Family Dollar Posts Strong 4th Quarter

Don Hogsett, March 27, 2006

Second-quarter profits at Family Dollar Stores Inc. fell by 31.9%, to $54.5 million from $80.1 million last year, clipped by a $45.0 million one-time litigation charge after an Alabama court ruled the retail chain must pay its store managers overtime.

Without that charge, the low-cost retailer did better than Wall Street expected, pushing earnings up by 10.4%, to $0.53 per share from $0.48 last year.

Analysts expected a per-share profit in the range of $0.50 per share, and cheered the good news by driving the retailer's stock sharply higher. In early trading after the news, Family Dollar shares climbed by $1.14 per share, or 4.5% in value, to $26.97.

Sales rose by 9.4%, to $1.7 billion from $1.6 billion, helped largely by continued expansion. Same-store sales improved by 3.2% as consumers responded to unadvertised holiday bargains, and sales of consumable foods climbed higher as the company continued the rollout of refrigerated units and a push on perishables in its stores.

“The initiatives that we launched last year are now providing a solid foundation supporting comparable store sales growth,” said Howard R. Levine, chairman and ceo.

“That, along with better than planned gross margin and expense control, drove above-plan operating results for the second quarter, excluding the legal charge,” he said.

Average gross margin rose slightly, by 10 basis points, or a tenth of a percentage point, to 32.9% of sales from 32% a year ago. Operating costs inched modestly higher, by 30 basis points, or three-tenths of percentage point, to 25.2% of sales from 24.9%.

The retailer said it expects gross margin to contract over the next several quarters as sales of perishables and other lower-margin items increase, driving same-store sales higher. The company also said costs should decline as sales continue to grow, offsetting any margin erosion.

Family Dollar Stores Inc.

Qtr. 2/25 (x000) 2005 2004 % change
a. Second-quarter results include a $45.0 million one-time litigation charge; and interest expense of $758,000, compared with interest income of $1.2 million during the prior-year period.
b. Six-month results include a $45.0 million one-time litigation charge; and interest expense of $2.1 million, compared with interest income of $1.7 million during the prior-year period.
Sales $1,735,683 $1,586,754 9.4
Oper. income (EBIT) 132,312 125,288 5.6
Net income 54,529a 80,073 -31.9
Per share (diluted) 0.35 0.48 -27.1
Average gross margin 32.9% 32.8%
SG&A expenses 25.2% 24.9%
Six months
Sales 3,247,140 2,966,999 9.4
Oper. income (EBIT) 215,224 209,929 2.5
Net income 105,918b 134,502 -21.3
Per share (diluted) 0.67 0.80
Average gross margin 33.2% 33.1%
SG&A expenses 26.6% 26.0%

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