All in the Family Dollar

When Ackman, Buffett, Peltz and Jefferies all agree, you should listen.

By Benzinga Oct 5, 2011 1:18PM

By Jonathan Chen, Benzinga


What a difference a few days makes.

 

Family Dollar (FDO) reported better-than-expected earnings on Sept. 28, raising its guidance and announcing it would be buying back an additional $250 million worth of stock. But the shares slumped along with the rest of the market. Then, on Wednesday, the stock got a boost from an analyst upgrade. As of midday, it was up $1.50, or about 3% to $53.

 

It's time for the rest of Wall Street  to sit up and take notice of the improving story here.


The Charlotte, N.C., company recently reported earnings of 66 cents per share on $2.13 billion in revenues. Wall Street had been expecting earnings of 63 cents per share on $2.12 billion in revenues. In addition to the better than expected earnings, the company said it expects to earn 65 to 73 cents per share. Wall Street expected earnings of 66 cents per share. Family Dollar also said it expects to earn $3.50 to $3.75 per share for fiscal year 2012, as opposed to estimates of $3.57 per share.


"A year ago we launched an ambitious, multi-year plan to accelerate revenue growth, expand operating margins and optimize our capital structure, and I am pleased to announce that we have executed well against our plans in a very difficult operating environment," said Howard Levine, Chairman and CEO.


"In fiscal 2012, we intend to accelerate investments to drive sales and profitability. We plan to open 450-500 new stores, a more than 50% increase over fiscal 2011 openings. We also intend to renovate, relocate or expand over 1,000 stores," continued Levine. "I remain confident that these investments, combined with our strategy of providing customers with great value and convenience, will continue to deliver strong shareholder returns in fiscal 2012 and beyond."


It looks as if earlier analyst reports from Deutsche Bank and Piper Jaffray were incorrect, as both investment banks were not buyers going into the quarter. Deutsche Bank actually said that it was a negative to have Bill Ackman and Nelson Peltz in the name. Just a little while ago, Deutsche Bank raised the price target on Family Dollar from $53 to $55. The bank obviously underestimated the company.


Piper Jaffray was downright bearish going into the quarter. In its note, Piper wrote, "We are maintaining our UW rating and $49 PT heading into FDO's Q4 earnings release on Wednesday. We expect in line Q4 EPS, and remain more concerned about the outlook and eventual results during the coming F12. We expect ongoing gross margin pressure as a result of supplier cost increases and FDO's push toward low- margin consumables within its mix. Also, we note expectations for out-year earnings growth heading into F12 are much higher compared to the two previous years, and this is coming off a year when FDO operationally missed its full year guidance." This obviously proved to be wrong.


Jefferies was proven right going into the quarter, however, and recently raised its earnings estimates for 2012. In its note, Jefferies wrote, "We are raising our FY11 and FY12 EPS estimates of $3.08 and $3.60 from $3.08 and $3.55, respectively. We are also introducing an FY13 EPS estimate of $4.15. We are anticipating comp store sales guidance for FY12 in the 4-6% range and 15-20% EPS growth."

Back in May at the Ira Sohn conference, Pershing Square's Ackman said that he thought the company was worth eventually $70 per share. He said the management needed to work on improving operating metrics, which it clearly has. The company added to its already existing $750 million share buyback program, and is now growing store count in a meaningful way.


Levin said the company is going to open 450-500 new stores, a more than 50% increase over 2011, and renovate over 1,000 stores. At the conference, Ackman said that the company spends around $325,000 on a new store, and the company earns anywhere from 37 to 50% on this investment. With renovations, the company spends $115,000, and earns between 30 and 40% on renovations.


With the earnings beat and raised guidance today, Family Dollar apparently is heeding Ackman's call for management to close the gap with its largest competitor, Dollar General (DG). At the conference, Ackman mentioned increasing private label goods, globally sourcing things, improved pricing, and cutting shrink. It looks as if the company is well on its way to getting its operating metrics where it can really compete with Dollar General. The increased guidance is especially important, as this is a strong sign for the growth of the company, as well as the space in 2012, and beyond.


With names like Peltz, Ackman and other major investors getting into the dollar store space, it looks like even the investment banks who underestimated the name are getting "all in the family." Perhaps even Archie and Edith will get on the piano to sing about these results.


ACTION ITEMS:

Bullish:
Traders who believe that Family Dollar will continue to outperform might want to consider the following trades:

  • Shares were recently trading at 15 times 2012 earnings with a 1.4% dividend yield. Shares are still cheap when compared to its competitors.
  • Also consider competitors like Dollar General and Dollar Tree (DLTR) which have been doing well recently.

Bearish:
Traders who believe that the dollar stores will eventually lose market share to Wal-Mart (WMT) may consider alternate positions:

  • Wal-Mart is well aware of its position being threatened by the dollar stores. If it decides to really attack the dollar store space with Wal-Mart Express, Wal-Mart could significantly hurt these dollar stores. 

Disclosure: Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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