Family Dollar Q2 Profit Misses Estimates, Cuts Fiscal 2013 Outlook

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Family Dollar Stores, Inc. (NYSE:FDO) posted less than expected quarterly profit Wednesday owing to sluggish sales at the end of January and early February mainly due to delay in tax refunds, reports Reuters. For the full year, the retailer expects profit to be below Wall Street estimates.

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For the second quarter ending March 2, the discount retailer’s net income increased $140.1 million, or $1.21 per share, from $136.4 million, or $1.15 per share, a year earlier. For the quarter, analysts expected a profit of $1.22 per share. Sales for the company grew by 17.7 percent to $2.89 billion, meeting Wall Street expectations.

The inventories for the company were up by 25.4 percent year over year against a total sales increase of 17.7 percent.  Average inventory per store was up by 17.1 percent driven by the company’s investments to expand its product line in consumable categories, primarily HBA, tobacco and food, says a report from Citigroup Inc (NYSE:C).

For the fiscal year, Dollar Stores expects earnings of $3.73 a share to $3.93 a share against $3.98 a share from analysts. For the rest of the year, the company expects weak sales of discretionary items such as apparel and home goods.  The retailer blames the unseasonably cold spring weather and financial pressure over customers for the grim sales.

“Our customers’ discretionary spend is expected to remain constrained,” Chief Executive Howard Levine said in a statement.

The company recently adopted some less profitable products to its shelf to compete with the stores like Dollar General Corp. (NYSE:DG) and Wal-Mart Stores, Inc. (NYSE:WMT). The sales of such products resulted in squeezing the retailer’s margins.

Also, to boost the revenues, the company recently started selling cigarettes and other tobacco products, soft drinks, gift cards, magazines and other high-turnover merchandise. By selling such products, the retailer expects to draw more shoppers into its stores more often, but such products carry lower margins.

EBIT for the company declined 126 bps, to 7.5 percent as Gross Margins declined 146 bps and expenses leveraged 20 bps.

Despite lower outlook, the company has plans to increase the Capex from $600-$650 million earlier to $650-700 million. The retailer repurchased about 0.8 million shares for a total of $50 million in the second quarter.

A report from BAML reiterate it’s ‘under perform’ rating for the stock and expects weak earnings due to intense competition and margin degradation due to company’s traffic-driving initiatives. The report believes “much of FDO’s weakness is company-specific, as initiatives are not delivering desired results.”

In the premarket trading, the shares of the discount retailer were down 4.3 percent at $57.20.



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