“Bargainistas” Push Family Dollar into Q4 Profit Rise

Family Dollar has also stepped up its apparel and accessories offerings as more middle income shoppers visit its neighborhood stores

Matthews, NC—The rise of “bargainistas” returning to its stores helped Family Dollar Stores post today an 8% increase in its fourth quarter profit.

The retailer, which operates 7,023 general merchandise discount stores in 44 states, said it plans to ramp up new store openings. So far, Family Dollar has opened 300 stores this year, compared to 200 new store openings a year prior, and plans to open another 450 to 500 stores in its next fiscal year.

For the quarter ended August 27, Family Dollar’s net income grew 8% to $79.8 million, or 66 cents a share, compared to $73.9 million, or 56 cents a share, a year ago.

Net sales rose 9.1% to $2.13 billion from $1.96 million a year ago. With increased shopper traffic and higher average transactions, the company posted a comparable store sales gain of 5.6%. Sales for its merchandise, most of which retail at $10 or less, were strongest in consumables, as well as in the seasonal and electronics categories.

The dollar store’s fourth quarter results exceeded analysts’ average estimate which expected earnings of 63 cents and met their expectations for total sales.

Family Dollar executives pointed to a long-range plan to accelerate its growth, challenging its rival, the larger Dollar General.

Noting Family Dollar expects to make capital expenditures of between $550 million and $600 million to support the new store openings and other plans, Howard Levine, ceo, said: “A year ago we launched an ambitious, multi-year plan to accelerate revenue growth, expand operating margins and optimize our capital structure, and I am pleased to announce that we have executed well against our plans in a very difficult operating environment.”

Gross margin edged to 34% from 34.7% due to increased sales of lower margined consumables and higher shipping costs.

Looking forward, the company expects fiscal 2012 earnings to hit be between $3.50 and $3.75, with revenue up between 8% and 10%. Analysts’ average estimate anticipates earnings of $3.59 a share on sales of $9.21 billion.

For the first quarter, Family Dollar expects comparable store sales to increase between 4% and 6%, with earnings in the range of 65 and 73 cents per share. Analysts’ average forecasted 66 cents.

Management Changes: New President/COO

Fashion offerings expand at Family Dollar

Prior to today’s earnings report, Family Dollar announced Tuesday that James Kelly, president and chief operating officer, will be retiring. Kelly, who’s been with the company for 15 year, will remain vice chairman through the transition.

Former CVS executive Michael K. Bloom will succeed Kelly as president and chief operating officer. Family Dollar said Bloom is a veteran of “the small-box retail” business for 30 years, including stints at the People’s Drug Stores and Shopper’s Drug mart chains. Most recently, he was executive vice president in charge of merchandising, supply chain, marketing and advertising for CVS.

In other management changes, Dorlisa K. Flur, chief merchandising officer, was promoted to vice chair overseeing strategy and chief administrative officer.

Family Dollar’s board also authorized the repurchase of an additional $250 million in stock.

The changes, along with increased scrutiny by retail analysts on the dollar store channels as the U.S. economy appears to be stagnant, has raised speculation that Family Dollar could once again become a takeover target.

The Federal Reserve said last week that there are “significant downside risks” to the economy, while a government report this month showed U.S. payrolls were unchanged in August, the weakest reading since September 2010. Dollar stores saw their market share increase during the Great Recession—even cutting into giant Walmart’s sales—and they continue to expand.

Over the past three years, the four leading Dollar Stores have pushed quarterly same-store sales to mid-single digit rates from the prior year compared with the low-single-digit gains posted by retailers overall, noted Ken Perkins, president of Retail Metrics.

Rise of the Bargainistas

In the most recent second quarter reports, Family Dollar, Dollar General, Dollar Tree and 99 Cents Only saw their comparable store sales rise an average of 5.3% vs. a 2.5% increase for retailers overall, Perkins added.

Analysts also say bargainistas shopping dollar stores are increasingly upper-middle-income consumers have been shopping at these stores for consumable items because of their everyday low prices and the stores are convenient to their neighborhoods. In his recent report, Brian Sozzi, retail analyst at Wall Street Strategies, noted  dollar stores for having “improved seasonal selection plus economic conditions” being a “win win scenario for the dollar store sector.”

“The prolonged economic soft patch appears to be creating more dollar-store customers,” MKM Partners analyst Patrick McKeever told Investors.com. “Customers are looking for sharp prices and convenience, where they can get in and out quickly.”

Bargainistas also making smaller shopping trips and spending less–$9 to $10 a visit at a Dollar General and Family Dollar store—than they would if they went into, say, a Walmart, where they might spend $40 to $50 a visit, McKeever says.

Despite Poison Pill, Family Dollar Still a Takeover Target?

Family Dollar, and other discount retailers, may once again become “the venue of choice in down times for large parts of the country where jobless rates are high and the desire to stretch a buck is intense,” Thomas Russo, who manages a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, said. “The environment feels relatively frugal.”

While earlier this year Family Dollar rejected a $7.6 billion takeover bid from billionaire investor Nelson Peltz and adopted a poison pill capping shareholders at 10% ownership, many analysts say a higher bid might appeal to the company’s shareholders.

Indeed, Family Dollar stock has gained 21% in the past seven weeks to $54.84 this week as Bill Ackman’s hedge fund disclosed it doubled its stake in the company. The shares were just 16 cents below a rejected February takeover bid of at least $55 a share from billionaire investor Nelson Peltz for the narrowest spread since July 7, according to data compiled by Bloomberg.

Family Dollar may still draw interest from Dollar General Corp., or Ackman and Peltz may team up to convince Howard Levine to sell, according to Tullett Prebon Plc.

“There’s a high probability that something gets done,” Sachin Shah, situations and merger arbitrage strategist for Tullett Prebon, told Bloomberg. “Dollar General is the most logical buyer, but there could also be some dialogue among Peltz, Ackman and Levine and the board to take it private. You have all these interested parties out there.”

 

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