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The News

Hard times haven't been all that hard for

Family Dollar Stores

The Mathews, N.C.-based company, which runs 6,500 stores in 44 states, reported earnings of 46 cents a share for the fiscal third quarter ended May 31, up from 40 cents a year ago. The consensus Wall Street estimate compiled by Thomson-Reuters was at 40 cents a share.

Family Dollar also raised its fourth-quarter earnings projection by a penny, to a range of 30 cents to 35 cents a share. It earned 26 cents in the year-ago quarter. Analysts expected earnings of 29 cents a share.

"After a challenging first half, our results for the third quarter and our outlook for the rest of the year reflect how quickly our team has adapted to the changing and challenging macro environment," Family Dollar CEO Howard Levine said on the earnings conference call. Second-quarter earnings had dropped 25%, to 45 cents a share from 60 cents a share a year ago.

In May, Family Dollar's total sales rose 2.9% to $1.7 billion, while same-store sales increased 0.1%, in line with company projections. Same-store sales for the first three quarters of the fiscal year were down 0.3%, the company said.

Tax rebate checks should push sales up significantly, CFO Ken Smith said on the call.

"For the quarter we expect comparable store sales to increase 4-6%," he said. "We believe the fourth quarter will benefit from the tax stimulus checks but projecting the full impact and the duration of the benefit is difficult."

He said increased food sales and continued tight expense control would put full fiscal-year earnings between $1.58 and $1.63. The company earned $1.62 a share last year and analysts project full-year results of $1.51 a share.

The Analysis

While there's little question tax rebates will boost Family Dollar's bottom line for a little while, Wall Street is hoping the sales impetus will linger after the last stimulus dollar has been spent.

Even as $4-a-gallon gas and rising unemployment take their toll on household budgets throughout the company's low-income customer base, those consumers haven't got many other options. It's not so much that people who might otherwise shop at Wal-Mart or Costco are starting to rely on the proximity of Family Dollar stores to their homes most stores serve a customer base that lives no more than five miles away it's that they're reacting to the spike in supermarket prices.

"Food and paper products are things people go day in day out to buy at Family Dollar," says analyst Patrick McKeever at MKM Partners, a Greenwich, Conn.-based institutional research and trading firm.

Morningstar analyst John Gabriel says it's an industrywide trend.

"Across the board in dollar-store chains, we've seen an increase in consumables as a percentage of merchandise," he says. "People are looking for cheap food, and even paper towels and cleaning supplies. They're lower-margin items, but everybody needs them, and they can make it up on volume."

That shift dropped gross profit as a percentage of sales to 34.6% in the third quarter, down from 34.9% a year ago.

Stimulus payments have certainly made a difference, even though Wall Street agrees with Smith's assessment that it's hard to know how long the boost will last.

"It's difficult to quantify because it gets dispersed a little bit," BMO Capital Markets analyst Wayne Hood says of the stimulus spending bulge. "Even more than that, people are looking for value, and they are clearly buying just what they need consumable everyday merchandise."

The Bottom Line

Dollar stores are a decent defensive play in tough times, and Family Dollar's shifting product mix has been a big help more than its customers' one-time government rebates.

"Not surprisingly, there was quite a bit of skepticism [on the call] about how long the fundamental trend they're seeing can continue once the stimulus payments go away," says McKeever.

He says June projections are the best same-store sales numbers Family Dollar has recorded in two years.

"My thinking is that the rebate spending is probably adding 2 to 3 percentage points to same-store sales right now, but even if you back that out, it's still an improvement in trend," he says.

This is a pennies-and-nickels business for both customers and investors. Squeezing the most out of every dollar is the name of the game and, in hard times, Family Dollar's skills in that regard make it a solid, if unglamorous play.

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