Family Dollar Margins Pressured

ELLIOT ZWIEBACH

MATTHEWS, N.C. — Family Dollar Stores said last week the expansion of consumables, including increased assortments of national brands, is helping to drive comparable-store sales while having a slightly negative impact on gross margins.

For the first quarter that ended Nov. 27, comps rose 6.9% — the biggest first-quarter jump in more than 12 years, the company said — while overall sales rose 9.5% to just under $2 billion and net income increased 9.9% to $74.3 million.

The increase in national-brand assortments boosted consumables to 67.9% of sales, compared with 67% in last year's first quarter.

Gross profit margin as a percentage of sales fell to 36%, compared with 36.1% in last year's first quarter, which the company said was due to stronger sales of lower-margin consumables and higher freight expenses, which were mostly offset by lower inventory shrinkage.

“Near term there is going to be pressure on our gross margins,” Howard R. Levine, chairman and chief executive officer, told analysts during a conference call, “but over the long haul we continue to believe there's a greater opportunity to improve our margins” by improving adjacencies, growing private label, improving marketing efforts and investing in global sourcing.

Family Dollar told analysts it is revising its guidance on earnings for the year down a penny — to a range of $3.08 to $3.23 per share, compared with previous guidance of $3.24 at the high end — to reflect the difference between an expected 4-cent increase related to the estimated impact of a stock repurchase program and an anticipated reduction of 5 cents reflecting performance year-to-date through December.

The company also said it expects sales to increase between 8% and 10% and comps to go up between 5% and 7%.

Family Dollar, which operates more than 6,800 stores, plans to spend $300 million to $350 million this year to open approximately 300 new stores — twice the number opened last year — and its 10th distribution center, Levine said. In addition, having completed 200 renovations during the first quarter, it expects to renovate 600 more locations this year and to impact all stores within the next four years, he added.

The renovated stores — with new layouts and 500 more SKUs — are “significantly outperforming” the rest of the chain, he said.

Q1 RESULTS