Shares of Family Dollar
Sales rose 8.7% to nearly $2 billion during the company's fiscal second quarter, fueled by a 6.4% increase in same-store sales. Earnings grew even more, 33% to $0.60 a share.
Yes, both gross margins and net margins inched higher at Family Dollar. It's a point worth emphasizing, because margins contracted at the more conventional discount chains such as Wal-Mart
Family Dollar customers loaded up on the chain's lower-margin consumable merchandise. Thankfully, that was more than offset by lower markdowns, freight expense savings, better inventory management, and generally higher markups.
The second-quarter results didn't take Wall Street by surprise. Analysts figured the company would post a profit of $0.60 a share. The real juice behind today's stock gains comes from the company's near-term guidance, which Family Dollar has upgraded. It sees a profit of $0.54 - $0.58 a share for the current quarter. Analysts had settled on the $0.50 mark.
Investors have recently warmed up to closeout, thrift, and dollar-store specialists such as Big Lots
Havens of thrift are magnetic when money is tight. The real challenge for investors, however, is to weed out the bargain stores that are shredding margins. Family Dollar has proven it belongs on the short list of retail longs. Value hounds may point out that chains such as Big Lots and Dollar Tree trade at lower earnings multiples than Family Dollar. They're right, but sometimes you have to pay up to land a bargain.
Other games to play:
Longtime Fool contributor Rick Munarriz is always on the hunt for a good bargain. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. He does not own shares in any of the companies in this story. The Fool has a disclosure policy.