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Family Dollar Stores Makes Gains During Third Quarter

Thanks largely to its heavy concentration on consumable products, Family Dollar Stores Inc. posted a strong third quarter, with increases in net income, net sales and comp store sales.

"Sales of consumables have been the primary driver of sales for several quarters," said Howard Levine, chairman and ceo, adding that the category currently makes up about 65% of sales compared to approximately 63% of sales last year and 58% of the mix three years ago. Food items were identified as "key."

Net income for the third quarter ended May 30 increased 35.5% to $87.7 million, compared with $64.7 million for the same period last year. Net income per diluted share increased 34.8% to 62 cents per diluted share compared with 46 per cents the prior year.

Sales were $1.843 billion, up 8.3% from $1.702 billion in 2008's third quarter. Comp store sales increased 6.2% — a boost that Family Dollar attributed to increased customer traffic and an increase in average customer transaction.

Customer demand for consumable merchandise proved more aggressive than that for more discretionary products. As a result, inventories by end of quarter were $1.035 billion, or 3.0% higher than the year-ago period. Inventory per store increased 1.3%.

Yet, Family Dollar — which operates more than 6,600 units in 44 states — sees its discretionary categories experiencing an uptick in performance lately as consumers spent their stimulus checks.

"Ideally, we want to balance traffic-driving consumables with profit-driving discretionary categories. But we also want to satisfy customer demand. As a result we continue to expand our selection of these key categories," Levine said.

Kenneth Smith, evp, cfo, offered some specifics. "We saw improving trends in more discretionary categories [during the third quarter]," he said. "Sales of home products continue to strengthen, and sales of apparel — while still negative — improved from trends we saw in the first half of the year."

In late May, Family Dollar began taking some floor space away from and reduced inventories of discretionary categories to expand the consumables business. This shift did not impact third quarter results, the retailer noted. But by the fourth quarter, about 40% of the chain is expected to be impacted.

"We are investing heavily in our 'Store of the Future' project and also in efforts to realign space in our stores to accommodate stronger customer demand," Levine said.

Gross profit as a percentage of sales rose to 36.2% compared to 34.6% in the third quarter of fiscal 2008. The improvement was a result of lower freight expense, lower inventory shrinkage and higher purchase mark-ups, "which more than offset stronger sales of lower-margin consumable merchandise," the company said.

During the third quarter, Family Dollar repurchased approximately 1.2 million shares of its common stock for a total cost of $38.5 million. As of May 30, the company has authorization to purchase up to an additional $94.6 million of its common stock.

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