Are These Discount Retailers Worth the Risk? – Wal-Mart Stores, Inc. (WMT), Family Dollar Stores, Inc. (FDO), Target Corporation (TGT)

Wal-Mart Stores, Inc. (NYSE:WMT) and dollar store format companies attract a lot of attention in the financial media, but they are not compelling investments at current prices. Investors should wait for meaningful declines in valuation multiples before jumping in.

Problems in Emerging Markets

Overseas expansion is cited as a source of Wal-Mart’s growth. This is increasingly being checked by regulatory pressures.

A panel approved by India’s cabinet is set to probe claims that Wal-Mart Stores, Inc. (NYSE:WMT) broke lobbying rules in attempts to enter the country’s retail market.

Manish Tewari, the Information & Broadcasting Minister, said that a retired judge of the Supreme Court or the former chief justice of the high court would investigate the matter. The judge would investigate the company’s lobbying disclosures and whether any of its activities broke the law or not. He will submit his findings within three months to the Government.

Since 2008, Wal-Mart Stores, Inc. (NYSE:WMT) has spent approximately $25 million promoting its foreign retail investments in India. In the parliament, opposition lawmakers suspected that a portion of the amount was spent in areas where paid lobbying is not allowed.

In order to revive the growth in the slowing economy, in December, India’s parliament approved a September decision to allow and encourage foreign investment in retail stores that sell over one brand.

The Associated Chambers of Commerce & Industry of India and Yes Bank reported that various multinational companies such as Wal-Mart, Tesco and Carrefour are planning to enter the world’s second-most populous nation, where retail sales are estimated to reach $875 billion by 2017.

According to Kevin Gardner, a Wal-Mart Stores, Inc. (NYSE:WMT) spokesman, the company is excited about expanding its business opportunities in India and would provide good opportunities to farmers, as well as reduce the cost of living for Indian families. He also said that inappropriate lobbying allegations against the company are false.

Wal-Mart Disappoints

Wal-Mart Stores, Inc. (NYSE:WMT) announced its first-quarter profit forecast lower than expected a week after the leaked memo reported that February sales for the company were a total disaster. The company’s disappointing guidance was issued after it reported its fourth quarter results, where the company reported a lower amount of revenue as forecast by Wall Street.

Wal-Mart Stores, Inc. (NYSE:WMT) forecasts its first quarter earnings between $1.11 and $1.16 per share. The company blamed an unsettled consumer. The various analysts have observed and speculated that an increase in the payroll tax in the U.S. would hurt the company’s low-income customers more than expected. A worse situation in various developed countries is stopping clients from spending freely. Analysts expected the company to earn more during its first quarter at $1.19 per share.

Charles Holley, the CFO of the company has accepted the fact that the company is going to face various challenges in the future, but points to the company’s strong balance sheet and formidable operations as being robust. According to Jerry Murray, Vice-President of finance and logistics, February displayed the worst monthly sales start in the last seven years and was “a total disaster.”

During the fourth quarter, the company has earned $5.6 billion or $1.68 per share as compared to $5.2 billion or $1.52 per share during the previous year. Analysts expected $1.57 per share. The company’s revenue was $127.9 billion, which was lower than analysts’ estimate of $128.8 billion. For fiscal year 2014, the company expected to earn $5.20 to $5.40 per share, a range that mostly falls below analyst expectations of $5.38 per share.

Analysts expect heightened competition from Target Corporation (NYSE:TGT), Costco Wholesale Corporation (NASDAQ:COST) and discount chains such as Dollar Tree, Inc. (NASDAQ:DLTR) and Dollar General Corp. (NYSE:DG).

Mixed Results Among Dollar Stores

A healthier consumer benefits dollar store stocks. Consumer confidence has improved with the economy. In January 2013, the U.S. economy added about 157,000 jobs, while the unemployment rate was 7.9%. However, consumer spending is expected to remain tight with consumers remaining price-conscious as they continue to deleverage.

Dollar Tree reported its third quarter results with net sales of $1.72 billion, representing an increase of 7.8% as compared to the previous year. The company’s operating margin improved 40 basis points. Dollar General reported its third quarter results, according to which its net income was $208 million or $0.62 per share as compared to $171 million or $0.50 per share during previous year.

However, not all is well among dollar store stocks. Family Dollar Stores, Inc. (NYSE:FDO) has become a defendant in a class action lawsuit filed in the  Western District Court of North Carolina by Robbins Geller Rudman & Dowd. This class action suit is based on allegations of misrepresented demand, sales, and financial results posted in calendar November and December of 2012. The stock dropped about 13% when management revealed disappointing results in January of 2013. A press release by Robbins Geller Rudman & Dowd questions whether management cashed-out their personal holdings before reporting this bad news.

Valuation

There isn’t a value-based justification for buying Wal-Mart or Family Dollar:

Their share prices do not reflect the problems affecting these firms. They do not offer compelling value and growth relative to their peers.

Conclusion

There really aren’t any discounts for bad news in Wal-Mart and Family Dollar. Investors who are interested in exposure to discount retailers should look at other names on this list.

The article Are These Discount Retailers Worth the Risk? originally appeared on Fool.com and is written by Bill Edson.

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