Family Dollar Earnings Preview: Buyout Offer Still Driving Shares

Family Dollar is scheduled to release its first fiscal quarter earnings report on Thursday before opening bell. The quarter runs from September through November and was expected to be the year’s most difficult quarter.

In the last earnings report, Family Dollar disappointed on earnings but beat sales estimates. Once again, this week’s report may not move the company’s stock much as Wall Street continues to focus on speculations about the Dollar Tree deal.

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Expectations for Family Dollar’s earnings report

In a report dated Jan. 4, 2014, Wedbush analysts Joan Storms and John Garrett provided their projections for Family Dollar’s quarterly earnings report. They expect the discount retail chain to post earnings of 57 cents for the quarter, compared to the consensus estimate of 62 cents per share. In the same quarter last year, Family Dollar reported earnings of 68 cents a share.

They’re expecting comparable store sales to rise 1%, compared to last year’s 2.8% decline. The consensus on Wall Street is for an increase of 1.3% in comparable store sales for Family Dollar’s November quarter.

Neutral rating maintained on Family Dollar

Family Dollar has been entertaining a buyout proposal from Dollar Tree for months, and most analysts, including those at Wedbush, expect that deal to be completed. The Wedbush team maintained their Neutral rating and $74.50 per share price target on Family Dollar because they expect the offer to close.

Dollar Tree has already lined up the financing that’s required to seal the deal and has signed a definitive agreement with Family Dollar. Also the activist investors who are involved in Family Dollar seem to like it.

One of the potential barriers to the deal closing is obtaining the necessary approvals from antitrust regulators. Analysts from most firms agree that it shouldn’t be much of an issue because the two discount chains follow different concepts. Also Dollar Tree has also said it will divest however many stores it must divest in order to obtain regulators’ blessing.

Dollar General versus Dollar Tree

Dollar General has been pursuing Family Dollar since not long after the offer from Dollar Tree was revealed. The Wedbush team thinks it would make more sense for Dollar General to acquire Family Dollar because the synergies between the two chains seem more “logical.” However, it seems pretty clear to everyone that Dollar General probably won’t win this fight, even though the chain offered a significantly higher price for Family Dollar.

Storms and Garrett say the biggest risk to Family Dollar Stores right now is a regulatory rejection for the offer from Dollar Tree. They believe Family Dollar stock will fall back down to around $61 per share if the deal doesn’t receive their approval. That’s about the same level it was trading at before the deal was offered.

Shareholders will vote (again) on Jan. 22 about whether to approve the buyout offer. Family Dollar Chairman and CEO Howard Levine is the company’s biggest shareholder and obviously supports it. The second-biggest shareholder is Trian Fund Management, which also supports it, so it seems clear which company will win despite Dollar General’s continue pursuit.