Family Dollar Stores Inc FDO.N reported a higher-than-expected quarterly profit on Wednesday as it sold more food, but some analysts still favor other dollar store chains that are doing a better job at attracting cost-conscious shoppers.
The second-largest U.S. dollar-store chain behind Dollar General Corp (DG.N) has been adding hundreds of food items to its stores, many of which are getting makeovers as it works to appeal to lower-income shoppers focused on buying essentials.
While the changes are increasing demand, sales at Family Dollar stores open for a year or longer were disappointing. A 4.5 percent rise in same-store sales fell short of the company's own 5 percent forecast as well as recent gains of 6.5 percent at Dollar General and 7.3 percent at Dollar Tree Inc (DLTR.O).
"I fancy that low-income consumers focused on one-stop destinations to save money will continue to shop with their trusted brands, which in this case is a Dollar Tree or a Dollar General," said Brian Sozzi, chief equities analyst at NBG Productions.
Trying to catch up to those chains is suppressing operating margins and returns at Family Dollar, he said.
Family Dollar, where most merchandise costs less than $10, said more shoppers made purchases at its stores and spent slightly more on each visit.
Shares of Family Dollar rose 0.5 percent to $58.55 in early trading.
The shares trade at about 16.2 times expected earnings, compared with multiples of 17.2 for Dollar General and 19.6 for Dollar Tree, according to Reuters data.
Graphic on Family Dollar: link.reuters.com/gez37s
GROSS PROFIT SLIPS
Family Dollar's net profit rose to $136.4 million, or $1.15 a share, in the second quarter ended February 25 from $123.2 million, or 98 cents a share, a year earlier. Analysts were looking for $1.13 a share, according to Thomson Reuters I/B/E/S.
Sales rose 8.6 percent to $2.46 billion, in line with analysts' estimates.
Gross profit, as a percentage of net sales, slipped to 34.9 percent from 35.7 percent, largely because of stronger sales of food and other basic goods, which typically carry lower margins than items like clothing and toys.
The chain forecast third-quarter earnings of $1.01 to $1.11 per share, compared with analysts' expectations of $1.06. It expects same-store sales to rise 5 percent to 7 percent.
For the fiscal year, the company raised the low end of its earnings forecast to $3.55 a share from $3.50 while keeping the high end at $3.75. The analysts' average estimate is $3.61.
Family Dollar also raised the low end of its fiscal-year same-store sales outlook to 5 percent from 4 percent and kept the high end at 6 percent.
While Family Dollar's third-quarter sales forecast and revised fiscal-year profit expectations are encouraging, the company continues to lag Dollar General and Dollar Tree in many respects, said BB&T Capital Markets analyst Anthony Chukumba, who has "hold" ratings on all three chains.
Dollar General and Dollar Tree both had stronger same-store sales and year-over-year earnings per share growth than Family Dollar in their latest quarters, Chukumba noted.
(Reporting by Dhanya Skariachan in New York and Jessica Wohl in Chicago; Editing by Maureen Bavdek, John Wallace and Lisa Von Ahn)