QUOTE AND NEWS
New York Times  2 hrs ago  Comment 
Dollar General offered to buy Family Dollar Stores for $8.9 billion, hoping to break up its fellow deep-discount retailer Family Tree’s agreed-upon $8.5 billion merger with Family Dollar.
Benzinga  11 hrs ago  Comment 
Family Dollar Stores (NYSE: FDO) shares moved up 4.89% to $79.78. The volume of Family Dollar Stores shares traded was 1279% higher than normal. Dollar General (NYSE: DG) offered to buy Family Dollar for around $9.7 billion. Dollar General...
Benzinga  Aug 18  Comment 
StreetInsider.com  Aug 18  Comment 
* Dollar General (NYSE: DG) announced it has made a proposal to acquire Family Dollar Stores, Inc. (NYSE: FDO) for $78.50 per share in cash, in a transaction valued at $9.7 billion. The proposal was conveyed this morning in a letter to Family...
TheStreet.com  Aug 18  Comment 
NEW YORK (TheStreet) --aFamily Dollara rose Monday after a bidding war broke out betweenaDollar Generala aand rivalaDollar Treea for the retailer. Dollar General offered $9.7 billion, or $78.50 a share, for Family Dollar. Dollar Tree had...
New York Times  Aug 18  Comment 
A rival bid for Family Dollar Stores could set up a bidding war. | PricewaterhouseCoopers faces a regulatory penalty. | Silicon Valley’s biggest corporate acquirers are leaning on internal teams to handle deals. | Alibaba's deal-making is under...
BBC News  Aug 18  Comment 
A takeover battle involving US dollar stores becomes a three-way fight after Dollar General unveils a $9.7bn bid for a rival chain.
Wall Street Journal  Aug 18  Comment 
Dollar General said it offered about $9 billion to buy rival Family Dollar Stores, topping the offer made by Dollar Tree three weeks ago.
Forbes  Aug 14  Comment 
Superstore chain Walmart reported flat second quarter comparable store sales and profit that only grew 0.6%. In the face of this sluggishness, some analysts are pointing to dollar store chains that are taking away Walmart's core customer.
Motley Fool  Aug 12  Comment 
At a time when many retailers are struggling, discount chains show no sign of abating.
Dividend Growth Investor  Aug 12  Comment 
After purchasing shares in 14 companies in the previous week, I didn't expect to put any more money to work until sometime in September. However, sometimes, there are external factors that come up my way, which can cause me to act in a certain...




 

Family Dollar Stores (NYSE: FDO) is a discount variety retailer operating 6,655 stores in 44 states. Most of the merchandise the company sells ranges from less than a dollar to around $10 in price, with the majority under $1 per unit. The company's strategy is to target low to lower-middle income households with cheap consumables and home goods. FDO recorded net sales of $7.867 billion and net income of $358 million in fiscal 2010.[1]

Unlike other retailers, FDO profits during recessionary U.S. Economic Cycles, as consumers substitute down to cheaper items. For example, recent harsh economic conditions led to a 23% increase in net income compared to fiscal 2009.[1] As a dollar-store retailer, Family Dollar has little ability to increase prices to compensate for any changes in input costs. Additionally, Family Dollar is trying to differentiate itself by focusing on selling food products and opening stores in urban areas.

Company Overview

Business Segments[2]

Family Dollar stores carry a variety of food products, housewares, clothing, accessories, toys, school supplies, and seasonal goods. The company divides its merchandise into the following segments:

Business Growth

FY 2010 (ended August 28, 2010)

  • Net sales of $7.867 billion, a 6.3% increase from fiscal 2009.[1]
  • FDO reported net income of $358.1 million, a 23% increase compared to fiscal 2009.[1].

Trends and Forces

Low Ability to Raise Prices

Discount retailers often experience difficulty passing on cost increases to customers, particularly "dollar-store" chains such as Family Dollar who by-name are obligated to keeping prices on some products at or under $1. In addition to this obligation, the company's customers can not afford to pay much more than a few dollars as many earn household incomes at, near, or below the poverty line.[3] Consequently, input cost increases (such as inventory, overhead, marketing) are difficult to pass on to consumers. Macroeconomic and company specific changes to cost structure, including higher distribution costs related to rising energy prices, and supplier or distributor consolidation may lead to large margin decreases that cannot be offset by price increases. This is particularly relevant to oil prices which increase freight costs and other activities related to getting products from factories to Family Dollar stores.

Stiff Competition and Low Competitive Advantages in a Mature and Saturated Market

Family Dollar competes against discounters with wider selection and significant cost and scale advantages in its local markets. A Family Dollar store operating within a few miles of a nearby Wal-Mart or Target, for instance, will struggle to compete on value and selection, and may instead gain customers via convenience and location. It also faces competition from other “dollar stores,” that have similar or identical value propositions, such as Dollar Tree Stores (DLTR), Dollar General (DG), and 99 Cents Only Stores (NDN). With low barriers to entry and few natural competitive advantages to gain, the industry has become flooded with dollar stores and collectively, these companies are approaching U.S. saturation. While Family Dollar has some competitive advantage in the southern US states, there is substantial risk of lower margins due to increased overhead expenses as well as stiff competition as other discounters pursue the same strategies.

Competition

Family Dollar vs. Comparable Dollar Stores

Family Dollar is a discount retailer that competes with other stores that have similar business models. Thus, the company faces direct competition from dollar-store chains, such as Dollar Tree Stores (DLTR) and 99 Cents Only Stores (NDN), that sell many of their products at or around $1.

  • 99 Cents Only Stores (NDN): operates 275 stores in the United States. The company sells all of its products for 99 cents or less. Food and grocery sales account for more than half of the company's annual revenue.[5]
  • Wal-Mart (WMT): is the world's third largest company[6] with 7,873 stores worldwide. Because of its mammoth size and buying power, Wal-Mart can buy its products at rock-bottom prices, exchanging high purchase volumes for low cost while passing the savings onto its customers.[7]
  • Target (TGT): operates 1,682 stores in 48 states. Target offers a range of general merchandise in a similar store format to Wal-Mart but targets a higher income demographic than that of Big Lots and Wal-Mart.[8]

Footnotes

  1. 1.0 1.1 1.2 1.3 FDO 2010 10-k
  2. FDO 2009 10-K "Merchandise" pg. 7
  3. U.S. Census Bureau, Poverty Measures
  4. DLTR 2009 10-K pg. 8
  5. NDN 2010 10-K pg. 3
  6. CNN Money "Fortune Global 500"
  7. WMT 2010 10-K, Exhibit 13, pg. 46-47
  8. TGT 2009 10-K, pg. 7
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