Monday, August 3, 1998
Family Dollar Stores
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Phone: 704-814-3252
Website: http://www.familydollar.com
Price (7/31/98): $18 1/8
HOW DID IT DOUBLE?
Both consumers and shareholders agree that the family dollar goes further at discounter Family Dollar. This small town retailer has found that everyday low prices, a strong economy, and controlled expansion make for a winning combination. That's why the stock has doubled in the last year and risen 500% since January 1996. Not bad for a company operating just under Wal-Mart's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> radar.
The numbers really tell the story. Revenues rose 17.5% in the third quarter (ended May 31), with same-store sales up 8%. Operating leverage allowed net income to soar by 35.8%. For the first nine months of FY98, revenues increased by 18.9%, with comparable-store sales up 9.4%. Meanwhile net income rose 37.7% to $83.3 million, more than in all of FY97.
Two minimum wage increases in the last two years have put more money in the pockets of Family Dollar's main customers, who are generally benefiting from this full-employment economy. Increased demand from these shoppers and lower operating expenses due to cuts in unnecessary advertising have pumped net margins from 4.1% for the first nine months of FY97 to 4.7% this year.
Through tighter asset management the company has increased inventory turns to an annualized rate of 3.44 at the end of May, up from 2.87 in the year-ago period. That plus the improved sales has significantly enhanced cash flow from operating activities and left the debt-free balance sheet sparkling even as the company continues to add new stores at about a 10% annual clip.
BUSINESS DESCRIPTION
With headquarters just outside of Charlotte, North Carolina, Family Dollar operates a chain of 2,982 discount stores throughout the U.S. Stores are about 6,000 to 8,000 square feet in size and are located in strip malls or freestanding locations mostly in communities with populations fewer than 50,000. The majority of stores are located in Texas, the Southeast, and the Midwest.
Most merchandise is priced under $17.99. Hardline goods such as health and beauty aids, food, household chemical and paper products, housewares, and toys account for two-thirds of sales while softline merchandise such as apparel, shoes, blankets, and sheets account for the other third.
By the end of the fiscal year ending in August, the company will have topped the 3,000 store mark, having added about 250 stores net this year after adding 186 last year. Family Dollar plans to open 300 to 350 net new stores in FY99.
Insiders own 17.2%, with most held by Chair/CEO Leon Levine and his son, COO Howard Levine.
FINANCIAL FACTS
Income Statement
12-month sales: $2,276 million
12-month income: $97.5 million
12-month EPS: $0.57
Profit Margin: 4.3%
Market Cap: $3138.3 million (Based on 173.15 million shares)
Balance Sheet
Cash: $140.6 million
Current Assets: $629.1 million
Current Liabilities: $330.2 million
Long-term Debt: none
Ratios
Price-to-earnings: 31.8
Price-to-sales: 1.4
HOW COULD YOU HAVE FOUND THIS DOUBLE?
The success of competitors such as Dollar General <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DG)") else Response.Write("(NYSE: DG)") end if %> and Fred's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FRED)") else Response.Write("(Nasdaq: FRED)") end if %> might have led an investor to Family Dollar, too. In this case, the strong economy was lifting all of these retailers. Family Dollar also should have showed up on screens for stocks with rising sales and rising margins.
But as is usually the case with retailers, monthly same-store sales gains were the best clue. Comp-store sales inched up 3.7% in FY96 and 9.3% last year before doing even better in the first part of FY98. The stock did trade at 25 times trailing earnings last September, or above its long-term growth rate. Nonetheless, earnings were accelerating enough so that the stock should have still looked interesting.
WHERE TO FROM HERE?
Same-store sales for June jumped 11%, reinforcing the view that the relatively weak 6.6% comp-store growth in May resulted from Family Dollar's decision to scrap a seasonal ad circular. Since moving to everyday low prices in FY95, the company has gradually pulled back on advertising, which has become less important.
Yet even assuming that results remain strong, the stock looks expensive at 31 times the consensus $0.58 per share earnings estimate for FY98 ending in August and around 26 times the FY99 estimate of $0.71 a share. Analysts put the long-term growth rate at no more than 22%, which would leave us with a YPEG fair value of $15 5/8.
On the other hand, competitor Dollar General is trading at 42 times January 1999 estimates. Although the General pulls down higher 5.5% net margins, its solid balance sheet is not as strong as Family Dollar's. Moreover, Dollar General has made less progress in improving its inventory turns, which stood at an annualized rate of about 3 at the beginning of May, below Family Dollar's.
If Family Dollar can continue growing sales at a 19% clip while pushing net profit margins to 5%, then the company would have $0.78 a share in trailing earnings a year from now. In that case, it would be trading at a more reasonable, though still pricey, 23 times forward earnings.
Given that the retailer has exactly matched estimates the last three quarters, though, one would need to really work the numbers before concluding that the analysts are being too conservative. Moreover, while Dollar General might offer a clue about how profitable Family Dollar could be, the former's rich valuation shouldn't lead one to argue that the latter is undervalued by comparison.
But if you're determined to bowl for a Dollar discounter, the Family looks more game than the General.
-- Louis Corrigan
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