Family Dollar (FDO) Margin Weakness Doesn't Derail Positive Thesis - MKM

January 4, 2013 11:28 AM EST
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Price: $79.39 --0%

Rating Summary:
    0 Buy, 23 Hold, 4 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 13 | Down: 22 | New: 54
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Yesterday shares of Family Dollar Stores Inc. (NYSE: FDO) fell after the retailer reported earnings that fell short of expectations. CEO Howard Levine blamed the miss on new sales initiatives, which pressured margin.

Commenting on the development, analysts at MKM said "margin weakness dings, but doesn't derail our positive thesis".

"Operating margin fell 80 bps, to 5.2%, well below our 6.0% estimate, largely because of a greater-than-expected 110 bps decrease in gross margin. The lower gross margin reflected very strong consumables sales (up 19% in total), softness in higher-margin categories and a related 360 bps mix shift toward consumables," said analyst Patrick McKeever.

McKeever thinks the weak gross margin trend is likely to continue into Q2, but expects some easing in the second half of the year as initiatives in global sourcing, private-label and pricing gain traction.

"While we expect weak margin trends to continue in the near term, and have reduced our EPS forecast to reflect a more difficult margin dynamic, we continue to expect easing margin pressures and stronger EPS growth in 2H13," said the analyst.

MKM trimmed its 2Q13 comp forecast from 5.0% to 4.5% and EPS estimate from $1.44 to $1.23.

MKM Partners reiterated a Buy rating on Family Dollar Stores Inc. (NYSE: FDO) but lowered its price target to $69.00 (from $78.00).

For an analyst ratings summary and ratings history on Family Dollar Stores Inc. click here. For more ratings news on Family Dollar Stores Inc. click here.

Shares of Family Dollar Stores Inc. closed at $55.74 yesterday.

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