Family Dollar: Challenges Ahead

Family Dollar Stores here last week posted third-quarter sales and earnings gains, but reduced its earnings guidance slightly for the year, citing the uneven environment. The environment remains challenging for consumers, and projecting short-term financial performance within this context remains difficult, said Kenneth T. Smith, senior vice president and chief financial officer, who

MATTHEWS, N.C. — Family Dollar Stores [4] here last week posted third-quarter sales and earnings gains, but reduced its earnings guidance slightly for the year, citing the uneven environment.

“The environment remains challenging for consumers, and projecting short-term financial performance within this context remains difficult,” said Kenneth T. Smith, senior vice president and chief financial officer, who also cited unfavorable comparisons due to federal tax credits received in the year-ago fourth quarter.

The dollar chain is continuing to expand its selection of traffic-driving consumables and adding more national brands, however.

“We are also leveraging stronger quality-control processes and investing to raise the quality of our private label, and we are protecting our strong price image and increasing our promotional efforts,” said Howard R. Levine, chairman and chief executive officer. “While these investments have slowed the expansion of gross margin, they provide a platform for further top-line growth and position us well to expand our market share and deliver even stronger financial results.”

Levine and Smith made their comments during a conference call with investors to discuss financial results for the third fiscal quarter, which ended May 29. For the quarter, net income rose 19% to $104.4 million, while sales, as previously announced, increased 8.4% to $2 billion, and comparable-store sales were up 7%. For the year to date, net income rose 22.9% to $284.2 million and sales climbed 5.7% to $5.9 billion.

Ticket size has been “pretty flattish,” Levine said, but traffic has been increasing “with amazing consistency and high growth within the consumables area.”

James Kelly, president and chief operating officer, said consumables sales rose 9% during the third quarter, compared with 13% growth in the year-ago quarter, “so we are encountering some fairly significant growth in that area, and we want to be able to sustain that. That was the primarily objective of the [company's] space realignment, and that has been largely realized.”

Family Dollar has completed space realignment at about two-thirds of its 6,700-store base, he noted.

Food continues to be a significant driver of shopping trips, especially midweek grocery trips, Levine said. “Reflecting this opportunity, we added more than 100 new items in the food category this spring, focusing primarily on grocery items. And to strengthen our quality perception, especially with new customers, most of these new items are nationally recognized brands,” he pointed out.

To make the stores easier to shop, Family Dollar is eliminating excess inventories and reducing clutter “and making layout changes that make it easier for customers to quickly find what they need,” he said. “We are also introducing new fixtures to accommodate expansions in key consumable areas and to present seasonal merchandise better. And to provide the customer with more shopping convenience, we've expanded our operating hours.”

Family Dollar has improved store performance in some urban markets “by better aligning space and inventories to the demand patterns of the store,” Levine said.

“We've gone through renovations at many of those urban stores,” Kelly added, “and as a result we're seeing some fairly outstanding productivity changes and sales growth numbers. “So the urban stores offer us a lot of opportunities to leverage the inherent traffic that is potentially there.”

Kelly also said Family Dollar has accelerated returns in the urban markets significantly “[because] programs to stabilize the workforce and improve training through technology are actually having more dramatic positive impact within the more-difficult-to-operate urban environments than in lower-volume stores.”

He said stores in core markets are also benefiting from corporate investments, “particularly as we've better met the needs of our customers within the food area by accepting food stamps and making our stores a more convenient place to shop through expanded hours.”