(FDO) Family Dollar Stores Misses – Earnings Up

Family Dollar Stores Inc. (FDO) recently posted third-quarter 2011 results. The quarterly earnings of 91 cents a share missed the Zacks Consensus Estimate of 95 cents, but jumped 18.2% from 77 cents earned in the prior-year quarter due to healthy sales witnessed in the Consumable and Home Products categories.

However, the shares of Family Dollar dropped 3.3% or $1.76 to $51.26 in pre-market trading.

The company had earlier guided earnings in the range of 92 cents to 97 cents for the quarter under review. Management now expects fourth-quarter 2011 earnings between 62 cents and 70 cents, and fiscal 2011 earnings between $3.08 and $3.16. The current Zacks Consensus Estimates for the fourth quarter and fiscal 2011 are 65 cents and $3.15 per share.

We observe that Family Dollar’s strategic initiatives to improve merchandising and store operations have helped grow the top and bottom lines.

Let’s Dig Deep

The operator of self-service retail discount store chains posted a 7.8% increase in revenue to $2,153.4 million from the prior-year quarter, and reflected sales growth across Consumables categories (up 10.6%) and Home Products (up 8.2%) but sales declined at Seasonal and Electronics (down 0.4%) and Apparel and Accessories (down 1.1%). Total revenue also fell short of the Zacks Consensus Estimate of $2,166 million.

Family Dollar, which faces stiff competition from Wal-Mart Stores Inc. (WMT) and Dollar General Corporation (DG), forecasts fiscal 2011 net sales to jump by 8% to 9%. We believe effective price and inventory management, private label offering, expanded operating hours and merchandise initiatives should drive sales trends.

Gross margin contracted 40 basis points to 36.2%, whereas operating margin expanded 10 basis points to 8.6%. Management expects operating margin to increase moderately in fiscal 2011.

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 are now prioritizing their purchases and looking for low-priced options. The company trades in merchandise generally priced under $10.

Based in Matthews, North Carolina, Family Dollar hinted that comparable-stores sales are on the rise due to improved traffic counts. Comps jumped to 4.7% in the quarter under review. Management predicts fourth quarter comps to rise between 5% and 7% and fiscal 2011 comps to increase in the range of 5% to 6%.

Other Financial Details

Family Dollar ended the quarter with cash and cash equivalents of $167.4 million, total long-term debt of $548.5 million and shareholders’ equity of $1,182.2 million. Capital expenditures for first nine-months were $230.3 million. Management expects capital expenditures for fiscal 2011 between $320 and $340 million.

During first-nine months of fiscal 2011, the company repurchased 10.9 million shares, aggregating approximately $512.5 million. The company still has $245.3 million at its disposal under its share repurchase program.

Stores Update

During the first-nine months of fiscal 2011, Family Dollar opened 206 stores and closed 48 stores taking the net store count up to 6,943. During fiscal 2011, the retailer plans to open about 300 new stores and close 60 to 80 stores.

Currently, we maintain our long-term Neutral rating on the stock. Furthermore, Family Dollar shares maintain a Zacks #3 Rank, which translates into a short-term Hold recommendation.

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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