Piper Jaffray Reiterates Underweight Rating on Family Dollar (FDO, WMT)

Piper Jaffray is out with a research report this morning, where it reiterates its Underweight rating on shares of Family Dollar Stores Inc. FDO; it has a $34.00 price target on the stock. The Piper Jaffray analysts said, “Yesterday, FDO announced Q3 EPS of $0.77, which topped PJC of $0.76 and guidance of $0.71-$0.76 and was in line with Consensus of $0.77. Recall that FDO announced a +7% comp on June 3. Q3 EPS was due to an improved GM (+37 bps y/y) resulting from reductions in markdown expenses and inventory shrinkage. Further driving the EPS was increased SG&A rate leverage, which fell from 28.7% in Q3 F09 to 28.1% in Q3 F10. The +7% comp helped drive leverage in occupancy costs and other expenses. Furthermore, insurance and incentive compensation were lower in Q3 and as a result, operating margins improved 97bps to 8.5%. FDO's tax rate was up 176bps y/y and the company repurchased ~2.4M share during Q3.” They also noted, “While F10 operating margin will likely expand by 100bps to 7.2% of sales, we believe the operating margin expansion story will likely slow in Q4 F10 and in F11. On the call, Management referenced they are taking benefit from sourcing and private label into promotions to drive sales trends. While not referenced, we believe this could be in response to Walmart's WMT recent rollback pricing on several consumable-based products. Additionally, we question FDO ability to continue to drive better GM rate expansion from shrink and freight expense.” The PJ analysts closed by saying, “We continue to believe FDO will face mounting comp headwinds in the 2H C10 as disposable income growth for their core customer is expected to slow. Recall, 56% of FDO's customers have annual gross incomes of <$40k per year and 26% have annual gross incomes of <$26K per year. At market close, FDO traded at a 14.1x fwd Consensus EPS estimate, which represents a 9% premium to the S&P500 of 12.9x.”