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Sales rise at Family Dollar, but pressures on profit remain

Sales at Matthews-based Family Dollar jumped in the company’s second quarter but profits were squeezed, a product of the discount retailer’s greater success selling lower-profit margin goods such as food and tobacco.

Profits fell short of expectations, and the company’s executives cut their estimates for the rest of the year, saying customers were being pressured financially.

“The current environment is more challenging than we expected,” CEO Howard Levine told analysts Wednesday during a conference call.

Family Dollar’s sales totaled $2.9 billion, up almost 18 percent from $2.5 billion in the second quarter last year. Profits rose more slowly however, and were up less than 3 percent, to $140.1 million.

The company’s fiscal quarter had 14 weeks in it, one more than the same quarter a year ago. That helped buoy the company’s sales and profits.

On a week-by-week comparable basis, sales at stores open for a year or more increased 2.9 percent compared to the second quarter a year ago. Such sales figures are considered a key indicator of a retailer’s health, because they exclude new and closed stores.

Levine said the economic environment remains very uncertain for the company’s core customers, typically households with income of less than $40,000. A payroll tax increase, gas prices and delayed tax refunds all hurt Family Dollar’s second quarter results, Levine said.

Family Dollar operates more than 7,600 stores. The company plans to open approximately 500 new stores this year, as well as a new distribution center in Utah to serve its new stores in California.

Stressed consumers

Executives said Family Dollar’s recent push to increase sales of consumable goods such as food and tobacco appears to be paying off in higher sales but crimping the company’s profit margins. That’s because while customers make more frequent trips to buy items such as food, those goods have a lower profit margin than “discretionary” items such as clothes.

Consumable categories drove sales growth in the second quarter, surging 26.6 percent, Family Dollar said. Consumable goods made up 70 percent of Family Dollar’s sales, up from 65 percent in the second quarter last year.

By comparison, sales of home goods fell 1.4 percent in the second quarter from a year ago. Sales of apparel and accessories barely increased, rising only 0.5 percent.

In a potentially troubling sign for investors, Family Dollar’s gross profit margin continued to shrink. As a percentage of sales, gross profit fell 1.5 percentage points from the same quarter a year ago, to 33.4 percent.

Inventories of unsold goods also expanded rapidly in the second quarter, increasing 17.1 percent per store.

Consumer spending remains precarious, and Family Dollar is lowering its estimates for discretionary spending on merchandise such as home goods and apparel sales for the rest of the year. Levine said he expects Family Dollar customers to focus on needs, not wants.

“When you’re dealing with a customer who’s stressed already...she buys what she needs,” Levine said.

To help deal with the uncertain economy, Family Dollar executives said the company is continuing to expand its direct merchandise sourcing from Asia. The company recently opened an office in Bangkok, Thailand to complement its China offices.

Levine also hinted that Family Dollar, which employs more than 1,000 people in Matthews, is tightening its belt. “We are adjusting our expenses to reflect a softer sales environment,” Levine said Wednesday, without being specific.

Analyst Wayne Hood of BMO Capital Markets called Family Dollar’s results a “poor-quality miss” in a note to investors Wednesday. “Sales in discretionary categories were disappointing and look to remain under pressure,” he said.

Family Dollar’s stock closed up 64 cents, or about 1 percent, at $60.44 a share Wednesday.

Portillo: 704-358-5041 On Twitter @ESPortillo
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