Family Dollar: Buy on Weakness?

[Stocks-to-Watch]

Family Dollar (FDO) reported fiscal first quarter earnings that were in line with analysts’ expectations, but its gross margin deteriorated, and the stock is falling hard today. It was recently down 6.8%. The dollar store marked down discretionary merchandise, and its gross margin dipped 77 basis points to 35.3%.

Some analysts defended the company today, with Citi’s Deborah Weinswig writing that* FDO “will be able to more than offset the deterioration through better SG&A leverage..”

Avondale Partners analyst Mark Montagna maintained his Outperform rating.

“We continue to point to the closing of its performance gap versus Dollar General (DG) in both sales per square foot and EBIT margin. Closing the gap should add $2.06 to EPS. This should occur over the next 3-4 years.”

But Deutsche Bank analysts sounded less optimistic.

“As we’ve written before, the FDO bull case is 100% predicated on ramping sales per square foot higher – a.k.a. following the DG playbook. However, as we recently saw with the Philadelphia Eagles . . . the “Dream Team” looked good on paper, but execution was a whole different story. Parallel to FDO, despite heavy store investments, the co. has struggled to narrow the SSS gap with its largest peer even though it seems as if comps should be trending much higher.”



Original Article Source by Barrons.com