Where Will Family Dollar Stores Go Post Earnings?

With shares of Family Dollar Stores (NYSE:FDO) trading around $64, is FDO an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Family Dollar Stores operates a chain of self-service retail discount stores primarily for low- and middle-income consumers in the United States. Its merchandise assortment includes consumables like household chemicals, paper products, food products, health and beauty aids, hardware and automotive supplies, pet food and supplies, and tobacco; as well as home products comprising blankets, sheets, towels, housewares, giftware, and home décor products. The company also provides apparel and accessories consisting of men’s and women’s clothing products, boys’ and girls’ clothing products, infants’ clothing products, shoes, and fashion accessories; and seasonal and electronic products, such as toys, stationery and school supplies, and seasonal goods, as well as personal electronics, including pre-paid cellular phones and services.

Family Dollar Stores today reported that for the third quarter of fiscal 2014 ended May 31, 2014, net sales increased 3.3 percent to $2.66 billion. Net income per diluted share for the third quarter of fiscal 2014 was $0.71. Adjusted third quarter fiscal 2014 net income per diluted share was $0.85 as compared to $1.05 in the third quarter of fiscal 2013. This year’s adjusted fiscal third quarter results exclude the negative impact on diluted net income per common share of $0.14 related to the Company’s restructuring initiatives as part of its previously announced strategic actions to strengthen its value proposition, increase operational efficiencies and improve financial performance. The tables included in this press release provide a reconciliation of GAAP to non-GAAP measures.

“We are executing our previously announced restructuring initiatives to improve our performance,” said Howard R. Levine, Chairman and CEO. “Our recent investment to permanently lower prices is resonating with customers; we are seeing savings from our workforce optimization efforts; and we are on track to close approximately 370 underperforming stores by the end of the fiscal year. We remain confident that these steps will position the Company to improve our financial performance and deliver higher long-term shareholder returns.”

“Our results continue to reflect the economic challenges facing our core customer and an intense competitive environment,” continued Levine. “We are pleased that our comparable store sales results in the third quarter in all four merchandise categories improved relative to our second quarter results. Although our sales results remain below our expectations, we are encouraged by the improving trends.”

T = Technicals on the Stock Chart are Mixed

Family Dollar Stores stock has seen its fair share of volatility over the last couple of years. The stock is currently pulling back and may need time to consolidate. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Family Dollar Stores is trading between its rising key averages which signal neutral price action in the near-term.

FDO

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Family Dollar Stores options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Family Dollar Stores Options

30.04%

0%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Average

Average

September Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Family Dollar Stores stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Family Dollar Stores look like and more importantly, how did the markets like these numbers?

2014 Q2

2014 Q1

2013 Q4

2013 Q3

Earnings Growth (Y-O-Y)

-32.38%

-33.88%

-1.45%

28.58%

Revenue Growth (Y-O-Y)

3.32%

-6.12%

3.22%

5.84%

Earnings Reaction

0.61%*

-3.21%

-2.06%

-1.06%

Family Dollar Stores has seen decreasing earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Family Dollar Stores recent earnings announcements.

* As of this writing

P = Excellent Relative Performance Versus Peers and Sector

How has Family Dollar Stores stock done relative to its peers, Dollar General (NYSE:DG), Dollar Tree (NASDAQ:DLTR), Wal-Mart (NYSE:WMT), and sector?

Family Dollar Stores

Dollar General

Dollar Tree

Wal-Mart

Sector

Year-to-Date Return

-1.12%

-4.62%

-2.12%

-1.87%

-1.43%

Family Dollar Stores has been a relative performance leader, year-to-date.

Conclusion

Family Dollar Stores operates a chain of self-service retail discount stores primarily for low- and middle-income consumers in the United States. The company today reported that for the third quarter of fiscal 2014 ended May 31, 2014. The stock has seen its fair share of volatility over the last couple of years and is currently pulling back. Over the last four quarters, earnings have been decreasing while revenues have been increasing, which has produced conflicting feelings among investors. Relative to its peers and sector, Family Dollar Stores has been a year-to-date performance leader. Look for Family Dollar Stores to OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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