(Adds effect of tax rebate, company comments)
By Nicole Maestri
NEW YORK, July 2 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
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
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