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Family Dollar: The Recession's Best Stock

Posted by: Ben Steverman on July 8, 2009

Of the 500 stocks in the S&P 500, (according to data from Capital IQ) fewer than 20 have actually risen in value in the economic downturn of the past 18 months. The leader of these recession-defying stocks is, far and away, Family Dollar Stores (FDO).

Since the end of 2007, Family Dollar shares are up 67%. Today, Family Dollar proved again why the downscale retailer is so attractive to investors.

In quarterly results released July 8, earnings per share of 62 cents were 35% higher than last year and 3 cents above Wall Street expectations. Family Dollar eased a few investor worries with this report.

Analysts had warned that profits might falter as “consumables” — which have lower profit margins — take up a bigger portion of the chain’s sales. Consumables sales were up 12.6%, but profit margins widened. “The company continues to demonstrate that it can increase gross margin despite the growing sales contribution from consumables,” wrote Raymond James (RJF) analyst Dan Wewer.

Also, many worry about retail results as the unemployment rate rises. But economic pain might actually be helping Family Dollar, as consumers look for bargains. Same-store sales rose 6.2%, while revenues rose 8.3%.

Mark Miller, an analyst at William Blair, reiterated his “outperform” rating on the stock. “Consumers [remain] focused on value,” he wrote, noting the U.S. savings rate could almost double in the future. Another positive factor:

Major legislative initiatives that should bolster income and spending for the lower-income consumer, including the third minimum wage increase this month and added funding for the food stamp program.

But how long can Family Dollar continue benefiting from economic trends that are clobbering other retailers? Wall Street seems to think the answer is “quite a while.” Family Dollar shares ended the day up 12.4% to 31.18.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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