Analyst to Wal-Mart: Buy Family Dollar for Small-Format Expansion
When Wal-Mart Stores (NYSE:WMT) reported yet another quarter of disappointing sales on Thursday, not all onlookers were surprised. The retailer has been warning investors for months now that its numbers aren’t where they need to be on account of flattened U.S. demand, along with frigid winter weather and food stamp benefit cuts. As it turns out, Wal-Mart wasn’t lying. The retailer reported net sales of $128.8 billion in the fourth quarter, up 1.4 percent on the year but falling short of analyst expectations for a 1.8 percent increase to $130.23 billion. Earnings fell 19.8 percent on the year to $1.34 per share, below the mean analyst of $1.59 per share.
The results were a bummer for investors, but luckily, one Credit Suisse analyst, Michael Exstein, an industry veteran, had some advice for the retailer pre-earnings that many shareholders are now latching onto. MarketWatch reported Wednesday that ahead of Wal-Mart’s earnings release on Thursday, Exstein advised the company’s new CEO, Doug McMillion, to consider buying Family Dollar (NYSE:FDO) so Wal-Mart can further grow its better-performing small-format business.
It’s not the first time the topic of smaller-format stores has arisen, considering Wal-Mart has noted before that it wants to expand those stores in the U.S. in order to draw customers interested in the “fill-in” trip, but until now, no acquisition ideas were suggested. The problem is that thanks to Family Dollar, Dollar General (NYSE:DG), and Dollar Tree (NASDAQ:DLTR), the smaller-format ground is already largely covered, but that is where Exstein believes Wal-Mart can fit itself. Should Wal-Mart decide to acquire Family Dollar, it could do much more than simply opening 150 small-format stores in the U.S. this year.
Thus far, Family Dollar, Dollar General, and Dollar Tree have a combined 23,000-plus stores in the U.S., but Exstein highlights Family Double as a possible “in” for Wal-Mart. According to MarketWatch, the retail giant has the lowest overlap in store locations with the Charlotte, North Carolina-based company.
Exstein says that only 19 percent of Wal-Mart’s store base is located within one mile of a Family Dollar, compared to Dollar General’s 29 percent overlap and Dollar Tree’s 49 percent. Of course, such a merger could prove to yield some pushback from the Federal Trade Commission, but Exstein believes Wal-Mart has the best chance with Family Dollar. He told MarketWatch that such a deal could immediately boost the retailer’s profit, helping it realize “significant” cost synergies.
Wal-Mart spokespeople didn’t comment on the analyst’s report, but it is possible the company is already pursuing the idea. The Bentonville, Arkansas-based retailer desperately needs to boost its sales in the U.S. and expand more in urban markets, and a merger with Family Dollar could essentially kill two birds with one stone. Family Dollar has many locations in urban markets, offering Wal-mart the opportunity to grow its presence there.
It’s not yet clear why smaller-format stores are performing significantly better than their big-box couterparts, but the success is evident. MarketWatch reports that even while Wal-mart’s U.S. comparable sales dipped in the third quarter, its Neighborhood Market sales rose 3.4 percent. Many analysts, including Exstein, recognize this as a clear area that Wal-Mart should concentrate on in the future, but we’ll have to see if the newly minted CEO agrees.