We recently upgraded our recommendation on Family Dollar Stores, Inc. (FDO), the operator of self-service retail discount stores in the United States, to Outperform from Neutral with a target price of $40.00.

Despite a sluggish macro economic environment, Family Dollar’s strategic initiatives to improve the merchandising, marketing, and store operations have resulted in sustained growth in the top and bottom lines.

The effective price management, cost containment, tighter inventory control, private label offering, expanded operating hours and recent merchandise initiatives within the consumables category should help drive sales and margin trends.

The company recently reported better-than-expected sales results for second-quarter 2010. Net sales for the quarter rose 4.9% to $2.09 billion from $1.99 billion delivered in the prior-year quarter. Comparable-store sales for the quarter also jumped 3.6%. The company witnessed robust sales during the quarter in the Seasonal, Home and Consumable categories.

The stronger sales results and favorable gross profit forecast have prompted management to raise its second-quarter 2010 earnings guidance to a range of 75 cents to 80 cents a share from 65 cents to 70 cents.

The company’s point-of-sale technology and store realignment initiatives are driving traffic. There is a tremendous opportunity to increase the gross margin by renewed effort on its store brand portfolio.

Although, the intense competition and shift in demand to lower-margin consumable merchandise categories triggered by the recent economic downturn remains a concern, we believe that the stock will Outperform in the near future.

Zacks Investment Research

1. (FDO) Family Dollar Stores’ Sales RiseFamily Dollar Stores, Inc. (FDO), the operator of self-service retail discount store chains in the...
2. (FDO) Family Dollar Stores Raises DividendFamily Dollar Stores Inc. (FDO), the operator of self-service retail discount store chains, recently boosted...
3. (FDO) Family Dollar Analyst Initiates Coverage at NeutralWe have recently initiated coverage on Family Dollar Stores Inc. (FDO), a self-service retail discount...
4. (FDO) Family Dollar Stores, Inc. – Momentum – Zacks Rank BuyFamily Dollar Stores, Inc. (FDO) continues to surge higher on strong second-quarter results and bullish...
5. (FDO) Family Dollar Stores – beat analyst estimates in each of the last four quartersFamily Dollar Stores (FDO) reported excellent first-quarter results in early January that sent its share...
6. (FDO) Family Dollar Stores – company also saw strong holiday salesFamily Dollar Stores, Inc. (FDO), the discount store chain with more than 6,600 stores in...

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