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Family Dollar Tries Beer and Wine to Fight Sales Hangover

Stocks in this article: FDO DG

Updated from 11:16 a.m. with analyst comments and afternoon share prices.

NEW YORK (TheStreet) -- Family Dollar (FDO) CEO Howard Levine said on Thursday he believes a turnaround of the struggling company is taking hold. The nationwide discount retailer also said that after a multi-year review, it has decided to begin offering beer and wine in select stores, matching competitor Dollar General (DG).

Levine and Family Dollar are working to stem falling comparable store sales and tumbling profits, as the company tries to recover from a weak economy and a poorly executed introduction of promotions across its stores that alienated customers.

"We were trying to be all things to all people," Levine said of the company's recent struggles. On Thursday, he reiterated that Family Dollar is investing heavily to return to its roots as an everyday low price retailer. Levine took Family Dollars' weak third-quarter earnings results as a reason for encouragement.

Read TheStreet's Feature: How Family Dollar Lost Its Way

Walgreen's US Fate Could Be Sealed By Labor Day 

Whether or not activist investor Carl Icahn, who recently became the company's largest shareholder, sees the same is a different story. Icahn believes Family Dollar should put itself up for sale immediately and he has threatened to run a campaign to get on the company's board of directors.

"Our trends are beginning to improve. We have a great business and are in the early stages of a turnaround," Levine said on Thursday. "For the first time in a while I have some positive comps."

If trends are improving for Family Dollar, it is from a very bad place. Comparable store sales fell to just 1.8% in the third quarter from 3.8% in the second quarter, however, those declines remain a very troubling sign for the company.

Meanwhile, earnings continue to drop at Family Dollar as a result of weak revenue and restructuring charges as the company closes underperforming stores and improves the competitiveness of its pricing.

The company posted fiscal third-quarter earnings on Thursday of $81.1 million, or 71 cents a share, down over 30% from a year earlier and missing Wall Street forecasts. Third-quarter revenue rose 3.3% to $2.66 billion; analysts were looking for sales of $2.61 billion. Family Dollar expects flat same-store sales in the coming quarter.

Perhaps, the raw numbers mask some signs of success for Levine. Family Dollar's comps are stabilizing as it cuts back significantly on promotions and circulars. Operational trends, for instance inventory and store-manager turnover, are showing signs of improvement.

Family Dollar also appears to be making the right investments by updating its distribution centers, refreshing stores and weeding out underperforming locations. Family Dollar will invest in clustering its stores, perhaps allowing the company to have more tailored assortment and pricing across its nationwide store base. The palletization of Family Dollar's distribution centers, a multi-year effort, may improve the company's efficiency.

"Although our financial performance remains below expectations, we are making progress," Levine said.

Jefferies analysts said those earnings supported Icahn's case for change. "While sales have gotten less bad, margins remain under pressure, which continues to lend support for Icahn Capital's case for action," Daniel Binder, an analyst at the firm wrote on Thursday. Binder welcomed Family Dollar's continued commitment to long-term strategic changes. However, he said the company did not provide specific details on the financial impact of its operational restructuring.

Bank of America analysts said on Thursday that Family Dollar's current restructuring initiatives may not be enough. "While we believe Family Dollar's restructuring initiatives are a step in the right direction, we are still cautious on how much improvement these will ultimately drive," Denise Chai, an analyst with the firm wrote.

Family Dollar may have disappointed some stock analysts by not repurchasing shares for the second straight quarter. JPMorgan calculates that Family Dollar has $245 million remaining in its buyback authorization for the full year.

Most analysts covering Family Dollar rate the company 'neutral' and believe Icahn's influence has provided support to an otherwise richly valued stock based on the company's earnings.

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