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Bargain Stores For Bear Markets

Posted: Jan 08, 2009 15:16 PM by Eric Fox

Tickers in this Article: DLTR, WMT, NDN, FDO

Family Dollar Stores (NYSE:FDO) continued to beat the recession as management correctly anticipated a customer shift toward more value-priced merchandise during the quarter, allowing the company to report its fourth-straight positive earnings surprise. (Learn how earnings surprises can bump up the price of a stock in Surprising Earnings Results.)

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Family Dollar Stores operates a chain of retail stores serving middle to low-income customers. The company sells food, sundries, household items and apparel at 6,600 stores in 44 states.

The company reported first quarter fiscal 2009 (ended November 29) earnings of 42 cents per share, up from 37 cents in the same quarter last year. Revenues were $1.75 billion, up from $1.68 billion in Q1 of fiscal 2008. Comparable same-store sales (comps) increased 2.1% due to increased traffic and higher sales of food items. The street was expecting 40 cents for the quarter.

Looking Forward
The company even raised guidance for Q2 of fiscal 2009, which ends February 28, and for full fiscal 2009. The new earnings ranges are:
- Fiscal 2009 Q2: 48-52 cents based on a 3-5% comps increase.
- Fiscal 2009 full year: $1.63 to $1.81 based on a 2-4% comps increase.

Consumables Drove Increased Sales
Kenneth T. Smith, the CFO, said that during the quarter, "Consumables continued to be the primary driver of sales, increasing approximately 10% on a comp basis in Q1. Sales in more discretionary categories continued to be weak, reflecting…the current economic environment." Consumables now represent 66% of sales compared to 61% last year.

Family Dollar also managed its inventory well during the quarter, as average inventory per store was 4.5% lower than the same quarter last year. The company did this by anticipating the customer shift and buying more consumables while cutting back on more discretionary categories.

Despite what is going on in the economy and other retailers, Family Dollar reported an excellent December with a 6% comps increase.

Financials Are In Good Shape
Family Dollar's cash balance at the end of the quarter was $152 million, and debt was $250 million.

The entire dollar store category is gaining share. Dollar Tree (Nasdaq:DLTR) reported a comps increase of 6.2% for the quarter ended November 1.

99 Cents Only Stores (NYSE:NDN) reported a comps increase of 4.7% for its operations outside of the Texas market. The company decided to exit this market last September.

Conversely, Wal-Mart Stores (NYSE:WMT), which has prospered during the current economic downturn and beaten estimates the last four quarters, reported weak December sales. The company said that comps increased only 1.7% after removing the fuel sales. This was below analyst estimates. Wal-Mart also lowered earnings guidance and said that Q4 earnings per share would be in a range of 91-94 cents.

The Final Word
Family Dollar continues its streak of increased earnings, and with the economy continuing to slow down, investors should see this continue for a few more quarters.

Find out where to turn when looking to invest in a tumultuous market; read Industries That Thrive On Recession.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator. Mr. Fox also publishes a paid investment newsletter. Please visit The Unknown Stock Report for more details.

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