Normally, an earnings disappointment would be reason to pull an ostrich and stick your head in the sand. Luckily, Family Dollar is anything but your ordinary stock. In fact, this earnings sell-off should be met with loud cheers, because it just might give us a second opportunity to get into this discount variety store and others at considerably more attractive prices.
Discounts, aisle four!
It's no secret that discount variety stores Family Dollar, Dollar Tree (Nasdaq; DLTR), and Dollar General
Gross margins at Family Dollar remain relatively steady. Sure, Family Dollar would love to see its higher-margin household products going out the door, but lower-margin consumables are also consistently on shoppers' buy lists.
However, its margin performance gives us another indication that consumers are still being frugal with their spending, buying only what they need. Frugal spending habits should translate into more loyal customers for these deep discounters, and customer retention will lead to long-term profit.
The growth figures we've seen from these companies simply cannot be matched:
|Company||Gross Margin (ttm)||Price to Earnings (ttm)||5-Year Expected Growth|
I chose to throw in Wal-Mart for comparison, since it also competes in the discount variety store arena.
You might notice just how much better these metrics look when compared to the leader in this sector. Gross margins consistently trump Wal-Mart's by 7 to 10 percentage points, and all three companies clearly appear cheaper if you look at their current P/E relative to their future growth rates. Now, we need to keep in mind that Wal-Mart's product selection is considerably greater, including a wider swath of gross margins across those product lines, but this demonstrates just how strong business is at these discount variety stores.
Family Dollar is no slam-dunk, but it's clearly gaining market share from grocers, and creating a loyal customer base for future growth. As long as the economy remains on track, and Family Dollar can deliver on its growth targets, shareholders could be poised to reap the benefits.
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Fool contributor Sean Williams does not own shares in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. Wal-Mart is a Motley Fool Inside Value recommendation. Wal-Mart is a Motley Fool Global Gains pick. The Fool owns shares of Wal-Mart. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.