Consumer Products

Discount Retailer’s Results are Good, But Not Good Enough (FDO, DG, DLTR, WMT, TGT, COST, SHLD)

Discount retailer Family Dollar Stores Inc. (NYSE: FDO) reported results for its third fiscal quarter this morning that were pretty much in line with expectations. EPS came in at $1.06 compared with a consensus estimate of $1.07, and sales totaled $2.36 billion against an expectation of $2.37 billion.

The company’s results were somewhat weaker than the most recent reports from competitors Dollar General Corp. (NYSE: DG) and Dollar Tree Inc. (NASDAQ: DLTR), both of which beat EPS and sales estimates. Wal-Mart Stores Inc. (NYSE: WMT) also beat expectations in its April quarter, and Family Dollar was probably expected to do at least as well. After all, the story is that the discounters are stealing sales from the likes of Walmart, Target Corp. (NYSE: TGT), Costco Wholesale Corp. (NASDAQ: COST), and even Sears Holdings Corp. (NASDAQ: SHLD).

But Family Dollar’s results indicate that there might be a problem with this story — gross margins are declining:

As a percentage of sales, the impact of stronger sales of lower-margin consumables, higher markdowns and increased inventory shrinkage were partially offset by higher markups resulting from the Company’s continued investments in private brands, global sourcing and price management capabilities, and lower freight expense.

The company’s margins fell from 36.2% in the second quarter to 35.8% in the third quarter and in comments on the company’s full fiscal year outlook, Family Dollar noted, “Gross margin pressure for the full year.” That pressure contributes to the company’s outlook for the fourth quarter and the full year.

Family Dollar expects fourth quarter EPS of $0.71-$0.81, while the consensus estimate had been $0.77. Full year EPS is now forecast at $3.70-$3.70 compared to a consensus estimate of $3.67. Full year sales are expected to rise 9%-10%, which gives a range of about $9.32-$9.4 billion versus an estimate of $9.34.

None of this is bad, but as we’ve noted before, investors have tagged Family Dollar and the other discounters as growth stocks and just meeting expectations doesn’t cut it. Family Dollar’s sliding margins are another cautionary signal.

In the pre-market this morning, Family Dollar shares are off more than -8%, at $5.63 in a 52-week range of $44.42-$74.73.

Paul Ausick