Family Dollar Stores, Inc. (NYSE:FDO) recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. Our analysis is based on the company’s performance over the last twelve months (unless stated otherwise). For a more detailed analysis of this company (and over 40,000 other global equities) please visit www.capitalcube.com.
Family Dollar Stores Inc.’s analysis versus peers uses the following peer-set: Costco Wholesale Corporation (NASDAQ:COST), Target Corporation (NYSE:TGT), Dollar General Corp. (NYSE:DG), Dollar Tree, Inc. (NASDAQ:DLTR), Big Lots, Inc. (NYSE:BIG) and Fred’s, Inc. (NASDAQ:FRED). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.
Valuation Drivers
Family Dollar Stores Inc.’s current Price/Book of 5.9 is about median in its peer group. FDO-US’s operating performance is higher than the median of its chosen peers (ROE of 35.4% compared to the peer median ROE of 19.4%) but the market does not seem to expect higher growth relative to peers (PE of 18.5 compared to peer median of 18.5) but simply to maintain its relatively high rates of return.
The company’s asset efficiency (asset turns of 2.9x) and net profit margins of 4.5% are both median for its peer group. FDO-US’s net margin continues to trend downward but is still within one standard deviation above its five-year average net margin of 4.0%.
Economic Moat
FDO-US’s revenues have changed in-line with its peers (year-on-year change in revenues is 9.2%) but its earnings have lagged (annual reported earnings have changed by 8.7% compared to the peer median of 12.2%), implying thatthe company has less control over its costs relative to its peers. FDO-US is currently converting every 1% of change in revenue into 0.9% change in annual reported earnings.
FDO-US’s return on assets is above its peer median both in the current period (13.3% vs. peer median 9.1%) and also over the past five years (11.6% vs. peer median 6.1%). This performance suggests that the company’s relatively high operating returns are sustainable.
The company’s gross margin of 37.2% is around peer median suggesting that FDO-US’s operations do not benefit from any differentiating pricing advantage. In addition, FDO-US’s pre-tax margin of 7.1% is also around the peer median suggesting no operating cost advantage relative to peers.
Growth & Investment Strategy
FDO-US’s revenues have grown at about the same rate as its peers (8.0% vs. 7.0% respectively for the past three years). Similarly, the stock price implies median long-term growth as its PE ratio is around the peer median of 18.5. The historical performance and long-term growth expectations for the company are largely in sync.
FDO-US’s annualized rate of change in capital of 3.0% over the past three years is higher than its peer median of 2.0%. This investment has generated an above peer median return on capital of 23.0% averaged over the same three years. Evidently, the relatively high capital investment was successful given the the relatively strong growth in its returns.
Earnings Quality
FDO-US’s reported net income margin for the last twelve months is around the peer median (4.5% vs. peer median of 4.1%). However, the company has also recorded a relatively low level of accruals (-0.6% vs. peer median of 2.1%) which suggests possible overstatement of its reported net income.
FDO-US’s accruals over the last twelve months are around zero. However, this modestly negative level is also less than the peer median which suggests some amount of draining of reserves.
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