There is a lot to like when it comes to the growth trajectory at Family Dollar and its record of consistency. The company just reported its 17th consecutive quarter of double-digit earnings per share growth, and the foundation is in place for more of the same.
Total sales increased 9.6% to nearly $2.4 billion, and same-store sales increased 5% during the third quarter ended May 26. Profits during the period increased 12.1% to $124.5 million, and earnings per share increased 16.5% to $1.06 compared with 91 cents the prior year. The company ended the quarter with 7,216 stores and is on track to end its fiscal year in late August with the addition of 450 to 500 new stores.
The knock on Family Dollar during the most recent quarter related to a decline in gross margins, but that appears to be a case of the company incurring some short-term pain in the name of long-term gain. As Family Dollar has expanded its assortment of food and consumables, its rate of profitability has come down.
Gross margins declined to 35.8% during the third quarter compared with 36.2% the prior year. Of course the bright side of increased sales of lower margin frequently purchased products is they do wonders for customer traffic. During the third quarter, Family Dollar’s same-store sales increase was attributable to more people shopping its stores and buying more stuff per visit.
Another knock on Family Dollar is that it is not Dollar General. The company’s larger rival operates roughly 3,000 more stores than Family Dollar and recently surpassed 10,000 units with the opening of its first stores and a new distribution center in California. The two companies target the same customer base with similarly sized stores offering a comparable product assortment, except Dollar General produces superior financial returns.
For example, while Family Dollar’s gross margin rate declined in the third quarter, it offset the drop by reducing its expenses, but did so at a slower pace. Expenses as a percent of sales sank to 27.4% in the third quarter compared with 27.7% the prior year. As a result, the company’s operating margin rate declined to 8.4% compared with 8.6% the prior year.
By comparison, Dollar General’s lower expense structure allows it to produce a superior operating margin even though its gross margin rate is lower than Family Dollar’s. Dollar General’s expenses as a percent of sale were 21.7%, its gross margin was 31.8%, and its operating margin was slightly more than 10% during the company’s most recent fiscal year.
Family Dollar chairman and CEO Howard Levine knows that to close the gap the company must increase the productivity of its selling space.
“Delivering stronger shareholder returns begins with increasing sales per square foot, and this quarter, we began to implement a number of initiatives to broaden our consumable assortment and satisfy more of our customers’ shopping trips,” Levine said last month.
Among the initiatives to which he is referring are the addition of even more food and consumables to more stores, new brands such as Pepsi and expanded health and beauty offerings, the addition of tobacco products and Red Box movie rental kiosks.
“As planned, most of these initiatives began late in the quarter and had little impact on our third-quarter sales results. We are on schedule, and I am very pleased with the progress our teams have made in such a short period of time,” Levine said. “As we complete most of these initiatives in the fourth quarter, we will have a fully competitive assortment and will be well-positioned to accelerate sales productivity further.”