We have recently initiated coverage on Family Dollar Stores Inc. (FDO), a self-service retail discount store chain, with a Neutral recommendation and a target price of $29.00, as we anticipate it to perform in line with the industry.

Headquartered in Matthews, North Carolina, Family Dollar offers general merchandise in four categories – consumables, home products, apparel and accessories, and seasonal and electronics ? and sells merchandise at prices from under $1 to $10.

Despite a challenging macro environment, the company’s strategic initiatives to improve the merchandising, marketing, and store operations have resulted in sustained growth in the top and bottom lines. Management now expects a growth of 5% to 7% in net sales, 3% to 5% in comparable-store sales and 3.9% to 13.5% in earnings per share in fiscal year 2010.

We believe there is a tremendous opportunity to increase gross margin through renewed effort on the store brand portfolio. Family Dollar’s point-of-sale technology and store realignment initiatives position it to drive traffic, meet customer demand and improve in-store shopping experience.

However, intense competition from other established players such as Wal-Mart Stores Inc. (WMT) and shift in demand to lower margin consumable merchandise categories triggered by the economic downturn will play spoiler.

Consequently, Family Dollar’s first-quarter 2010 sales underachieved the guidance. Although comparable store-sales for the quarter rose 2.4%, a jump of 30 basis points year-over-year, it remained below its guidance of 3% to 5%. The volatility in sales trend and the financial distress continue to adversely affect sales.

Family Dollar currently operates a chain of more than 6,600 general merchandise retail discount stores in 44 states and the District of Columbia.

Zacks Investment Research

Similar Posts: Family Dollar Stores Inc. | FDO | Wal-Mart Stores Inc. | WMT | Discount, Variety Stores | Services

RSS feeds: Family Dollar Stores Inc. | FDO | Wal-Mart Stores Inc. | WMT | Discount, Variety Stores | Services |

Other Posts by vitalstocks | RSS Feed for this author