Bullish on Family Dollar Stores - Analyst Blog

Family Dollar Stores Inc.'s (FDO) strategic initiatives to improve the merchandising, marketing and store operations have resulted in sustained growth in the top and bottom lines. This is evident from the company's better-than-expected fourth-quarter 2010 results.

Family Dollar posted fourth-quarter earnings of 56 cents a share that beat the Zacks Consensus Estimate of 51 cents, and rose 30.2% from 43 cents earned in the prior-year quarter. The operator of self-service retail discount store chains posted an 8% year-over-year increase in revenue to $1,956.8 million, which remained in line with the Zacks Consensus Estimate.

The company's point-of-sale technology and store realignment initiatives better position it to drive traffic, meet customer-oriented demand and improve in-store shopping experience. Consumers with lower disposable income have been prioritizing their purchases and looking for low-priced options. The company trades in merchandise generally priced under $10.

Management now expects a growth of 8% to 10% in net sales and an increase of 13% to 20% in earnings per share in fiscal 2011.

The effective price management, cost containment, tighter inventory control, private label offering, expanded operating hours and recent merchandise initiatives should drive sales and margin trends. Moreover, in order to enhance its market share, Family Dollar intends to focus on both consumable and discretionary categories.

We remain encouraged by the company's decision to expand its store base by about 300 stores with plans to remodel 600 to 800 stores in fiscal 2011. Moreover, Family Dollar's share repurchase program of $750 million will also be accretive to earnings. The company also maintains a healthy balance sheet with cash and cash equivalents of $382.8 million and long-term debt of $250 million at the end of fiscal 2010.

In spite of intense competition from other established players such as Wal-Mart Stores Inc. (WMT) and Dollar General Corporation (DG), and erratic consumer spending pattern, we remain bullish on the stock. Family Dollar maintains a Zacks #2 Rank, which translates into a short-term ‘Buy' rating. Moreover, our long-term recommendation on the stock remains Outperform.

 
DOLLAR GENERAL (DG): Free Stock Analysis Report
 
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