Frugal Shoppers Lift Family Dollar Store Stock

FDO Stock Was S&P's Biggest Gainer Last Year

March 25, 2009

Everybody likes a bargain. The current economic environment is amplifying this axiom, as financially stressed consumers look for ways to stretch their purchasing dollars.

Nowhere is that more evident than at the Family Dollar Store (FDO). The deep discounter reported that second quarter sales were up 8.7%, with same store sales up 6.4 %. Double-digit growth in sales of consumables offset the slight decline in sales of apparel.

More important to investors than the sales increase was the accompanying guidance for the second quarter, ending February 28. Previously issued guidance forecast second quarter earnings of $0.49 to $0.51 per share. The company is now looking for earnings $0.10 higher, or $0.59 to $0.61. Analysts' consensus estimate had called for earning $0.50.

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Consumer Discounters Like FDO and Wal-Mart Benefitting From Recession

Family Dollar is riding the same crest of shifting consumer preferences as other discounters. Privately-owned Dollar General reported an increase in same store sales for the first quarter of 15.4%. Wal-Mart (WMT) and Dollar Tree (DLTR) are experiencing similar lofty sales increases.

The price of FDO increased 30% in 2008, while the S&P decreased by 40%. The current year is mirroring the last, as FDO reached another 52-week high at $32.50 for the stock this week. The stock is currently trading at 31.28 per share.

Family Dollar operates 6643 stores in 44 states, 57 of those stores having opened in the quarter ending February 28 alone. The company employs 25,000 people and anticipates the opening of additional stores this year.

Competitor Dollar General, while privately held, does release quarterly financials. For the company's fiscal fourth quarter, an earnings increase of 48% was reported. The KKR-held company reported long term debt of 4.5 times Ebitda, a key financial ratio and a significant improvement over the 7.1 times Ebitda at the time of the acquisition.

Family Dollar Increases Buying Power of Its Customer Base

FDO has targeted its locations and marketing to lower-income consumers. As the economy reduced the purchasing power of consumers at all levels, in 2008, Family Dollar began accepting credit cards and food stamps for purchases for the first time in most of its locations.

S&P recently reiterated its Strong buy rating for the stock, in part due to this change, as well as to the low debt to equity ratio of 0.19.

Family Dollar was the top performer among the companies comprising the S&P 500 in 2008. All indications are that it will be among the top for 2009 as well. Conservative corporate leadership and a strong balance sheet, combined with an effective marketing strategy, continue to serve the company well.

I rate FDO an A in my Portfolio Grader stock rating tool.

For more top stocks poised for big gains in this market, see Top Stock Picks for Today's Market – Look Beyond the Sectors.