Must-know: Carl Icahn cuts down stake in Family Dollar stores (Part 5 of 5)
Family Dollar’s profits tumble in the third quarter
Activist investor Carl Icahn’s hedge fund Icahn Capital trimmed its stake in Family Dollar (FDO) stores last week after the deep-discount retailer agreed to a takeover deal from rival Dollar Tree Inc. (DLTR) for $8.5 billion. Family Dollar shares fell after the company posted a drop in profits in its latest 3Q14 results.
The company beat on revenue estimates, but missed earnings. For the 3Q14 ending May 31, 2014, net sales increased 3.3% to $2.66 billion. Net income for the third quarter declined 33% to $81.1 million, or $0.71 per share. The company said it incurred a $23 million charge as part of its previously announced restructuring initiatives including planned store closures and workforce optimization.
Comparable store sales for the 13-week period decreased 1.8% as a result of fewer customer transactions. Sales in the 3Q14 were strongest in the Consumables category, driven primarily by strong growth in refrigerated or frozen food and tobacco. CEO Howard Levine said that, “Our results continue to reflect the economic challenges facing our core customer and an intense competitive environment.”
However, Levine added that the company’s “recent investment to permanently lower prices is resonating with customers; we are seeing savings from our workforce optimization efforts; and we are on track to close approximately 370 underperforming stores by the end of the fiscal year. We remain confident that these steps will position the Company to improve our financial performance and deliver higher long-term shareholder returns.”
Family Dollar said it is investing in longer-term initiatives to drive more profitable growth including:
- Building on efforts to capture more food trips, the company intends to further expand its refrigerated and frozen cooler program beginning in fiscal 2015
- Continuing to expand traffic-driving categories with a multi-year rollout of beer and wine, beginning in fiscal 2015
- Leveraging the scale and considerable diversity of the chain to launch a multi-year clustering initiative designed to enhance store productivity
In terms of 4Q14 outlook, Family Dollar said its comparable store sales will be approximately flat and that earnings per diluted share will be between $0.75 and $0.85, excluding ~$0.37 related to restructuring charges. For the full year 2014, the company expects earnings per diluted share to be between $3.07 and $3.17, excluding ~$0.51 per share related to restructuring charges.
Family Dollar’s consumers yet to benefit from economic recovery
Discount retailers such as Family Dollar, which expanded during the Great Recession, have seen slowing same store sales as low income customers have been pressured by slower wage growth, higher payroll taxes, and federal cuts to food stamp and unemployment benefits. On the earnings call, Levine said that “The low end consumer has not benefited in this recovery at all, in fact I think have slipped further back.” News reports have noted that there’s an increasing divide between low-income households whose spending is constrained and higher-income groups who are reaping the benefits of a rising stock market and economic recovery. According to data from the U.S. Bureau of Labor Statistics, between 2004 and 2012, the total income of all households who earned more than $150,000—7% of the U.S. population in 2012—was up by 9%, while the total income of all households who earned less than $30,000—33% of the population in 2012—fell by 1%.
Family Dollar and its peers Dollar General (DG) and Dollar Tree are also facing competition from big-box retailers, such as Walmart (or WMT) and Target (or TGT), who are expanding with small-format stores as shoppers increasingly look for convenience. Family Dollar and its peers Dollar General and Dollar Tree are members of the State Street SPDR S&P Retail ETF (XRT) and the SPDR Consumer Discretionary Select Sector Fund (XLY).
Browse this series on Market Realist:
- Part 1 - Why Carl Icahn trims stake in Family Dollar stores
- Part 2 - Family Dollar and Dollar Tree merger transaction details
- Part 3 - Why the merger deal sees concerns over potential synergies
- Investment & Company Information
- Family Dollar
- Carl Icahn
- Dollar Tree