The Zacks Analyst Blog Highlights: Family Dollar Stores and Wal-Mart Stores

CHICAGO, Jan. 13, 2012 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Family Dollar Stores Inc. (NYSE: FDO) and Wal-Mart Stores Inc. (NYSE: WMT).

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Here are highlights from Thursday's Analyst Blog:

Earnings Scorecard: Family Dollar

Family Dollar Stores Inc. (NYSE: FDO), the operator of self-service retail discount store chains, recently posted first-quarter 2012 results. Street analysts have now had time to ponder the company's scores. In the paragraphs that follow, we cover the recent earnings announcement, subsequent estimate revisions by analysts, as well as the Zacks Rank and long-term recommendation for the stock.

Last Quarter Synopsis

Based in Matthews, North Carolina, Family Dollar unveiled its first quarter financial results on January 5, 2012. The quarterly earnings of 68 cents a share, which came in line with the Zacks Consensus Estimate, jumped 17.2% from 58 cents earned in the prior-year quarter. Healthy sales witnessed in the Consumables, and Seasonal and Electronics categories spurred the quarterly earnings.

Family Dollar posted a 7.6% increase in revenue to $2,148.3 million from the prior-year quarter, and reflected sales growth across Consumables (up 11.4%) and Seasonal and Electronics (up 5.6%), offset by Apparel and Accessories (down 3.4%) and Home Products (down 2.8%). However, total revenue fell short of the Zacks Consensus Estimate of $2,166 million.

The company hinted that comparable-stores sales are on the rise due to improved traffic count and increase in average consumer transaction values. Comps jumped to 4.1% in the quarter. Family Dollar had delivered comps growth of 6.9% in the prior-year quarter.

A Look at Guidance

Family Dollar now expects second-quarter 2012 earnings between $1.10 and $1.18 per share. However, the company reiterated its fiscal 2012 earnings of $3.50 to $3.75.

Management predicts second quarter comps to rise by 5% and fiscal 2012 comps to climb between 4% and 6%. Family Dollar, which faces stiff competition from Wal-Mart Stores Inc. (NYSE: WMT), continues to expect fiscal 2012 net sales to jump by 8% to 10%.

Agreement of Estimate Revisions

In the last 7 days, 5 out of 20 analysts covering the stock lowered their estimates, whereas 2 analysts raised them for the second quarter of 2012. For the third quarter, 7 analysts trimmed their estimates, with only 1 analyst making an upward revision.

For fiscal 2012, 9 analysts revised their estimates down, with only 2 analysts revising the same upward in the last 7 days. For fiscal 2013, 6 analysts lowered their estimates and only 2 analysts increased them.

What Drives Estimate Revisions

Family Dollar did register growth in the top and bottom lines, but these were not enough to alleviate the concern about increasing gross margin pressure. It was apparent that the growth in the top line was led by lower-margin consumables category, which now accounts for 70.3% of total sales compared with 67.9% in the prior-year quarter.

Consequently, the increase in sales of lower margin merchandise weighed upon the company's gross margin that contracted 70 basis points to 35.3%.

It is obvious that given a dismal economy, consumers will focus on basic necessities only, such as food, that generally carries lower margins. Management now expects gross margin in the second quarter of 2012 to be somewhat in line with the first quarter. For the year, management expects gross margin to remain under pressure.

Moreover, the comparable-store sales for the quarter came in at 4.1%, which remained at the lower end of the company's previously-provided guidance range of 4% to 6%. Further, as mentioned already, total revenue did climb up, but it failed to impress the Street as it came in below expectations.

However, the company's commitment toward better price management, cost containment efforts, effective inventory management, private label offering, store expansion and renovation, and merchandise initiatives raise the hopes of some of the analysts, who revised their estimates upwards.

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