Family Dollar in Firm Shape

Don Hogsett, January 8, 2007

Helped by stronger margins, stringent inventory controls, and money it earned on its investments, Family Dollar Stores Inc. recorded a first-fiscal-quarter profit of $54.4 million, up 5.8% from $51.4 million during the same period a year ago.

But the numbers are only preliminary, the retailer emphasized, and might be revised when it completes an ongoing review of the way it handed out stock options in the past. Other retailers, tagged in a widespread scandal revolving around the practice of back-dating options to inflate their value, have been forced to substantially revise or reduce their earnings as they revalue the options to their fair value, or to protect those workers who got the options from a big bill for back taxes.

Quarterly sales at the chain of low-price neighborhood stores increased by 5.9%, to $1.6 billion from $1.5 billion last year, while same-store sales edged ahead by 0.9%.

The uptick in same-store sales, Family Dollar said, stemmed mainly from an increase in the value of the average transaction, offset by a slight decline in traffic.

But revenues were reduced by a change in the way the retailer records pre-paid cell phone services. Beginning with this quarter, those sales will be recorded on a net basis, with only the markup on the sales recorded as revenue. That change had the effect of reducing sales by $24.3 million, and taking a bite out of same-store sales, which were held to 0.9%.

Despite the bite taken out of revenues, the retailer said the change had no impact on operating profits, which rose by 10.2%, to $91.3 million from $82.9 million last year, helped by improved sales and stronger margins.

In a boost to the bottom line, average gross margin widened by 90 basis points, or nine tenths of a percentage point, to 34.5% from 33.6% during the same period last year. Bulking up margins, the retailer said, was the volume it did in those prepaid cell phone services, as well as lower markdowns and lower inventory shrinkage.

Partly offsetting improved margins were higher costs, which rose by 70 basis points, or seven-tenths of a percentage point, to 28.8% of sales from 28.1% last year, due to lower than expected same-store sales growth and the cost of its review of past stock options practices.

On the plus side, the retailer kept chipping away at stockpiles, reducing inventory levels by 1.8%, to $1.1 billion, yielding a savings of $20.5 million.

Scoping out sales by category, the retailer said consumables grew by 6.4%, to $964.9 million; home products grew by 3.9%, to $242.4 million; apparel and accessories grew by 5.7%, to $222.9 million; and seasonal and electronics rose by 5.7%, to $170.0 million.

Family Dollar Stores Inc.

Qtr. 11/25 (x000) 2006 2005 % change
a.First fiscal quarter results include $1.4 million in investment income, up 70.0% from $851,000 during the same period a year ago.
Sales $1,600,264 $1,511,457 5.9
Oper. income (EBIT) 91,344 82,912 10.2
Net income 54,371a 51,389a 5.8
Per share(diluted) 0.36 0.32 12.5
Average gross margin 34.5% 33.6%
SG&A expenses 28.8% 28.1%

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