Dollar stores are facing tough competition from big box retailers. Thus, they have been trying to lure customers through various promotional measures. On the other hand, big box retailers are finding ways to decrease their costs in order to provide the lowest prices possible. However, consumers do turn to dollar stores for their needs. With the competition getting intense, there are some players who are able to win the battle. On the other hand, there are some who have given up hope and plan to sell their business.
An apt example here is that of Family Dollar Stores (FDO, Financial), which is witnessing problems and plans to merge with one of its peers. Its recently reported quarter was a mixed one, enabling its share price to fall. Let us take a look.
Mixed bag of numbers
Revenue for the quarter jumped 4.5% to $2.61 billion as compared to the previous year. Although this was ahead of the Street’s expectations, the bottom line missed the estimates. The top line was driven by a slight improvement in same store sales of 0.3%. One of the greatest advantages of the retailer is the fact that it offers products at $1, which lures the cost-conscious customers who are not willing to shell out much money at a go.
Further, Family Dollar also reduced prices for many products in order to market its goods well. It offered discounts on 1,000 items which helped in boosting overall sales.
Moving down to the bottom line, earnings fell drastically to $0.30 per share as compared to $0.88 per share in the prior year. However, the earnings were affected by restructuring costs, which are nonrecurring in nature. The company has undertaken a turnaround plan in order to improve its performance. Also, it has closed 375 underperforming stores, which brought in additional costs.
But if we exclude the one-time expenses, the adjusted earnings stood at $0.73 per share. This was below the analysts’ estimate of $0.77 per share. Also, margins shrank to 33.7% from 34.2% last year. Therefore, Family Dollar is unable to manage its costs properly.
Merger talks
The discount retailer is expected to be acquired by peer Dollar Tree (DLTR, Financial) by the end of this year. Both Dollar General (DG, Financial) and Dollar Tree had offered a bid to acquire Family Dollar. However, Dollar Tree was the winner. This merger is expected to be very fruitful and the combined entity will directly compete with Dollar General. In fact, this will create the largest discount chain in the industry, although the acquirer will have to close down certain stores.
Dollar Tree’s last quarter was a blockbuster one with the top line surging 9.7% over last year. Revenue was driven by comparable store sales growth of 4.5% and new store openings of 324.
However, competitive threat from retailers such as Walmart (WMT, Financial) will continue to persist. Walmart’s efforts to open neighborhood and express stores have been quite fruitful. Because of the smaller size of the stores, it makes the cost structure, light and easily accessible to customers. It will be interesting to see how the competition shapes in the near future.
Summary
Although Family Dollar registered an unattractive quarter, its potential merger with Dollar Tree is expected to yield benefits. Further, its strategy of offering discounts and items for $1 has been quite attractive. However, it faces stiff competition from peers such as Dollar General and retailers such as Walmart. Thus, a merger with Dollar Tree should be helpful in overcoming competitive pressures. Staying on the sidelines and watching this company closely looks like a good idea.
