Family Dollar Sees Long-Term Shift Toward Value

Family Dollar is acting quickly to capitalize on the demand for value and convenience. The chain expects about 40% of its 6,660 stores will have shelf space reallocated from general merchandise to food and consumables during the current quarter. The latter categories showed continued growth in sales and profits during the company's fiscal third quarter, which ended May 30, the retailer

MATTHEWS, N.C. — Family Dollar is acting quickly to capitalize on the demand for value and convenience.

The chain expects about 40% of its 6,660 stores will have shelf space reallocated from general merchandise to food and consumables during the current quarter. The latter categories showed continued growth in sales and profits during the company's fiscal third quarter, which ended May 30, the retailer said last week.

About 1,500 Family Dollar stores have expanded space for food and consumables since late May, Howard Levine, chairman and chief executive officer, said in a conference call. Combined with ongoing technology improvements that give Family Dollar stores the ability to accept credit cards and food benefits, the chain is positioning itself to gain from what Levine described as a permanent shift in consumer attitudes toward value.

“I believe that this growing importance of value is not a temporary fact,” Levine said. “For more families, this recession has altered their views on spending and saving in a structural way. And I believe that going forward, value will remain a key decision driver.”

The trend toward value has resulted in increased shopping trips from a wider range of shopper demographics, Levine said. He said the chain likely took market share from supermarkets and convenience stores as sales climbed by 8.3% overall and 6.2% on a comparable-store basis during the quarter. Net income improved 35.5% to $87.7 million as a result of higher sales leverage and gross profit increases stemming from lower freight expenses, reduced shrinkage and higher purchase mark-ups.

Reallocating space from slower-moving items will provide the chain more space for fast-growing items like food and paper goods, and “enable us to develop multiple but manageable prototypes to facilitate future space allocation efforts,” Levine said. “In addition, we intend to incorporate some of the most customer-impactful elements of our concept renewal work into the stores, such as signage and more intuitive merchandize adjacency.”

Consumables accounted for 65% of the total sales at Family Dollar during the quarter, up from 63% in the same period last year, and consumables sales increased 12.6% overall. The category's growth has more than made up for decreased sales in apparel and accessories, the company said. That category experienced a 5% sales decline during the quarter.

Efforts to reallocate space in accordance with those trends will result in an increase in capital spending in this quarter, Levine said, but will have benefits over the longer term.

Sales in the current quarter will be tempered some by comparison to the year-ago period when consumers spent government stimulus checks, officials said. However, benefits to lower-income shoppers are taking different forms this year.

“This year, our customers are also benefiting from the government stimulus, but the impact is somewhat different from a timing standpoint,” explained Kenneth Smith, chief financial officer. “This year, the federal stimulus package is intended to provide assistance to low-income families for the rest of 2009 through tax credits and expansion of the food stamp program and increased unemployment benefits. All of these programs should benefit our customers, but over a prolonged period. In addition, the minimum wage increase, which will be an effective later this month, could also provide customers with additional income.”

The company expects overall comparable sales of 2%-4% in the fourth quarter, which ends Aug. 29.

Q3
RESULTS

Qtr Ended 5/30/09 5/31/08
Sales $1.8B $1.7B
Change +8.3%
Comp-store +6.2%
Net Income $87.7M $64.7M
Change 35.5%
Inc./Share 62 cents 46 cents
40 Weeks 2009 2008
Sales $5.6B $5.2B
Change +7.1%
Net Income $231M $180M
Change +28.3%
Inc. /Share $1.64 $1.28