Family Dollar Carries Momentum - Analyst Blog

Family Dollar Stores Inc. (FDO), the operator of self-service retail discount store chains, carries its growth momentum in fourth-quarter 2010. Following an increase of 8.4% in third-quarter 2010, the retailer stated that sales had jumped 8% to $1,957 million in the quarter under review from $1,811 million posted in the prior-year quarter.
 
Comparable-stores sales remain healthy, reflecting improved traffic counts and an increase in average transaction value. Comps climbed 6.1% during the quarter. The operator of 6,785 stores, Family Dollar, hinted that sales were strongest in the consumables category.
 
Matthews, North Carolina based company, Family Dollar, highlighted that sales for fiscal 2010 came in at $7,867 million, up 6.3% from the year-ago quarter. Comparable-stores sales grew 4.8% for the year.
 
Despite a sluggish economic environment, Family Dollar’s strategic initiatives to improve the merchandising, marketing, and store operations have resulted in sustained growth in both the top and bottom lines.
 
The effective price management, cost containment, tighter inventory control, private label offering, expanded operating hours and recent merchandise initiatives should inevitably drive sales and margin trends. Moreover, in order to enhance its market share, Family Dollar intends to focus on both consumable and discretionary categories.
 
Family Dollar has been actively managing its cash flows, returning much of its free cash to shareholders through share repurchases and dividends. The company has also been making prudent investments relating to store infrastructure; store openings, expansions and relocations; along with improvement of distribution centers to drive revenue growth.
 
However, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn, affect the company’s growth and profitability.
 
Moreover, Family Dollar operates in the highly competitive discount retail merchandise sector, and faces stiff competition from Wal-Mart Stores Inc. (WMT) and Dollar General Corporation (DG), which will likely continue to weigh on its results.

Given the pros and cons, we currently prefer a Neutral rating on the stock. Moreover, our Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation, correlates with our long-term view.

 
DOLLAR GENERAL (DG): Free Stock Analysis Report
 
FAMILY DOLLAR (FDO): Free Stock Analysis Report
 
WAL-MART STORES (WMT): Free Stock Analysis Report
 
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