Family Dollar No Bargain Despite Beatdown

by Ethan Roberts | January 4, 2013 11:07 am

People say the family dollar doesn’t stretch as far as it once did in this tepid economy. Well, on Thursday, Family Dollar Stores’ (NYSE:FDO[1]) earnings didn’t stretch far enough to hit analysts’ expectations, either … so, they took the stock out into the alley and roughed it up.

The report was ugly. FDO announced earnings of 69 cents per share, which was on the low end of its previous call of 69 to 78 cents per share; disappointed analysts had been expecting 74 cents. Net income dropped from $80.4 million a year ago to $80.3 million for the last fiscal quarter.

On a more positive note, net sales were up 12.7% and same-store sales increased by 6.6% from a year ago. But this couldn’t keep FDO from being severely punished.

Family Dollar, which had closed Wednesday at $64.04, opened at $56.93, drifted as low as $54.93 and ended the day down $8.30 (12%) to close at $55.74 on heavy volume of 14.9 million shares. The other major dollar stores, Dollar Tree (NASDAQ:DLTR[2]) and Dollar General (NYSE:DG[3]), also were hit, though they bounced off their lows to end the day down only about 1%. (All three were bouncing back by 1%-2% early Friday.)

Family Dollar’s miss should not have been a big surprise. In recent months, both Dollar Tree and Dollar General had warned about slower sales because of consumers tightening their belts. FDO blamed the worse-than-expected number on a weak holiday season.

Accelerating the price decline was Raymond James’ analyst Dan Wewer, who slashed his rating on Family Dollar from “outperform” to “market perform.” He cited “accelerating gross margin deterioration,” rapidly declining inventory productivity and inconsistent sales trends.

Despite all of that, he said Raymond James remains positive on the longer-term potential for FDO to improve its sales productivity.

Apparently the Raymond James analyst was not the only one who had mixed feelings about Family Dollar’s earnings report. Six different FDO company insiders sold thousands of shares between October and November 2012. Officer Howard Levine sold 227,570 shares at $68.75 for a total of $15,645,437. Another insider, Charles Gibson Jr., sold 74,350 shares over a two day period, collecting almost $3.3 million on the various transactions.

Obviously it pays to watch what the insiders do, especially when multiple insiders are all buying or selling thousands of shares of their own stock around the same time period. You often will find that the next earnings report is coming up sooner rather than later.

Chart Says ‘Hold Off’

Click to Enlarge
So where does Family Dollar stock go from here, and is it a bargain at this price?

The accompanying two-year weekly chart shows a lot of technical damage being done. During the past five weeks, FDO has dropped some 23%, falling below the 50-day average on heavy volume. Some recent support is at $52.50, but if that does not hold, the next level of support would be all the way down into the mid-$40s. The 200-day moving average currently is at $48.48, so that would seem a more logical place for the bottom to form.

Therefore, Family Dollar remains a technical risk going forward. The huge drop, along with several bearish engulfing candlesticks, suggests a pattern that usually is followed by continued underperformance. With the S&P 500 testing overhead resistance at 1,470 right now, it would seem that one could well afford to wait for a better price on FDO.

What’s really to blame for Family Dollar’s poor quarter? Take your pick: Hurricane Sandy, the fiscal cliff uncertainty, the Connecticut school shooting, cold weather and snow in the Midwest … the culprits that several other companies have blamed for poor earnings reports. With all of that, it’s not surprising that consumers are being more cautious about where they spend their ever-shrinking dollars. On the other hand, excuses don’t help your portfolio.

Considering all of that, as well as FDO’s less-than-stellar 1.5% dividend yield, investors should ignore Family Dollar shares right now and focus their investment dollars on stronger stocks. As I have mentioned before[4], I continue to favor DLTR as the best of the three major dollar stores. I firmly believe it will be DLTR that leads the way in a broader sector rebound.

As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.

  1. FDO:
  2. DLTR:
  3. DG:
  4. mentioned before:

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