Friday, February 28, 2014

Stay Away From This Dollar Store

This article was originally published by GuruFocus

By Sarfaraz A. Khan, Research Assistant: Gohar Yousuf
February 28, 2014
The current economic environment in the U.S., with sluggish economic recovery, slow growth of the labor market and cautious consumers, seems ripe for the growth of dollar stores. Despite the favorable business environment, Family Dollar (FDO) continues to struggle. The store has disappointed its investors with an earnings miss and a significant cut in its guidance. Moreover, the COO’s exit has further exacerbated the situation.

The company’s shareholders did get some support from Credit Suisse in which the bank suggested that Wal-Mart (WMT) should consider acquiring Family Dollar. This would give a significant boost to Wal-Mart’s efforts to expand its small stores. As a result, Family Dollar’s shares rose 1.7% on Wednesday.

Earnings Miss

In its previous quarterly results which included the holiday season, Family Dollar ended up giving more discounts to customers than it had originally planned.

Although the company’s quarterly sales rose 3.2% to $2.50 billion, its net income dropped 2.8% to $78 million, or $0.68 per share. Family Dollar missed both revenue and earnings estimates by $10 million and $0.01 per share, respectively.

The company showed strongest performance in the consumables category, which accounts for 75% of its quarterly sales. In this segment, Family Dollar witnessed a 4.7% sequential growth in sales. However, this growth was driven largely by low margin products. Therefore, the company’s income dropped, despite an increase in revenues.

Moreover, Family Dollar has announced that its president and chief operating officer, Michael Bloom, has resigned. Family Dollar has been implementing some significant … read full article at GuruFocus