Costco and Family Dollar beat expectations

SAN FRANCISCO Wed Oct 7, 2009 12:23pm EDT

Stacks of shopping carts are lined up waiting for customers outside a Costco store in Carlsbad, California October 5, 2009. REUTERS/Mike Blake

Stacks of shopping carts are lined up waiting for customers outside a Costco store in Carlsbad, California October 5, 2009.

Credit: Reuters/Mike Blake

SAN FRANCISCO (Reuters) - Family Dollar Stores Inc and Costco Wholesale Corp reported better-than-expected quarterly profits on Wednesday and said sales improved in September from preceding months, sending their shares higher.

Low-priced retailers have attracted more shoppers in the U.S. downturn, although those that sell discretionary merchandise, like Costco, have seen sales lag as shoppers hold back on buying jewelry or clothes.

The results on Wednesday showed that after a tough summer, in which shoppers put off buying back-to-school merchandise until the last minute, consumers once again headed to stores in September.

"We're not out of the woods yet," said Telsey Advisory Group analyst Joseph Feldman, but "sequentially (sales) continue to get gradually better."

Family Dollar shares rose 1.6 percent, while Costco gained 2.3 percent.

For a graphic on Costco and Family Dollar shares, click here

Family Dollar said consumers continue to gravitate toward buying necessities like food, with sales of consumable items accounting for 66.2 percent of its sales in the quarter, up from 63.7 percent a year ago.

The retailer said it is gaining market share, attracting more lower income and middle income "trade down" customers.

"Today, more middle income customers ... have consolidated shopping trips, reduced discretionary purchases and increased their reliance on coupons and promotions for basic needs," said Chief Executive Officer Howard Levine on a conference call.

Family Dollar reported a 13 percent rise in quarterly profit. [ID:nN07462362] The company, which sells most of its merchandise for $10 and below, estimated that same-store sales in September increased roughly 5 percent. In its just-completed fourth quarter, same-store sales rose 1 percent.

Meanwhile, quarterly profit fell at Costco, the No. 1 U.S. warehouse club operator, as shoppers continue to cut back on purchases of discretionary merchandise, like jewelry.

But the decline was not as steep as Wall Street expected.

For the fourth quarter ended August 30, Costco said earnings fell to $374 million, or 85 cents a share, from $398 million, or 90 cents a share, a year earlier. Analysts on average were expecting 77 cents per share, according to Thomson Reuters

I/B/E/S.

Costco said sales at its clubs opened at least a year rose 1 percent in September, while analysts were expecting a decline of 0.7 percent, according to Thomson Reuters data. The results marked an improvement from August, when same-store sales fell 2 percent.

REARRANGING THE STORE TO BOOST SALES

Family Dollar is winning over middle-income consumers and gaining more business from its core lower-income shoppers as families -- regardless of income -- look to save money.

This summer it began rearranging stores to give more room to fast-moving items like food and paper towels and cut space for items like clothes, which are languishing. The retailer is also accepting food stamps as payment in more locations.

Family Dollar said the store rearrangements hurt sales in the quarter as consumers were not used to the new layouts and could not find items they needed. But the retailer said it has improved signs in stores and sales are gaining momentum.

Family Dollar said the momentum it saw in its recently completed fiscal year should continue into the new one.

For its current fiscal year, Family Dollar expects net sales to rise 5 to 7 percent, with same-store sales up 3 to 5 percent. It plans to open about 200 new stores.

The company forecast full-year earnings of $2.15 to $2.35 per share on stronger sales of food and other consumable items, and more private-label offerings. Analysts on average expect $2.25.

(Reporting by Nicole Maestri; Editing by Lisa Von Ahn and Matthew Lewis)