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Family Dollar hits record net income as new ‘trade-down’ shoppers become customers

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Matthews, N.C. – As Family Dollar continues to capture new better-income shoppers the retailer described as “trade-down, middle-income customers” compared to the chain’s typically lower-income consumer, the hit a new record in fiscal 2009 as its net income per share jumped 24.7% to $2.07. The company also enjoyed a healthy 25.0% increase in net income to $291.3 million.

 “Our improvements in traffic suggest that we are building momentum with both our core lower-income customer as well as more middle-income customers who are trading down in search of value,” explained Howard Levine, chairman and ceo, during the company’s quarter conference call this morning. “To drive continued market share growth, we have identified additional opportunities to broaden the appeal of our assortment and improve the in-store shopping experience for both our core customer as well as customers who in the past shopped us less frequently.

Consumables continued to be the primary driver of sales for the fourth quarter, increasing to 66.2% of sales compared 63.7% of sales in fiscal 2008, but home was singled out as a discretionary segment with a potentially bright future in the coming year.

“We’ve had some good results in the home area,” Levine continued. “Frankly, when we compare our results to what we see in the market, I think the home area is performing pretty competitively, and I think that’s an opportunity for us. In addition, seasonal categories, which were also good margin categories for us, I think we have opportunities to drive improvements there.”

He added that with Family Dollar’s 7,000- to 8,000-square-foot store formats, “we have a lot of opportunities to make tweaks and adjustments, and we’ve developed the capabilities to make some of those changes quickly and effectively. So we’ll move through the year and through time with that thought.”

Net income per share in the fourth quarter ended Aug. 29 increased 13.2% to 43 cents compared with 38 cents per share in the fourth quarter of fiscal 2008. Net income rose 13.0% to $60.1 million on sales of $1.811billion, which were up 2.6%. Comps rose 1.0% thanks to increased customer traffic. During the quarter, Family Dollar opened 32 stores and closed 31.

Gross profit, as a percentage of sales, was 34.5% in the fourth quarter compared to 32.9% a year ago. The improvement was credited to lower freight expenses, less inventory shrink, and higher mark-ups, which offset stronger sales of lower-margin consumable merchandise.

The company admitted the fourth quarter was “our most challenging quarter this year,” Levine said, explaining that the company not only anniversaried the effect of last year’s stimulus package, but also re-merchandised the sales floor in approximately half of its more than 6,600 units during the period.

“Customers are responding favorably to the improved store layout,” Levine continued. “While our ambitious pace did pressure SG&A expenses in the quarter, I believe that these investments support our continued efforts to expand our assortment of key traffic-driving consumables and improve the in-store shopping experience.”

Sales for the full year climbed 6.0% to $7.401billion, with comps up 4.0%. During the year, Family Dollar opened 180 new stores and closed 96 stores.

Inventories at the end of fiscal 2009 were $993.8 million, or 3.8% below inventories of $1.0 billion at the end of last year. Average inventory per store at the end of the year was approximately 5% lower than a year ago as the retailer cut skus in discretionary categories.

Commenting on Family Dollar’s outlook for fiscal 2010, Levine said, “We believe that the current consumer focus on saving money will remain strong in 2010. Our strategy of providing value and convenience positions us well to deliver sustainable growth for our shareholders as the economy stabilizes and improves.”

For fiscal 2010, the company expects earnings per share will be between $2.15 and $2.35 as a result of stronger consumable sales, an expanded private label program and investments in the store experience. Sales are expected to increase by 5% to 7% and comps by 3% to 5%.

“The economic downturn has provided us with a unique opportunity to expand our customer base. And I believe that our expanded assortment of brand names, merchandise quality improvements and improved store operating standards have the potential to broaden our customer appeal,” Levine said. “In addition, improving economic conditions would most likely result in a more favorable sales mix as customers resume their discretionary purchases.”

Family Dollar plans to open approximately 200 new stores in the new fiscal year. Capital expenditures for fiscal 2010 are expected to be between $160 million and $180 million and will dedicated to technology improvements, new store openings and existing store improvements.

 

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