Family Dollar: On Sale


Family Dollar: On Sale

This discount chain's customers have been pinched by high energy prices. But one fund manager is confident that sales will eventually pick up -- and in the meantime, the stock looks like a bargain.

Family Dollar Stores hasn't been making dollars for investors of late. The stock (symbol FDO) trades at about $25 -- down from $35 early last year. But Mark Giambrone, co-manager of Vanguard Selected Value fund, sees better times ahead.

A chain of 5,900 modestly sized retail stores, Family Dollar provides what Giambrone terms "mini-Wal-Marts" to residents of mainly lower- and lower-middle-class neighborhoods.

But those customers are spending less, which has pummeled Family Dollar's earnings and profit margins. "Their customers have been hurt the most by higher energy prices," Giambrone says. The company netted $1.31 per share in the fiscal year that ended last August -- down 22 cents from the previous year. Gross and net profit margins also declined. "Same-store sales growth slowed dramatically," Giambrone says, referring to stores open at least one year. That's largely because Family Dollar earns less on necessities than it does on non-necessities such as toys and T-shirts.

Why be upbeat? The basic business is sound, Giambrone says, and either energy prices will drop or consumers will become accustomed to higher prices. "It takes people time to adjust, but they generally do adjust -- and spend more again," he says.


On average, analysts surveyed by Thomson First Call estimate that Family Dollar will earn $1.35 per share in the fiscal year ending this August. But if Giambrone is right, the company could easily beat estimates. Using the $1.35 number, the stock trades at 18 times earnings. That's lower than the price-earnings ratio has been in nearly ten years. In short, says Giambrone, Family Dollar is a bargain.

--Steven Goldberg