advertising efforts in its first quarter, Family Dollar's (NYSE: FDO) stock skidded to a 52-week low today after the discount chain reported yesterday that same-store sales fell and shrinkage -- read, theft -- rose.
During challenging times, you would think that deep discounters like Family Dollar, Dollar Tree (Nasdaq: DLTR), and Big Lots (NYSE: BIG) would attract more customers. After all, families begin pinching pennies and looking for the best value for their buck. So when a discounter like Family Dollar has difficulty bringing in customers, that's an ominous sign.
My one guess is that mass-merchandise discounters like Wal-Mart (NYSE: WMT) could be pulling in customers who would otherwise shop at the dollar stores. True, they might not be getting the lowest possible prices, but typically the products are a step up compared with the deeper discount stores. As a result, Family Dollar faces a quandary: It's neither fish nor fowl.
While it's considered a "dollar store," many of Family Dollar's price points well exceed that threshold, unlike a 99 Cents Only (NYSE: NDN) store. But these "premium priced" items, including electronic goods, are the key to the company's growth right now. In fact, while Family Dollar's total sales only grew 5.2% for the first quarter, seasonal and electronic merchandise rose a whopping 14.5%. Yet it also must go up against the purchasing power of Wal-Mart and Target (NYSE: TGT); it can't hope to compete with the broad selection of goods that they offer.
Like all retailers who offer food, the company is faced with rising costs in this area, which is squeezing gross margins. However, Family Dollar says food is one of its best performers in terms of sales, which is why it will continue expanding its freezer rollout program (the rising costs are one of the reasons Big Lots abandoned the freezer approach). Family Dollar plans to begin accepting food stamps in about 30% of its stores by the end of the year and is allotting additional space in its stores to food.
Sales in the first quarter grew to $1.7 billion on the strength of that extra selling week, but margins contracted all the way around even with share buybacks boosting the results. Next quarter doesn't look too promising, either. The extra holiday week in Family Dollar's first quarter will have an effect on results for the second quarter, which will also include one fewer week than the year-ago quarter. Management doesn't see economic trends improving anytime soon, offering guidance of sales falling 5% and estimating earnings per share at $0.40 to $0.44, well below analyst expectations of $0.57.
While items at Family Dollar may be cheap, this stock doesn't yet have enough of a discount to warrant putting it in your shopping cart.
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