Family Dollar Stores, Inc. (FDO): Don’t Be Fooled by This Discount Retailer’s Recent Results

Thus, the other two are expected to grow faster than Family Dollar Stores, Inc. (NYSE:FDO) and investors should instead consider them. However, as I’d stated in a previous article, I believe that even Dollar General Corp. (NYSE:DG) is witnessing headwinds similar to Family Dollar. Dollar General had to suffer a decline of 89 basis points in its gross margin in the previous quarter as it sold more low-margin items and counted on tobacco products to drive traffic.

Dollar General Corp. (NYSE:DG) has also been cutting its guidance and for this reason, I think it won’t make sense to purchase the stock right now until there is further clarity over its direction. So, we are left with just one player to consider — Dollar Tree, Inc. (NASDAQ:DLTR) — and this stock passes the test with flying colors. In addition to the positives mentioned above, Dollar Tree is the smallest of the discount stores discussed here and as such, it has more room to grow its business.

But, Dollar Tree, Inc. (NASDAQ:DLTR) isn’t growing its business in a sporadic manner by focusing on low margin items, and it does not sell tobacco products to drive traffic. The company is intent on growing margins and improving earnings and its various initiatives enabled it to increase its full-year earnings guidance to $2.61-$2.77 per share from $2.54-$2.74 per share earlier.

The takeaway

So, Family Dollar Stores, Inc. (NYSE:FDO)’s rise after earnings is nothing more than a damp squib and the company wouldn’t make for a good investment, especially considering the available alternatives. It is focusing more on quantity, and margins are being hurt in the process. An unfavorable product mix would probably continue to pressure margins, and keeping all the factors in mind, it would be best to look at Dollar Tree, Inc. (NASDAQ:DLTR) if you’re looking for exposure to this sector.

The article Don’t Be Fooled by This Discount Retailer’s Recent Results originally appeared on Fool.com.

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