Net income grew by double digits at Family Dollar Stores Inc. during the third quarter, but expanding consumables sales pressured gross margins and results just missed Wall Street’s expectations.


Family Dollar Stores Inc., Wall Street, Howard Levine, Family Dollar






























































































































































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Inside This Issue - News

Family Dollar on roll

July 23rd, 2012

MATTHEWS, N.C. – Net income grew by double digits at Family Dollar Stores Inc. during the third quarter, but expanding consumables sales pressured gross margins and results just missed Wall Street’s expectations.

Management, however, expects its latest initiatives to fuel continued top-line growth, although executives say the chain’s customers are under increased pressure.

Net income for the quarter ended May 26 climbed 12.1% to $124.5 million, or $1.06 per diluted share, a penny shy of the average estimate among analysts polled by FactSet.

Third quarter net sales, meanwhile, advanced 9.6% to $2.36 billion, which also missed analysts’ average forecast of $2.37 billion. Comparable-store results expanded 5%, at the low end of the company’s guidance, driven both by greater customer traffic and a higher average transaction.

Focusing more closely on the sales performance by department, seasonal and electronics recorded the biggest increase, expanding 15.4% to $237.2 million, or 10% of the total top line, even with their year-ago share. Sales of consumables jumped 12.2% to $1.63 billion, or 69% of sales, up 200 basis points year over year. Apparel and accessories achieved a 1.1% increase to $226.8 million, constituting 10% of sales. Home products edged downward 1.8% to $270 million, losing 200 basis points to 11% of the mix.

The operating performance was impacted by the shift in sales mix, as gross margin contracted 39 basis points to 35.82%, due largely to the higher sales of lower-margin consumables, increased promotional markdowns and greater inventory shrink, partially countered by the benefits of ongoing investments in price management capabilities, global sourcing and growing private brand sales. At the same time, greater sales leverage and ongoing productivity improvements helped reduce selling, general and administrative (SG&A) expense by 28 basis points to 27.37% of sales.

As a result, operating profit grew 8.2% to $199.4 million, or 8.45% of sales, a decrease in operating margin of 11 basis points.

Interest expense, however, fell 21.1% to $5.64 million, while investment income plunged 39.8% to $274,000. With that, pretax income outpaced operating profit growth, rising 9.2% to $194 million.

"We reported another quarter of strong double-digit earnings growth," said chairman and chief executive officer Howard Levine in a statement. "I am especially pleased that we delivered these record results even as we launched multiple initiatives late in the quarter to increase our relevancy to the customer and drive greater store productivity."

Year-to-date net income jumped 10.6% to $341.3 million, as net sales advanced 8.6% to $6.97 billion. Operating profit, meanwhile, improved 9.7% to $555.4 million, as gross margin receded by 66 basis points to 35.31%, while SG&A expense dipped 73 basis points to 27.34% of sales.

With interest expense vaulting 23.1% to $18.8 million, pretax income was held to a 9.2% increase to $537.4 million.

"Delivering stronger shareholder returns begins with increasing sales per square foot, and this quarter, we began to implement a number of initiatives to broaden our consumables assortment and satisfy more of our customers’ shopping trips," Levine concluded. "As planned, most of these initiatives began late in the quarter and had little impact on our third quarter sales results. As we complete most of these initiatives in the fourth quarter we will have a fully competitive assortment and will be well positioned to accelerate sales productivity further."

During the first nine months of fiscal 2012 Family Dollar opened 287 stores and closed 43 while renovating 583 locations, giving it 7,267 units in operation as of May 26, a year-over-year increase of 324. The company also repurchased 1.7 million outstanding shares of stock at a cost of $91.6 million, leaving it with authorization for an additional $245.7 million in share repurchases.

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