Holidays not so happy at Family Dollar

Despite solid sales trends at Family Dollar during the company’s first quarter ended November 24, margins contracted and profits were less than expected.

The company reported earnings per share of 69 cents that were at the low end of the company’s guidance range of 69 cents to 78 cents and well below analysts’ consensus forecast of 75 cents. The culprits were sales driving initiatives that involved food and consumables that put pressure on gross margins. The company’s second quarter is also off to a shaky start due to a weaker than expected 2.5% same store sales increase in December.

Sales for the quarter increased 12.7% to $2.4 billion due to a combination of a 6.6% same store sales increase, the addition of 125 news stores and the renovation, relocation and expansion of 169 others. The top line improvement didn’t translate entirely to bottom line success though as net income for the quarter was $80.3 million compared with net income of $80.4 million for the first quarter of fiscal 2012. Gross margins also contracted to 34.1% of sales from 35.3% of sales the prior year. Stronger sales of lower margin consumables, higher markdowns and increased inventory shrinkage were partially offset by higher markups and lower freight expense, according to the company.

"Early results from our sales-driving initiatives exceeded our expectations in the first quarter, resulting in more gross margin pressure than anticipated. This mix pressure, combined with expected headwinds from insurance expense, resulted in earnings that were at the low end of our guidance," said Family Dollar chairman and CEO Howard Levine.

He added that investments made to increase Family Dollar’s relevance to customers are delivering results and increasing traffic and market share. The company’s sales were strongest in the consumables category, which increased 18.5% during the quarter, driven primarily by strong growth in tobacco, food and health and beauty care. The 6.6% comp increase was driven by a mix of increase traffic and larger average transaction sizes.

"While the near-term economic environment remains difficult to predict, I continue to be excited about the long-term opportunity for our business," Levine said. "We are seeing tangible benefits from our margin-enhancing investments in global sourcing and private brands, and as we work to drive further benefit from the investments we are making to expand profitability, I remain confident that our efforts will deliver stronger results as we progress through fiscal 2013 and beyond."

Although the company’s second quarter is off to a slow start given the 2.5% December comp increase, Family Dollar said it expects comps for the second quarter to increase between 4% and 5%.

"Despite the ongoing economic uncertainty, we expect that the investments we have made in traffic-driving categories will continue to build sales momentum through January and February, as customers focus even more on basic needs," Levine said.