Family Dollar Keeps Falling Short

NEW YORK (TheStreet) -- Family Dollar (FDO) has been struggling -- and it looks like it's about to get worse.

The company's revenue and income could fall in the coming years due to the closure of more than 300 stores, a drop in the pace of new store openings, and price cuts. Its competitors, on the other hand, aren't slowing down. As a result, Family Dollar could see its market share shrink.

Family Dollar has been lagging behind its main rivals in terms of revenue and earnings growth for the last five years. It is already the least profitable operator in its peer group, and its margins aren't getting any better.

For these reasons, the company's shares -- down 11.6% year to date to $57.40 as of Monday at 3:15 p.m. -- could continue to struggle.

The short interest in Family Dollar has reached record lows, but that is due to takeover speculation, not an improvement in the company's fundamentals.

In its previous quarterly results, Family Dollar reported a 6.1% year-over-year drop in revenue to $2.72 billion, while its net income plummeted 35.2% to $90.9 million, or 80 cents per share.

Last year's results included an extra week, which contributed $189 million to sales and 7 cents per share to earnings. The severe winter weather in the previous quarter dragged the company's earnings by 5 cents per share.

Family Dollar's same-store sales dropped 3.8% due to lower customer transactions. The company reported a drop in revenue in all categories.

Category (in Millions)

2Q 2013

2Q 2014

% Change

Consumables

$1,932.45

$2,011.50

-3.90%

Home products

$281.78

$322.23

-12.60%

Apparel and accessories

$183.61

$206.89

-11.30%

Seasonal and electronics

$318.79

$353.38

-9.80%

Family Dollar will close 370 underperforming stores, or more than 4% of its total of 8,100 stores as of the second half of this fiscal year. This is significant for a company that closed just 22 stores in the previous six months.

The stores that are being closed have average annual sales of $650,000, which is 50% below the company's average sales per store.

Meanwhile, Family Dollar will open between 350 and 400 new stores in the next fiscal year, a drop from 525 new store openings in the current year.

In other words, the company is slowing down the growth of its number of stores. This comes at a time when its rivals, like Dollar General (DG) and Dollar Tree (DLTR), are expanding. Over the next two years, Family Dollar could end up losing market share to its competitors.

Dollar General has planned to open around 700 new stores in the current year, while Dollar Tree has targeted 375 new stores.

To further exacerbate the situation, Walmart (WMT) has emerged as a new direct competitor. The retail behemoth increased its focus on daily shoppers by selling products in smaller packages. Moreover, the company will open more than 320 small-format stores in urban areas, calling some Walmart Express, as it marches into the territory of dollar stores.

Besides the aggressive expansion, Family Dollar's rivals have also outperformed the company with better sales and profits.

In its previous quarterly results, Dollar General reported a 6.8% year-over-year increase in net sales to $4.49 billion. Dollar Tree's revenue was flat from the same quarter last year. Dollar General and Dollar Tree witnessed a 1.3% and a 1.2% increase in same-store sales, easily outperforming Family Dollar.

It's not just the previous quarter, either. Dollar General and Dollar Tree have been outperforming Family Dollar for years. Over the last five years, on an average, Family Dollar's revenues have risen by 7% per year, while Dollar General and Dollar Tree have grown their revenue by more than 8% per year.

Revenue

2009

2013

CAGR

Family Dollar

$7.4 billion

$10.4 billion

7.0%

 

2010

2014

 

Dollar General

$11.8 billion

$17.5 billion

8.2%

 

2010

2014

 

Dollar Tree

$5.2 billion

$7.8 billion

8.4%

Following this disappointing performance, Family Dollar has announced that it will reduce the prices of nearly 1,000 basic items in order to attract price-sensitive customers. While this reduction may give a boost to the company's sales, its margins could come under additional pressure.

In the previous quarter, the severe weather dragged the margins of all the players in this industry. In the previous quarter, Family Dollar's margins fell to 3.34% from 4.84% in the prior year. Over the long term, however, Family Dollar, which used to be more profitable than Dollar General, has reported deteriorating margins. 

FDO Profit Margin (Quarterly) Chart

FDO Profit Margin (Quarterly) data by YCharts

Family Dollar has lagged behind its rivals in terms of revenue growth, and the company is the least profitable of the three leading discount retailers. Therefore, it comes as no surprise that over the last five years, on an average, Family Dollar has managed to grow its net income by 8.6% per year while its two leading rivals have managed double-digit growth.

Net Income (non-GAAP)

2009

2013

CAGR

Family Dollar

$291 million

$440 million

8.6%

 

2010

2014

 

Dollar General

$425 million

$1,037 million

19.5%

 

2010

2014

 

Dollar Tree

$321 million

$597 million

13.2%

For fiscal 2014, ending in August, Family Dollar has projected earnings of between $2.55 and $2.75 per share, including the 50 cents per share impact of the restructuring charges. The mid-point of this range shows a 30% drop in earnings from last year.

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At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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