UPDATE 4-Family Dollar beats estimates, shares rise

Wed Jul 2, 2008 1:24pm EDT

(Adds effect of tax rebate, company comments)

By Nicole Maestri

NEW YORK, July 2 (Reuters) - Family Dollar Stores Inc (FDO.N) reported a higher-than-expected rise in third-quarter profit on Wednesday as the discount retailer kept tight control on expenses and inventory, and U.S. tax rebates put extra cash into the hands of its lower-income shoppers.

Family Dollar, which prices most of its merchandise for below $10, also raised its forecast for June sales and projected fourth-quarter earnings that could beat current Wall Street targets.

Its shares initially rose much as 13.8 percent, but pared some of the gains after Chief Executive Howard Levine said the benefits from tax rebate checks will be relatively short-lived, and it is planning conservatively for Christmas holiday sales.

"Most companies today are challenged by an environment of intense pressure from rising commodity prices, energy costs and inflation," he said on a conference call. "The pressures we face today are some of the strongest headwinds I've seen in my 25-plus years in retailing."

Net income rose 7.1 percent to $64.67 million, or 46 cents per share, in the third quarter that ended May 31, from $60.37 million, or 40 cents per share, a year earlier. The results beat analysts' average estimate for earnings of 40 cents per share, according to Reuters Estimates.

"Our intense focus on controlling expenses and mitigating inventory risk has resulted in net income growth and an improvement in inventory productivity, despite flat comparable store sales," Levine said in a statement.

Shares were up 7.7 percent to $21.86 in afternoon New York Stock Exchange trading.

LURING SHOPPERS WITH CHEAP CONSUMABLES

Family Dollar, which operates more than 6,500 stores, caters to lower-income shoppers, who are being pinched by rising food costs, surging fuel prices and the housing downturn.

It has said its shoppers, many with salaries below $30,000 a year, are severely strapped for cash by the end of the month and have been consolidating their store trips and putting fewer dollars toward discretionary items, like clothing.

To increase customer traffic, Family Dollar has installed coolers in its stores to sell perishable items like milk, and it is stocking more quick-preparation or ready-to-eat items.

Its quarterly sales rose almost 3 percent to $1.702 billion. Sales at stores open at least a year, known as comparable store sales, rose 0.1 percent. The retailer said shoppers, on average, spent more, helping to offset a decline in customer traffic.

Sales of consumable merchandise like food, pet supplies and household cleaners, jumped 9.4 percent, while sales of home products like towels, fell 3.7 percent and sales of apparel and accessories fell 12.2 percent.

The results drew mixed reviews. JP Morgan retail analyst Charles Grom, who has an "underweight" rating on the stock, cautioned that the better-than-expected results were driven largely by lower insurance and professional fees.

"Although we'd expect Family Dollar to trade up today on the beat, we wouldn't chase the stock with rebate checks winding down in July and continued expense savings as sizeable next quarter as reported today seem unlikely," he wrote.

But William Blair & Co analyst Mark Miller raised his rating on Family Dollar shares to "outperform" from "market perform," after downgrading the stock in December,

"Our upgrade is based on evidence of an improved spending environment for Family Dollar's consumer and stronger internal execution at the company, as well as the shares' modest valuation," he wrote.

CAUTIOUS ON HOLIDAY PLANNING

With U.S. government tax rebate checks now reaching its customers, Family Dollar said June sales are above initial expectations. It now expects June comparable-store sales to rise approximately 6 percent, up from a previous forecast for a gain of 2 percent to 4 percent.

For the fourth quarter it expects comparable-store sales to increase 4 percent to 6 percent, and it forecast earnings per share for that quarter between 30 cents and 35 cents. Analysts, on average, currently expect 29 cents per share.

Levine said he remains concerned about the economic pressures facing Family Dollar's customers as it heads into its next fiscal year.

"The way I would characterize our purchase plans as we go in to the holiday is one of conservatism as it relates to discretionary merchandise," he said.

"One of the things that impacted us last holiday season was we were pretty aggressive in the purchase plan. This year, we are taking a more conservative approach." (Reporting by Nicole Maestri; Editing by Dave Zimmerman and Leslie Gevirtz)

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