Family Dollar disappointed its investors this week with a third-quarter earning report in which gross margin pressures caused the company to report earnings per share of 91 cents that were four cents shy of analysts’ consensus estimates. The operator of 6,900 stores also said its 4.7% same-store sales increase was short of guidance of 5% to 7% and then used the occasion to lower fourth-quarter sales and earnings forecasts.
It would be tempting to look at this performance as sign of weakness on the part of a major competitor and therefore good news for Walmart, but looking beyond the headline numbers it is clear Family Dollar is positioned to be an even more meaningful competitor going forward.
For starters, the company said its same-stores sales growth was driven by an increase in customer traffic as well as larger average transaction sizes. Its strongest performing categories were consumables and home. Those shoppers had to come from somewhere.
The surest indication that Walmart will face increased competition in the back half of this year and beyond involves commentary around inventory levels. Family Dollar said its overall inventories grew by 15% and said that increase was driven by a 20% expansion of assortments in the food category and a 25% expansion in the health-and-beauty-care area that took place in 5,000 of the company’s stores.
“We accomplished much this quarter to position us to capture greater market share and execute our longer-term vision for Family Dollar,” said Howard Levine, Family Dollar chairman and CEO. “I remain confident that our strategy of providing customers with value and convenience, combined with the impactful investments we are making to improve the shopping experience in our stores and our profitability, will continue to deliver strong shareholder returns.”
Delivering those returns comes at a cost. Gross margins declined to 36.2% from 36.6% the prior year because of strong sales of lower margin consumables, increased promotional markdowns and higher transportation costs. Expenses related to new stores are also on the rise. During the first three quarters of it fiscal year, Family Dollar opened 206 new stores and closed 48 stores compared with 125 store openings and 56 closings in the first three quarters of the prior year. During the third quarter alone, there were 367 store renovations giving the company a total of 680 on the year.
More renovations are planned during the fourth quarter and will bring the full-year figure to 900. Additional store openings will also occur, bringing the total number of new units to 300.