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Family Dollar’s lower-margin goods hit profit

A Family Dollar logo is seen on a shopping basket in Chicago in this file photo. Family Dollar Stores Inc. posted a lower-than-expected quarterly profit on Thursday.


Family Dollar Stores Inc. posted a lower-than-expected quarterly profit on Thursday, sending its shares tumbling 11.8 per cent as its push to sell more everyday items including soft drinks and cigarettes attracted more customers but hurt profitability.

The company also lowered its forecast for the year and said December sales, which came in after the quarter ended, were hurt as shoppers limited their discretionary spending.

The discount chain began selling cigarettes and other tobacco products, Pepsi drinks, gift cards, magazines and other high-turnover merchandise in recent months to better compete against chains such as Dollar General Corp. and Wal-Mart Stores Inc., which saw their shares fall 1.7 per cent and 0.8 per cent, respectively.

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While the additions have helped Family Dollar draw more traffic, those items tend to carry lower profit margins.

Larger price cuts also hurt margins, according to J.P. Morgan analyst Matthew Boss.

Gross profit margin fell to 34.1 per cent in the quarter from 35.3 per cent a year earlier, the company said.

The results, including December same-store sales, also spotlight the impact of price competition from Dollar General and Wal-Mart and pressure on lower-income consumers that may worsen given payroll tax increases this year, Mr. Boss said in a note to clients.

"Clearly, (our customers) do not have as much today for discretionary purchases as they did," chief executive Howard Levine said on a conference call with analysts, referring to the payroll tax increase.

"We expect in the near-term our discretionary categories will remain challenged," Michael Bloom, Family Dollar's president and chief operating officer, said on the call.

To combat that trend, the retailer is refining its assortment of merchandise and advertising campaigns while it also looks to simplify store operations.

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Family Dollar's profit was $80.3-million (U.S.), or 69 cents a share, in the fiscal first-quarter that ended Nov. 24, compared with a profit of $80.4-million, or 68 cents, a year earlier.

Analysts on average forecast 75 cents a share, according to Thomson Reuters I/B/E/S.

Sales rose 12.7 per cent to $2.42-billion. Analysts on average forecast $2.38-billion.

Sales at stores open at least a year rose 6.6 per cent. The company had forecast an increase of 4 per cent to 6 per cent.

But December's same-store sales rose only 2.5 per cent.

Sales of "consumables" such as food and beauty products – by far the chain's largest category – rose 18.5 per cent in the first quarter, the company said.

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Family Dollar forecast second-quarter earnings of $1.18 to $1.28 per share on same-store sales growth of 4 per cent to 5 per cent. The average of analysts' estimates was for a profit of $1.37 per share.

The combination of strong consumables sales growth, softness in December discretionary sales and additional discretionary markdowns "will likely result in gross margin pressures similar to, or slightly more than what we saw in the first quarter," chief financial officer Mary Winston said on the call.

For the year, Family Dollar said it expects earnings of $3.95 to $4.20 per share, below its prior forecast of $4.10 to $4.40. Analysts on average forecast $4.24 a share.

Family Dollar's shares fell $7.56 to $56.52 in midday trading and were the percentage loss leader on the New York Stock Exchange. The shares dropped as low as $54.95 early in the session, their lowest level since March.

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