Family Dollar Stores Inc FDO.N reported a smaller-than-expected quarterly profit on Thursday as it sold more low-margin consumables and cut prices to remain competitive, and the company said it expected margins to stay under pressure.
Shares dropped 3.2 percent to $66.91 in midday trading.
Sales grew 9.6 percent to $2.36 billion in the third quarter through May 26, helped by lower-income shoppers buying items such as milk and food from its small stores, while sales at stores open at least a year were up 5 percent - at the low end of a Family Dollar forecast in March.
But Family Dollar's gross margin fell 0.4 point to 35.8 percent of sales in its third quarter. The hit from price markdowns was offset somewhat by sales of more profitable private brands - a segment of its business that the company hopes to beef up.
Family Dollar has faced tough competition from Dollar General Corp (DG.N) and Wal-Mart Stores Inc (WMT.N), which has been cutting food prices to woo shoppers.
Indeed, the company said on a conference call on Thursday that its gross margins will likely remain under pressure in the current quarter.
"It is clear that consumers continue to face difficult economic headwinds," Family Dollar Chief Executive Howard Levine told analysts.
The retailer's same-store sales were below Dollar General's most recent quarterly same-store performance.
In a research note, BB&T Capital Markets analyst Anthony Chukumba said that disparity showed it was "easier said than done for Family Dollar" to catch up to Dollar General - a hope that had propelled Family Dollar's shares to a 52-week high of $74.71 earlier this month.
Family Dollar, which sells a variety of general merchandise, hopes to grow both by opening more stores and by adding more products to its shelves.
To compete with Dollar General and other dollar store chains, it recently added more health and beauty items, PepsiCo drinks, magazines and gift cards, as well as cigarettes and other tobacco products.
For the current quarter, Family Dollar expects profit of between 71 cents per share and 81 cents per share, with same-store sales rising between 5 percent and 7 percent. That compares with analysts' expectations of 77 cents per share.
Family Dollar earned $124.5 million, or $1.06 per share in its fiscal third quarter, missing Wall Street estimates by a penny, according to Thomson Reuters I/B/E/S.
That compares with a profit of $111.1 million, or 91 cents a share, a year earlier.
(Reporting by Phil Wahba in New York and Jessica Wohl in Chicago; Editing by Jeffrey Benkoe and Bernadette Baum)