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Family Dollar Stores (FDO) |
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WIKI ANALYSIS
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:
- Consumables (64.4% of net sales)
- Home Products (13.4% of net sales)
- Apparel and Accessories (11.2% of net sales)
- Seasonal and Electronics (11% of net sales)
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.
- Dollar Tree Stores (DLTR) : operates 3,806 stores in the United States. The company sells all of its products for $1.[4]
- 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
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