Family Dollar Profits Fall 30 Percent

Don Hogsett, October 3, 2005

Matthews, N.C. — With the high cost of updating its stores taking a big bite out of profits, fourth quarter earnings at Family Dollar Stores Inc. slumped 29.8 percent, to $29.2 million from $41.7 million.

Sales at the chain of low-price neighborhood stores climbed 8 percent, to $1.4 billion from $1.3 billion during the same period a year ago. Same-store sales edged up 0.6 percent.

Putting profits under pressure was a big spike in operating costs, which jumped 14.7 percent, to $409.4 million from $357 million last year, a $52.5 million jump. Measured as a percentage of rising sales, costs advanced 160 basis points, or 1.6 percentage points, to 28.6 percent from 27 percent the preceding year.

Customer count, measured by register transactions, slipped 2.3 percent, but acting as an offset, the average transaction increased 2.9 percent, to $8.98.

Driving costs higher, said Howard Levine, chairman and CEO, the company installed refrigerated coolers in about 1,000 stores for the sale of perishable goods, and rolled out a new Urban Initiative in about 1,200 stores. “These strategic initiatives will provide the foundation for our future profitable growth,” said Levine.

Weighing further on costs and the bottom line, said Levine, was a one-time charge to establish property-tax accruals on leased properties.

Average gross margin held steady during the closing quarter, at 31.9 percent. Lower markdown expense partially offset higher freight costs resulting from higher fuel costs, the retailer said.

During the fourth quarter, Family Dollar opened 222 new stores, while closing five. During the entire fiscal year, the retailer opened 500 stores and closed 68.

Going forward, said Levine, “We will move aggressively forward in those areas that are performing well, and we will slow down and focus on improving those processes where we have significant opportunity to do better. We plan to install coolers in approximately 2,500 additional stores this year, and while we will not expand the Urban Initiative beyond our target of 1,300 stores, we will continue to support and refine the program to increase financial returns.”

The number of store openings will be cut back to about 400 in fiscal 2006, down about 20 percent from 500 last year, said Levine.

During the new fiscal year, the retailer said it expects same-store sales to increase 2 to 4 percent.

Family Dollar Stores Inc.

Qtr. 8/27 (x000) 2005 2004 % change
Sales $1,429,843 $1,324,358 8.0
Oper. income (EBIT) 46,181 66,125 -30.2
Net income 29,233 41,652 -29.8
Per share (diluted) 0.18 0.25 -28.0
Average gross margin 31.9% 31.9%
SG&A expenses 28.6% 27.0%
12 months
Sales 5,824,808 5,281,888 10.3
Oper. income (EBIT) 324,795 406,662 -15.7
Net income 217,509 257,904 -15.7
Per share (diluted) 1.30 1.50 -13.3
Average gross margin 32.9% 33.8%
SG&A expenses 27.0% 26.1%

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