Family Dollar Stores, Inc. (NYSE:FDO) announced earnings on Wednesday and is currently trading higher by almost 8%. The company’s earnings were in-line with expectations, nothing special, but its stock obviously responded well to the numbers. However, does this mean that Family Dollar is a “Buy”?
What Stood Out?
First, here are three things that stood out to me in the quarter:
1. Earlier in the year, Family Dollar projected that Q4 comparable sales would rise 2%-4% year-over-year. Now, the company is tightening that range, and guiding for growth of just 2% during its upcoming quarter. As an investor, I would like to have seen guidance on the high-end, or at least the midpoint of prior guidance.
2. For the first time since 2009, Family Dollar Stores, Inc. (NYSE:FDO) did not buyback any shares during the last quarter. While this may mean nothing, it is still worth noting, and is a fact that some might be missing.
3. Lastly, Family Dollar saw a 15% year-over-year sales gain in consumable products. However, these products are low margin. Its high margin business, discretionary, saw sales fall 4% over the prior year. This is problematic and is part of a larger trend that we’ve seen develop in retail, and especially with dollar stores.
An Industry Side-By-Side
Despite an in-line quarter and three key takeaways that I obviously view as problematic, we can’t deny that Family Dollar is still the only of the dollar stores that returns a yield, but is the best?
| Family Dollar Stores, Inc. (NYSE:FDO) | Dollar General Corp. (NYSE:DG) | Dollar Tree, Inc. (NASDAQ:DLTR) | |
|---|---|---|---|
| Forward P/E | 16.25 | 14.63 | 16.5 |
| Price/Sales | 0.72 | 1.04 | 1.57 |
| Operating Margin | 6.95% | 10.2% | 12.59% |
| Comp. Sales Growth | 2% | 3% | 2% |
Dollar General Corp. (NYSE:DG) and Family Dollar Stores, Inc. (NYSE:FDO)operate a near identical business. Yet, when we look at the two companies’ side-by-side we can see that Dollar General is a little cheaper relative to earnings but only because it has higher operating margins.
In addition, Dollar General’s comp growth may look more attractive, but it’s only because the company has restructured and closed branches that were causing it to operate in negative comp growth territory. Thus, my concern with Dollar General is the industry-wide shift of lower discretionary sales growth.
Clearly, Dollar General has capitalized in this space, due to its high margins. Therefore, I think Family Dollar is the more attractive of the two, as Dollar General has the most to lose from the macro shift and Family Dollar is the cheaper stock relative to sales.
Dollar Tree, Inc. (NASDAQ:DLTR) is a completely different business model, selling everything for $1. Yet remarkably, it has the highest margins of any dollar store, and has managed this feat despite rapid store expansion.
Personally, I don’t know how Dollar Tree has produced its margins, but during its last quarter we did see a slowdown in its higher margin discretionary products. Therefore, with Dollar Tree having the most to lose, and the highest valuation relative to sales, I also believe that Family Dollar is the more attractive of the two.
Final Thoughts
As far as I’m concerned, Family Dollar Stores, Inc. (NYSE:FDO) is the best stock in this space, both in valuation and in growth outlook. Moreover, with a dividend yield of 1.6% and a payout ratio of 24% there is still room for the company to give more back to shareholders.
With that said, I still can not comprehend why the company did not buyback shares, and I view both the macro shift and tightened guidance as a potential problem in the space. Therefore, as I compare Family Dollar Stores, Inc. (NYSE:FDO)’s forward P/E ratio of 16.34 to the S&P 500 and its growth to the rate of GDP I see that it is slightly more expensive than the overall market.
Thus, with a dividend yield that is less than the S&P 500 “SPY” ETF, I think I feel more comfortable in avoiding this space altogether for now and seeking value elsewhere. Overall, the value that it presents relative to the space does not outweigh its expense and the problems that it faces.
The article Is This Dollar Store a Post-Earnings “Buy”? originally appeared on Fool.com and is written by Brian Nichols.
Brian Nichols has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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