MATTHEWS, N.C. — Adjusted net income rose during both the fourth quarter and full 2013 fiscal year at Family Dollar Stores Inc., but decelerating sales growth in the final period surprised management and prompted executives to take a cautious outlook for fiscal 2014.

Adjusted net income rose during both the fourth quarter and full 2013 fiscal year at Family Dollar Stores Inc., but decelerating sales growth in the final period surprised management and prompted executives to take a cautious outlook for fiscal 2014.

Reported net income for 2013 advanced 5.1% to $443.6 million, or $3.83 per diluted share, as net sales climbed 11.4% to $10.39 billion. Fiscal 2013 included an extra, 53rd week (which added a 14th week to the second quarter), and management estimates that the additional week contributed about $189 million in sales and earnings of 7 cents per share to full-year results.

The bottom line for the quarter ended August 31, meanwhile, vaulted 26.3% to $102.2 million, or 88 cents per diluted share.

Net results for the most recent quarter and year reflect a favorable pretax adjustment of $4.95 million ($3.18 million, or 2 cents per diluted share, after tax) related to a change in accounting for certain vendor allowances. The prior-year quarter, meanwhile, reflected the negative impact of an $11.5 million pretax litigation charge ($7.14 million, or 6 cents per share) stemming from the preliminary settlement of a class-action lawsuit brought against the company by store managers in New York.

Factoring out both special items, adjusted full-year earnings advanced 2.6% to $440.4 million from $429.4 million, while the bottom line for the fourth quarter added 12.4% to $99 million, or 86 cents per share, from $88.1 million, or 75 cents per share. That was good enough to beat the average estimate of 84 cents per share among analysts polled by Thomson Reuters.

Earnings for both the 2013 quarter and year benefited slightly from lower effective income tax rates. The fourth quarter reflects a tax rate of 34.9% compared with 36% a year ago, largely due to a decrease in the reserve for state taxes, partially offset by higher federal tax on foreign operations and reserves for uncertain tax positions. The full-year tax rate was 35.8%, down from 36.4% in fiscal 2012. The rate for fiscal 2013 benefited not only from the lower reserve for state taxes but also from a higher benefit from federal tax credits.
Net sales for the quarter gained 5.8% to $2.50 billion, short of analysts’ forecast of $2.56 billion. The increase was generated entirely by new stores, as comparable-store results were unchanged, reflecting flat customer traffic and average transaction. Management had projected in July an increase in comparable-store sales of about 2%.

In a conference call with analysts, president and chief operating officer Michael Bloom offered an explanation for the top-line disappointment. "While we delivered strong earnings growth this quarter, our comparable-store sales were flat versus last year and lighter than we had planned," he said. "We believe this sales weakness was due to a couple of key factors. First and most importantly, this quarter we began to anniversary many of our sales-driving initiatives. In fiscal 2012 we launched about 1,000 new consumable SKUs in food and health and beauty aids and we also introduced tobacco. As we anniversaried these additions, we generated a consumables comp of about 2% on top of a 10.5% increase in the fourth quarter last year. Second, our customer continues to struggle financially, and she is spending less in the market overall. However, we drove market share gains in both dollars and units during the quarter."

Full-year sales reflect more robust growth, rising 11.4% to $10.39 billion. Excluding the $189 million generated during the second quarter’s extra week, the adjusted top line for the year still improved 9.3% to $10.20 billion, with comparable stores up 3%.

Taking a closer look at the top-line performance for the year by department, consumables sales leapt 16.9% to $7.52 billion, or 72.4% of total sales, an increase of 340 basis points. Sales of home products, which contributed 10.1% of the mix, decreased 1.3% to $1.05 billion, while seasonal and electronics gained 2.5% to $1.03 billion, contributing 9.9% of the top line. Apparel and accessories brought up the rear, with sales falling 4.6% to $785.4 million, or 7.6% of total sales.

The expanding share of consumables in the sales mix put pressure on margins for the year. Gross margin for the 53 weeks contracted 73 basis points to 34.21%. Fourth quarter gross margin, however, expanded 88 basis points to 34.71%, thanks to higher markups and lower freight costs that were partially countered by the sales mix shift toward consumables, higher markdowns and increased shrink. Even backing out the favorable impact of the accounting change cited above, fourth quarter gross margin still grew 67 basis points to about 34.50%.

The full-year margin compression was somewhat offset by a reduction of selling, general and administrative (SG&A) expense, which receded 11 basis points to 27.59% of sales. However, fourth quarter SG&A expense expanded 46 basis points to 28.49% of sales, largely due to the lack of leverage from flat comparable-store sales.

With that, operating income for fiscal 2013 improved 3.6% to $688 million, or 6.62% of sales — a 50-basis-point decrease in the operating ratio. Factoring out the special items detailed above, adjusted operating profit for the year edged up 1.1% to $683 million from $675.7 million.

Reported operating profit for the final period, though, surged 23.9% to $155.6 million, or 6.22% of sales, an improvement in operating margin of 91 basis points. On an adjusted basis, operating profit still advanced 9.9% to $150.6 million from $137.1 million.

Full-year net interest expense expanded 3.2% to $25.9 million while other income vaulted 18.1% to $28.2 million, helping boost pretax income growth past that of operating profit, with a 4% increase to $690.7 million.

Fourth quarter interest expense, meanwhile, declined 6.3% to $5.92 million, while other income grew 2.6% to $7.22 million. Pretax profit consequently soared 24.1% to $157 million.

Capital expenditures rose 23.4% to $744.4 million during fiscal 2013. According to chief financial officer Mary Winston, around $385 million was allocated to new store development, while about $149 million was invested in store renovations. Supply chain projects accounted for another $76 million, including the construction of the chain’s 11th distribution center in Utah, while corporate and technology investments claimed $81 million, followed by unspecified other investments in existing stores totaling $53 million.

During fiscal 2013, Family Dollar opened 500 stores and closed 26 while renovating, relocating or expanding 830, giving it a year-over-year net increase of 474 to 7,916 outlets operating in 46 states as of August 31.

"In fiscal 2013 we had several key accomplishments," chairman and chief executive officer Howard Levine told analysts. "We exceeded the $10 billion milestone in net sales, comparable-store sales increased 3%, and we increased our market share. Adjusted earnings per share increased 4.4% to $3.80, and we finished the year with adjusted earnings per share in the fourth quarter increasing almost 15% to 86 cents. We opened 500 new stores and launched our partnership with McLane Co.

"Our team adjusted well to unexpected headwinds and, as a result, we have stabilized gross margin, reduced inventory levels per store and improved profitability. While we expect that our customer will continue to face near-term challenges, we are adapting to the slower sales environment and managing the business appropriately for the short term while continuing to invest for our long-term growth."