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Family Dollar profits slip amid executive shakeup

Matthews-based Family Dollar said Thursday that a top executive has left the company after disappointing results, as the discount retailer seeks to catch up with rivals that have grown more profitable.

Profits and customer traffic fell in the three months that ended Nov. 30, Family Dollar said, noting that the economy is pressuring its low-income core customers. The company’s larger rival, Dollar General, saw its profits rise by double digits in its most recent quarter.

Family Dollar chief executive Howard Levine said chief operating officer Michael Bloom, who joined the company in 2011, has left “to pursue other interests.” Levine, the son of Family Dollar founder Leon Levine, said he hopes to find a replacement for Bloom who can one day succeed him as CEO.

“While we’ve made some progress during Mike’s tenure, we weren’t happy with our financial results,” Levine told investors and analysts during a conference call. Levine said he and Bloom disagreed on merchandising strategies, and that while it was “not at all pleasant” to let Bloom go, it was the right choice.

His exit is the latest in a round of executive turnover in the past year that has included the departures of Family Dollar’s chief merchandising officer and two executive vice presidents of supply chain.

Bloom had been a visible face of the company in recent years. In November, he appeared on the CBS show “Undercover Boss,” operating a forklift and working in Family Dollar stores. Bloom was the second Charlotte-area business executive to appear on “Undercover Boss,” after former Chiquita Brands International CEO Fernando Aguirre, who also left his company.

Levine said Family Dollar will change its pricing strategy back to “everyday low prices,” as opposed to running frequent promotions to entice customers. The retailer will also cut back on its use of printed circulars, which grew under Bloom.

Heavy promotions have hurt Family Dollar, Levine said. “You get caught up in a habit of continuing to run circulars” to advertise various sales. “We ran 11 events in a 13-week period in the first quarter. Our model is not built to sustain that level of promotional activity.”

In addition to hurting profit margins, Levine said the promotions require extra labor to set up. Family Dollar’s business model is built in part on limited in-store labor, often with only a few employees in the shop at any one time.

“We are not satisfied with the results,” Levine said. He also said the company “will continue to look aggressively for ways to reduce core operating costs.”

Levine added that Family Dollar will tweak its merchandise assortment, but did not give details.

Tough times ahead

Family Dollar employs about 1,500 people at its Matthews headquarters, including a distribution center next to the corporate building.

Sales climbed 3 percent, to $2.5 billion in the most recent quarter. But profits fell 3 percent, to $78 million, amid higher payroll and store occupancy costs, as well as increased “shrinkage,” an industry term for shoplifting and lost goods. To lure shoppers, Family Dollar also offered more discounts than it originally planned.

Sales at stores open for a year or more, considered a key measure of a retailer’s health, dropped 2.8 percent. Family Dollar said it saw fewer customer transactions and a drop in the average transaction size.

Executives also warned that the tough times didn’t end in November. Sales in December at stores open a year or more fell 3 percent, and the heavier-than-expected discounting continued. “We have lowered our earnings expectations for the second quarter of fiscal 2014 and the full year,” Levine said.

Part of the problem, Levine said, was that low-income customers are still feeling the pressure of a lackluster economy. While much of the economy, such as home prices and the stock market, has rebounded, wages have remained largely stagnant and unemployment is higher than the historical average.

Family Dollar’s core customer is typically a female head of household making less than $40,000 a year, and Levine said many people who shop there are “absolutely living paycheck to paycheck.”

Thursday’s results showed Family Dollar lagging its largest rival, Tennessee-based Dollar General. Last month, Dollar General reported its profit for the quarter ended Nov. 1 jumped 14 percent, to $237 million, and sales at stores open a year or more were up 4.4 percent.

Analyst Wayne Hood of BMO Capital Markets wrote to investors that he prefers Dollar General and Dollar Tree over Family Dollar, given “their relatively stronger sales and earnings growth outlooks.”

Pier One Imports and the parent company of Victoria’s Secret and Bath & Body Works also cut forecasts and issued disappointing results Thursday, showing some retailers continue to struggle.

Executive turnover

Levine also addressed some of the executive turnover that has occurred at Family Dollar over the past two years. On Thursday, the company announced a new chief marketing officer, Jason Reiser, who was hired last year from Sam’s Club as a senior vice president. Paul White, the former chief marketing officer, left last year “to pursue other interests.”

Also last year, Jeffrey Macak, executive vice president of supply chain, left Family Dollar two months after he was hired. He replaced Charles Gibson, who left the same post three months before Macak was hired.

“Why do you think it’s been so hard to find the right people and execute?” an analyst on the conference call asked Levine. “People get concerned, is there something structural?”

Levine said many of the changes were brought about when new executives started coming in to replace retiring executives in the past few years. Bloom replaced chief operating officer James Kelly, a longtime executive with Family Dollar who held a number of roles until his 2011 retirement.

“When you bring in new folks, they want to bring in new folks,” he said. “It becomes a slippery slope at times. It’s something I’m not accustomed to and not at all happy with.”

“I can’t change what’s happened in the last two years,” said Levine, who also said he has confidence in the executives now in place.

Family Dollar’s sales of consumable items – including food, health items and tobacco – increased 4.7 percent in the quarter. Those items typically have low profit margins, and their increasingly large share of Family Dollar’s sales puts pressure on the retailer’s profitability.

Sales of seasonal and electronic items rose 1.2 percent, but sales of home products fell 0.8 percent and sales of apparel and accessories fell 3.7 percent.

Family Dollar operates more than 8,000 stores in 46 states, and executives said they plan to continue aggressive growth, with 525 new stores set to open this year. The company’s stock fell 2 percent Thursday, to close at $64.97, down $1.37 a share.

Portillo: 704-358-5041; Twitter: @ESPortillo
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