Family Dollar (FDO) missed on its fiscal second quarter 2014 earnings report for the second consecutive quarter this morning, blaming much of its poor performance on a shorter calendar period and tough winter weather, while promising major changes to its stores going forward.
FDO stock was initially down 3.5% from yesterday’s closing price of $59.07 to $57 in pre-market trading, but bounced back before to open about 0.5% higher this morning. Shares of rivals Dollar Tree (DLTR) and Dollar General (DG) were slightly lower in early trading.
The results of the fiscal second quarter were rather dismal. Earnings per share for Family Dollar came in at 80 cents — down from $1.21 in Q2 2013, and below expectations of 90 per share. Net sales were $2.72 billion, compared to $2.9 billion for Q2 2013, and below the street’s expectations of $2.78 billion. Net income fell from $140 million to $90.9 million year-over -year. Same-store sales were down 3.8% from a year ago.
Family Dollar was quick to point out that the second quarter of fiscal 2014 had only 13 weeks, compared to 14 weeks for the second quarter of fiscal 2013. FDO estimated an impact of about $189 million in sales and 7 cents of earnings losses from the one-week difference. The company also said that bad weather accounted for about 5 cents of losses. But even adding these numbers to the bottom line, the quarter would still have been weaker than the comparable 2013 quarter.
Howard R. Levine, FDO’s chairman and CEO was blunt in assessing FDO’s poor performance. He said:
“Our second quarter results did not meet our expectations. The 2013 holiday season was challenged by a more promotional competitive environment and a more financially constrained consumer. In addition, like many retailers, our second quarter results were significantly impacted by severe winter weather, which resulted in numerous store closings, disrupted merchandise deliveries and higher than expected utility and store maintenance expenses.”
Mr. Levine added that company executives hold themselves accountable for the poor results and that numerous changes would be made to FDO stores over the remainder of 2014, including:
- Lowering prices on almost 1000 basic store items to become more competitive
- A reduction in corporate overhead and a re-alignment of organizational functions
- Closing some 370 underperforming stores and cutting jobs over the rest of the year
- Reducing its projected new store openings in 2015 from 525 to 350-400. FDO had opened 244 new stores during the first half of fiscal 2014, and it closed 22.
So, what’s going on with FDO? Well…
Three months ago, another poor earnings report led to the resignation of Michael Bloom, the President and COO of Family Dollar. This produced much speculation that FDO might become a takeover target by one of the other discount retailers, or from Paulson & Company, which owns almost a 10% stake in FDO stock. In 2011, FDO had rejected a $7.75 billion offer from Trian Partners, the second-largest shareholder of FDO stock.
In the aftermath of the last bad earnings report, FDO stock was beaten down from $67 to $58 per share. As can be seen from the accompanying chart, the stock is well below both its 50- and 200-day moving averages.
The discounter, which owns and operates 8100 stores across 46 states, is struggling to retain market share in a competitive discount store environment. It’s possible that additional corporate heads could roll, and a takeover becomes even more likely with any further erosion in the value of FDO stock.
However, there are still some positives for FDO stock. The company repurchased 1.8 million shares of its common stock over the first half of fiscal 2014, and was authorized to purchase an additional $245 million of FDO stock going forward. During that time, FDO paid out $59.5 million in stock dividends. And right now, FDO yields a decent 2.1%.
FDO stock had previously demonstrated strong support around $58 per share, so this morning’s pre-market decline below that level could be an ominous sign. The next support level is not until $53.
Although it seems even more likely that FDO could be a takeover candidate, investors should remember that it’s unwise to buy shares of a poorly performing stock simply on takeover speculation. It’s also suspicious that FDO is shaking up its pricing, closing stores, and slashing expansion, given their assertion that the poor second quarter was largely a result of temporary factors such as a shorter calendar and bad weather. That logic just doesn’t add up.
Another interesting side note is that Richard Dreilling, the CEO of discount rival Dollar General recently sold $19 million worth of his company’s shares on the open market. Given the recent difficulties within this sector, investors might be wise to remain on the sidelines and avoid all of the discount retail stocks for the time being.
Ethan Roberts does not own shares of any of the companies mentioned in this article.