Sales Up But Profits Flat at Family Dollar

Don Hogsett, March 28, 2005

Matthews, N.C. — Hit by a change in accounting, then squeezed by thinning margins and rising costs, second quarter profits at Family Dollar Stores were virtually flat with year-before levels despite a double-digit gain in sales.

Earnings during the period dipped slightly, 0.4 percent, to $80.1 million from $80.4 million during the same period a year ago. Taking a modest bite out of the bottom line, and reducing earnings by about $700,000 during the period, was a change in lease accounting practices. Excluding the non-cash charge, earnings were still virtually unchanged, inching up just 0.4 percent, to $80.8 million.

Putting additional pressure on earnings, and offsetting gains in sales and same-store sales, were weaker margins and higher costs. Average gross margin narrowed 100 basis points, or 1 percentage point, to 32.8 percent from 33.8 percent a year ago, as sales of lower-margin basic consumables ran stronger than sales of higher-margin discretionary goods. In addition to the shift in mix, rising freight costs put steady downward pressure on margins.

Costs edged up 20 basis points, or two-tenths of a percentage point, to 24.9 percent of sales from 24.7 percent, driven higher by urban initiatives and the installation of coolers for the sale of perishable goods.

On the upside, sales improved 13.1 percent, to $1.6 billion from $1.4 billion last year, while the crucial gauge of same-store sales improved 4.5 percent. Sales of hard lines rose 5.8 percent, and soft lines sales were unchanged.

Family Dollar Stores Inc.

Qtr. 2/26 (x000) 2005 2004 % change
Sales $1,586,754 $1,402,798 13.1
Oper. Income (EBIT) 126,497 126,660 -0.1
Net income 80,073 80,432 -0.4
Per share (diluted) 0.48 0.46 4.3
Average gross margin 32.8% 33.8%
SG&A expenses 24.9% 24.7%
Six months
Sales 2,966,999 2,647,481 12.1
Oper. Income (EBIT) 211,662 226,556 -6.6
Net income 134,502 143,869 -6.5
Per share (diluted) 0.80 0.83 -3.6
Average gross margin 33.1% 34.2%
SG&A expenses 25.9% 25.6%

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