Family Dollar Stores Inc. (FDO - Analyst Report) posted first-quarter fiscal 2015 earnings of 44 cents a share, which missed the Zacks Consensus Estimate of 59 cents, and plunged 35.3% from 68 cents earned in the prior-year quarter. Stiff competition and margin contraction hurt the results.
Family Dollar Stores, Inc - Earnings Surprise | FindTheBest
To bring itself back on the growth trajectory, this self-service retail discount store chain had earlier announced a slew of measures to improve its operational and financial performances. Management reduced prices of approximately 1,000 basic items and disclosed plans to add value-based products, optimize the cost structure by lowering headcount, reduce inventory shrinkage, close underperforming outlets and being more rationale on new store opening to reap higher returns on investment.
The company is undertaking initiatives to enhance store productivity and remains focused on enhancing sales. This is well evident from the company’s comparable-store sales performance so far in the second quarter. Comps grew 1.2% in December on account of fewer markdowns and increase in customer traffic.
Including fees associated to the pending merger with Dollar Tree Inc. (DLTR -Analyst Report), the earnings came in at 36 cents a share, substantially down from the year-ago quarter. Family Dollar decided to stick with Dollar Tree and rejected Dollar General Corp’s (DG - Analyst Report) buyout offer on grounds of difficulty to win over antitrust regulatory concerns. The giant that will arise will have the ability to generate sales of over $18 billion and reach out to more consumers through its vast network of stores.
Let’s Dig Further
Family Dollar posted a 2.3% increase in net sales to $2,556.4 million from the prior-year quarter, reflecting sales growth across Consumables (up 3.5%) and Seasonal & Electronics (up 2.5%). This was offset by decline witnessed in Home Products (down 4.8%) and Apparel and Accessories (down 1%). Total revenue came below the Zacks Consensus Estimate of $2,577 million.
The strength witnessed in the Consumables category came following robust growth across frozen food and tobacco. Strong focus on consumables helped Family Dollar to drive business from budget-constrained consumers. The Consumables category accounted for 75.8% of first-quarter net sales compared with 74.9% in the prior-year quarter.
Comparable-store sales for this Matthews, NC-based company fell marginally 0.4% on account of decline in average consumer transaction value and lower customer transactions.
Gross profit dropped marginally by 0.5% to $852.9 million, whereas gross margin contracted 90 basis points to 33.4%. The sturdy sales of lower-margin carrying consumables and lower markups were partly offset by lower markdowns.
Family Dollar stated that adjusted operating profit for the quarter came in at $79.5 million, down 33.9% year over year. Operating margin shrunk about 170 basis points to 3.1%.
Other Financial Details
Family Dollar ended the quarter with cash and cash equivalents of $209 million, long-term debt of $299.1 million, and shareholders’ equity of $1,686.7 million. Capital expenditures for the quarter totaled $103.5 million.
Store Update
During the quarter, Family Dollar opened 59 new outlets taking the total store count to 8,101. The company also renovated, expanded or relocated 178 stores.
Closing Comment
Despite the economy on the recovery path, consumers still remain cautious on their spending, buying only things that fulfill their basic needs. Consequently, we could see more competitive pricing and new products attracting shoppers. A price war would definitely eat away margins, which in turn would affect the company’s results. In order to remain competitive, it might be better to try out innovative ways to win over target consumers.
Family Dollar currently carries a Zacks Rank #4 (Sell). A better-ranked stock in the retail industry includes Burlington Stores, Inc. (BURL - Snapshot Report) sporting a Zacks Rank #1 (Strong Buy).
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