Sales rose but profits fell at Family Dollar during its third quarter, the discount retailer reported Wednesday, reflecting both strong sales of low-margin products such as tobacco and frozen foods and more money spent on new stores.
Family Dollar’s sales were up 9 percent from the third quarter last year, finishing at $2.57 billion. The Matthews-based retailer attributed the sales jump to high customer traffic and a boost in sales of consumables – a broad category that includes food, health and beauty aids, and tobacco. Consumable sales rose 14.8 percent from a year ago.
Since the start of the downturn, Family Dollar has gradually added consumable items, such as milk and cheese, and most recently tobacco. Consumables accounted for more than 70 percent of the retailer’s sales in the third quarter, Family Dollar reported.
Emphasizing those products helped Family Dollar capture high-earning customers trying to save a few bucks during the downturn, said Brian Youngblood, a consumer analyst for Edward Jones. And those customers are still visiting.
“They (Family Dollar) are still not seeing those customers making $70,000-plus go away,” he said.
Despite a rise in third-quarter sales, Family Dollar’s profit dropped by more than $4 million from the same time last year, sinking to $120.9 million. The retailer earned $1.05 per diluted share for the quarter, down from $1.06 last year.
Family Dollar said the weakened profits stemmed from strong sales of low-margin products compared to discretionary items that offer higher profit margins, such as apparel and accessories. Apparel and accessory sales were down 8.9 percent from a year ago.
“Our discretionary sales remained challenged as our costumers have been forced to make spending choices between basic needs and want,” CEO Howard Levine said. “Consistent with market trends, we expect that our customers will continue to face financial headwinds.”
Changes in merchandising
Sales at stores open a year or more, considered a key aspect of a retailer’s health, climbed to 2.9 percent in the third quarter from a year ago.
Mary Winston, the company’s chief financial officer, said she expects the profit loss caused by selling low-margin items to flatten in the next few quarters.
The company has added more store brand products to its shelves and increased the amount of direct-to-factory shipping to cut costs and stabilize the margin pressure, Mike Bloom, the company’s president, said.
Family Dollar also made a change to its merchandising team Wednesday, announcing that an executive from Sam’s Club would become senior vice president of merchandising. Jason Reiser will succeed the retiring John Scanlon in the role.
Reiser will oversee a portion of Family Dollar’s consumable products: health, beauty, personal care and household items – the same role he held at Sam’s, according to a news release.
Constructing more stores
So far this year, Family Dollar has reported more than $200 million more in capital expenditures than in the same period in 2012, primarily because of investment in new stores. The company has opened 380 stores this year, 93 more than it had opened at the same time last year. It now operates more than 7,800 stores across 45 states, it said.
Family Dollar says it intends to open about 500 stores this year, and Youngblood expects the retailer to open 500 or more stores annually for the next decade.
Youngblood said that Family Dollar and its larger competitor, Dollar General, have been adding new stores at a breakneck pace since the economy began to rebound. Dollar General, based in Goodlettsville, Tenn., saw profits soar in its most recent quarter, raking in a record $220 million at its 10,662 stores.
Youngblood said that while growth at big-box retailers such as Target and Wal-Mart has matured, small-box dollar stores that can enter virtually any market are still blooming.
“It’s a growing industry, largely because it’s convenient,” he said. “People don’t want to walk through a parking lot and a 100,000-square-foot Walmart just to buy milk.”
Family Dollar’s stock closed up more than 7 percent, at $68.50 a share.
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