What's Saving Wal-Mart Could Ruin Family Dollar
The best way to get away from daily price fluctuations is to concentrate on long-term value creation. By revenue, Wal-Mart Stores ranks No. 1 on the Fortune 500 list for 2013. Family Dollar Stores is also one of the top 10 Fortune 500 companies but in terms of five-year stock returns..
There's good reason to believe that both companies have the potential to generate solid long-term returns, but only after a change in strategy. To that end Wal-Mart is accelerating expansion efforts, while Family Dollar is slowing them down.
In the short term, Family Dollar's fundamentals are deteriorating rapidly. Second quarter earnings per share of $0.80 reported on April 10 missed consensus estimates by $0.10, the largest miss in at least the past four years. The company also reported a decline in same-store sales of 3.8%. The second quarter, which ended on March 1, was eerily similar to the first quarter, which saw a decline in same-store sales of 2.8%.
Today, we are expanding on our original plans with additional small stores...We're also pleased with how well the 20 Express stores are doing, and we're expanding our pilot beyond the initial three markets...We will now open between 270 and 300 small format units this year, which will nearly double our fleet and fuel growth as we enter the next generation of retail.
On the first-quarter earnings call, the CEO, who's also the founder's son, blamed declining same-store sales growth on the COO; he gave him the proverbial boot, but sales continued to decline. Even with deteriorating sales the company doubled-down on its store acceleration program. "[W]e are committed to our new store program," the CEO said on the Q1 earnings call. He continued,
With strong returns on investment and ample market opportunity, opening new stores continues to be an investment priority....We believe we can double the size of our chain... and we remain committed to 5% to 7% annual square footage growth...
The company already operates more than 8,100 locations and plans to open a total of 525 in fiscal-year 2014. On the same earnings call, John Heinbockel, an analyst for Guggenheim Securities, asked the one question on everyone's mind,
And then just with regard to expansion -- and I understand the new stores are working well. But with [the earnings before interest and taxes] margin down 250 -- and including this year, down 250 over the last three years. Is there not a good argument for stepping back new store openings in '15 and '16 for a bit, focus on existing stores and comps and get the margins back to kind of where they were a couple years ago?
The CEO's answer at the time was
Thankfully, the CEO changed his mind on the last earnings call; he announced the closing of approximately 370 underperforming stores and the deceleration of expansion efforts beginning in fiscal 2015.
To explain why we are so bullish on new stores is because our new stores are performing well. Clearly, there's a lot of opportunity to continue to grow this chain and expand our market opportunity there.
On the Q2 earnings call, Levine tells investors, "With regard to new store openings, we have decided to slow down new store growth beginning in fiscal 2015." This move is a sign that Family Dollar understands the problem and is taking corrective action to fix it.
Wal-Mart and Family Dollar represent two companies that are fighting to maintain market share and grow sales. Wal-Mart is focused on accelerating its small-store expansion program, and Family Dollar has agreed to abandon its current acceleration plan to focus on its existing store base. These strategies are two different sides of the same coin, but the end result will likely be the same for long-term investors -- an increase in value.
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The article What's Saving Wal-Mart Could Ruin Family Dollar originally appeared on Fool.com.C Bryant has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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