Do Lower Sales At Family Dollar Point to Tougher Times Ahead?

Submitted by Wall St. Daily as part of our contributors program

Family Dollar Stores (FDO) is seeing profits dwindle.

The discount chain’s earnings shrank in the third quarter, but they beat Wall Street’s forecasts – topping $120 million.

Overall sales did increase 9%. But looking further into the company’s financials reveals that revenue of discretionary items took a hit.

While sales of consumables (such as food and health goods) grew nearly 15%, clothing sales dropped almost 9%.

According to the company’s Chief Executive, Howard Levine, Family Dollar is struggling to get shoppers to buy things that they don’t deem necessary – something that’s bound to cut into its profitability.

“Our discretionary sales remained challenged as our customers have been forced to make spending choices between basic needs and wants. Consistent with market trends, we expect that our customers will continue to face financial headwinds,” says Levine.

Or could it be that consumers are becoming more confident – and, as a result, are moving away from discount stores in general? After all, first quarter underlying retail revenue at Burberry jumped 18%, as the British luxury brand made more than $500 million and maintained its full-year guidance.

Either way, Family Dollar expects slower sales growth this quarter at stores open at least a year, and it narrowed its profit forecast for the full year.

The stock, which had been an investor favorite during the Great Recession, has fallen roughly 8% in the last 12 months. But beware. As BMO Capital Markets analyst Wayne Hood says, “We would not use the weakness in Family Dollar as a buying opportunity, as confidence in our earnings-per-share estimates is lower.”

There is something that should put investors at ease, however. Inventory at its stores shrank a bit. Wall Street was worried that the chain had too much merchandise on hand, which could push it to further cut prices.