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Family Dollar beats estimates, shares jump

2/07/2008 - 14:11

By Nicole Maestri

NEW YORK (Reuters) - Family Dollar Stores Inc on Wednesday reported higher-than-expected quarterly profit as the discount retailer kept a tight control on expenses and inventory to navigate the tough environment, sending its shares up than 11 percent.

Family Dollar, which prices most of its merchandise below $10, also said June sales are tracking above expectations as consumers receive their tax rebate checks, and it forecast fourth-quarter earnings that could surpass current Wall Street estimates.

"Our intense focus on controlling expenses and mitigating inventory risk has resulted in net income growth and an improvement in inventory productivity, despite flat comparable store sales," Howard Levine, chairman and chief executive officer, said in a statement.

Shares rose 11.4 percent to $22.60 in trading before the opening bell from a close of $20.29 on the New York Stock Exchange.

Charles Grom, a retail analyst with JP Morgan who has an "underweight" rating on its stock, cautioned that Family Dollar's better-than-expected results were driven largely by lower insurance and professional fees.

"Although we'd expect Family Dollar to trade up today on the beat, we wouldn't chase the stock with rebate checks winding down in July and continued expense savings as sizeable next quarter as reported today seem unlikely," he wrote.

LURING SHOPPERS WITH CHEAP CONSUMABLES

Net income rose to $64.67 million, or 46 cents per share, in the third quarter that ended May 31, from $60.37 million, or 40 cents per share, a year earlier.

Analysts, on average, had been expecting Family Dollar to earn 40 cents per share, according to Reuters Estimates.

Quarterly sales increased almost 3 percent to $1.702 billion. Sales at stores open at least a year, known as comparable store sales, rose 0.1 percent. The retailer said shoppers, on average, spent more, helping to offset a decline in customer traffic.

Family Dollar operates more than 6,500 stores, and it caters to lower-income shoppers who are being squeezed by rising food costs, the spike in fuel prices and the housing market downturn.

It has said its shoppers, many with salaries below $30,000 a year, are severely strapped for cash by the end of the month and have been consolidating their store trips and putting fewer dollars toward discretionary items, like clothing.

To try to increase store traffic, Family Dollar is installing coolers in its stores so it can sell perishable items like milk and eggs, and is also stocking more quick-preparation and ready-to-eat products.

With U.S. government tax rebate checks now reaching its customers, Family Dollar said sales in the month of June are above initial expectations.

It now expects June comparable-store sales to rise approximately 6 percent, up from a previous forecast for a gain of 2 percent to 4 percent.

For the fourth quarter it expects comparable-store sales to increase 4 percent to 6 percent, and it forecast earnings per share for that quarter between 30 cents and 35 cents. Analysts, on average, currently expect 29 cents per share.

(Reporting by Nicole Maestri; Editing by Maureen Bavdek and Dave Zimmerman)


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