Family Dollar Q3 up But Misses Forecast

Matthews, NC–Family Dollar Stores, Inc. reported today reported a higher third-quarter profit on sales growth, but both figures came in below analysts’ estimates.

For the quarter ended May 28, net income was $111.1 million, or 91 cents a share, compared with $104.35 million or 77 cents a share a year ago.

Net sales at the 6,943-unit chain rose 7.8% to $2.15 billion from $1.997 billion in the third quarter 2010. Comparable store sales were up 4.7%, “driven by higher customer traffic, as measured by the number of register transactions, and an increase in the value of the average customer transaction.”

But the figures fell short of analysts’ average estimates that expected earnings of 95 cents a share in the quarter on sales of $2.17 million.

Gross profit, as a percentage of net sales, was 36.2%, compared with 36.6% in prior year quarter, due in part to higher sales of lower-margin consumables, increased promotional markdowns and higher freight expense. While consumables may have increases, markdowns on seasonal and apparel and accessories increased.

Low Income Consumers Feel Pinch

Inventories rose 15% from a year ago as Family Dollar expanded merchandise offerings in food, health and beauty products.

“Higher gas prices, combined with rising food costs and sluggish income growth, have left many families believing that the economic recovery has yet to take hold,” Howard Levine, ceo, told analysts.

“It’s hard to raise prices when you operate the dollar store model,” Wall Street Strategies analyst Brian Sozzi said.

Nothing that Dollar General recently missed expectations by 2 cents a share, Sozzi noted that price inflation is cutting into margins. “Even buying discretionary goods under a dollar store umbrella is a reach for stretched low income consumers.You can’t go out there and price things at $2 because that undercuts what you stand for.”

Looking ahead, Family Dollar forecast fourth-quarter earnings of 62 cents to 70 cents a share, compared with 56 cents  share in the prior-year quarter. Comparable sales are expected to rise 5 to 7%.

Analysts’ average estimate expects earnings of 65 cents a share in the quarter and comparable store sales to increase 5.1%.

The growth of Family Dollar and its rivals during the Great Recession as consumers looked for lower prices garnered the retailer increased investor interest. Store additions and expanded private-label offerings have helped Family Dollar post improving results, as well as attract buyout interest and the endorsement of hedge-fund managers like William Ackman of Pershing Square Capital Management, which holds a 8.9% stake in the company.

However, after Family Dollar instituted a poison pill to avoid a takeover by another activist investor, Nelson Peltz’ Trian Fund Management LP, Pershing cannot add much more to its stake.

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