July 10 - Family Dollar's profit falls as shoppers buy cheap goods they need, not the pricier things they want. Fred Katayama reports.
Family Dollar is struggling to get shoppers to buy things that they don't deem necessary, and that has cut into its profitability. The discount chain's profit shrank in the third quarter but beat Wall Street's forecasts with earnings topping 120 million dollars. Sales rose 9 percent, but look behind the labels and you find that consumers are not buying discretionary items. While sales of consumables such as food and health goods grew nearly 15 percent, clothing sales dropped almost 9 percent. Family Dollar CEO Howard Levine said, "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." And so, the company 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 percent in the last 12 months. But BMO Capital Markets analyst Wayne Hood said, "We would not use the weakness in Family Dollar as a buying opportunity as confidence in our earnings per share estimates is lower." One thing could put investors at ease: inventory at its stores shrank a bit. Wall Street had worried that the chain had too much merchandise on hand that could push it to further cut prices.