NEW YORK (TheStreet) -- Family Dollar's fiscal third-quarter earnings missed estimates but investors embraced the discount retailer's financials. They shouldn't have.
With Carl Icahn owning 9.4% of Family Dollar and being a vocal critic of management, Family Dollar executives did their best job on Thursday to pitch the company as being in the early stages of a turnaround. Embattled CEO Howard Levine said the company had a "strong July 4 weekend," supported by actions to lower prices on more than 1,000 items and better coordinate that value proposition to consumers.
Levine said, "For the SKUs (stock keeping units) where we have reduced prices, we are seeing nice unit lifts, quicker than we thought." The CEO also said Family Dollar anticipates $40 million to $45 million in annualized operating profit from the closing of more than 370 stores.
The company narrowed guidance for 2014. But investors shouldn't believe that will be the end of the warnings from Family Dollar.
Family Dollar, rated a hold by my firm, Belus Capital Advisors, because of Icahn's involvement potentially leading to board level and operational changes, continues to have deeply unfavorable fundamental trends. The trends are so entrenched that even with suggestions that the business is crawling out from a dark hole, there remains an elevated risk of investor disappointment over the next earnings report. This is especially so if Icahn takes his paper profit of a reported $126 million, cashes in, and moves onto another target.Here are the three financial fails from Family Dollar's most recent quarter that Wall Street missed: Family Dollar's same-store sales have been declining for three straight quarters but that doesn't tell the entire story. About 45% of Family Dollar's store base is in urban markets, which Levine characterized as "struggling" on the earnings conference call. Levine went so far as to say that economic conditions in inner cities have worsened during the recovery in the jobs market. A fundamental issue such as this will not change overnight. Family Dollar now needs at least a 2% same-store sales increase to "break-even," according to Chief Financial Officer Mary Winston. That type of increase appears off in the distance as Family Dollar prices its merchandise more competitively and deals with the economic challenges of urban communities. Finally, there was a non-commitment by management on profit margins expanding in fiscal 2015, hinting at another soft outlook three months from today. Winston divulged that gross margins are to be "pressured" for the foreseeable future as Family Dollar sells a greater number of consumable merchandise and contends with stubbornly high overhead costs.
Family Dollar shares fell 12 cents on Thursday to $64.12. In these Vine videos, the challenges that Family Dollar continues to face are obvious. From excess apparel inventory being moved outside of the store and sold at a deep discount to hastily constructed percentage-off signs, Family Dollar's operations are in a state that clouds future earnings potential.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV