Family Dollar to close stores as sales, profits fall

0512.2011:  SPMAGAZINE PROFILE: Profile on Family Dollar chief and SouthPark resident Howard Levine.
T.Ortega Gaines -
0512.2011: SPMAGAZINE PROFILE: Profile on Family Dollar chief and SouthPark resident Howard Levine. T.Ortega Gaines - T. Ortega Gaines,

After struggling to catch up with competitors, Matthews-based Family Dollar said Thursday it will close hundreds of stores and lower prices on 1,000 items in a bid to lure shoppers back.

The discount retailer said Thursday that its profits and sales fell in its most recent quarter. Executives placed some blame on bad weather and a poor economy, but they acknowledged that Family Dollar’s strategy needs adjustment.

“Clearly, these results did not meet our expectations,” chief executive Howard Levine said during a conference call with analysts. “The last few quarters have been challenging.”

Levine said the retailer’s core customers – which it defines as female heads of household making less than $40,000 a year – are still pressured by a weak economy that has left many low-income workers struggling. Cuts to federal food stamp benefits have also hurt Family Dollar, Levine said.

The chain will also return to an “everyday low price” strategy, executives said. Former President Mike Bloom, who focused more on discounts and promotions, left the company in January after Family Dollar posted disappointing results.

To boost its performance, Family Dollar plans to close 370 stores, about 5 percent of its 8,100 locations. The company did not release a list of stores that will close. Levine said the stores targeted for closure are mostly older locations, with average annual sales of about $650,000. That’s about half of the company’s average sales-per-store. “It really did not make sense to continue to operate these stores,” Levine said.

Family Dollar will also open 350 to 400 new stores next year, down from the 525 new stores it will open this year.

The company said last week that it plans to lay off 135 workers at its Matthews headquarters, about 6 percent of the total. Levine said the step was “difficult but necessary.” Spokeswoman Bryn Winburn said the company isn’t planning further cuts.

Analysts said the discount retailer’s steps to trim costs are likely to improve its results. But they said they were concerned that Family Dollar can’t seem to close the gap with rivals Dollar General and Dollar Tree.

Dollar General’s profits have tripled over the past five years, while Family Dollar’s have increased only half that.

“Something is amiss here,” Brian Yarbrough, an analyst with Edward Jones, said in an interview. “I think it’s the merchandise, and the marketing, and the strategy.”

Family Dollar’s sales-per-square-foot are about $180, compared with $210 at Dollar General, he said. “There’s a huge gap there,” Yarbrough said.

Yarbrough said he expects the board of directors to ask some tough questions about whether the retailer should change its strategy as it searches for a new president and chief operating officer.

“Wait a minute, you guys have been under-performing the competition more than two years,” he said. “Don’t you think you need to change things?”

Analyst Wayne Hood of BMO Capital Markets said Family Dollar’s strategy could improve the company’s prospects in the long run.

“Slowing store growth, closing unproductive stores and better aligning its cost structure is the correct long-term strategic action to improve margin and productivity,” Hood wrote in a note to investors Thursday.

But he said he continues to favor Dollar General and Dollar Tree as investments.

Thursday’s poor financial results could revive long-running speculation that Family Dollar might be a takeover target for a larger retailer. Yarbrough didn’t give it much credence Thursday.

“These rumors have floated around now for four or five years, and no one has stepped up,” Yarbrough said. He put the odds of a sale at less than 25 percent.

The last time Family Dollar was under such pressure was in 2011, when activist investor Nelson Peltz made a buyout offer that the company ultimately rejected.

Getting back to low prices

Levine acknowledged that Family Dollar strayed from its core strategy of always having the lowest prices over the past few years.

“We felt we kind of lost our way there with our price perception,” Levine said. He said the company needs to get more items to the “magical $1 price point,” and that Family Dollar didn’t have the amount of $5 toys it typically does during the holiday season.

Family Dollar’s cost-cutting measures are expected to deliver $40 million to $45 million worth of annual savings. Levine said the company had carefully considered how to cut corporate staff without overworking those who remain.

“It wasn’t just to eliminate heads without understanding who was going to be picking up the remaining work there,” Levine said. “There may be some people that have some bandwidth that now will not have extra time on their hands. We did our best to ensure we don’t overburden our workforce here.”

Many of those cost savings will be directed toward lowering prices in stores.

Family Dollar said it will lower prices on 1,000 basic items. That will cost $50 million annually. Family Dollar also said last week that it will introduce 400 more food items to its stores. Adding food, which customers shop for frequently, has been a major part of the discount retailer’s strategy to grow.

But food items tend to have low profit margins, and Family Dollar’s margins suffered in the second quarter, falling 0.2 percentage points, to 33.2 percent. Family Dollar said sales of low-margin consumables such as food, which now make up 71 percent of Family Dollar’s revenue, were partly to blame.

Family Dollar’s financial results were generally poor Thursday.

The company’s stock fell 3 percent, or $1.90, to close at $57.17 a share Thursday.

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