Family Dollar's Urban Shift

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Big business is all about finding a niche that can be leveraged into a profitable existence. With all of the competition in the discount retail industry these days, Family Dollar (NYSE: FDO) has steadily shifted its focus to low-middle-income urban markets.

Family Dollar, which now has more than 5,000 stores in 43 states, reported third-quarter earnings today of $0.43 per share, better than last year's $0.40. The company posted an 11.3% increase in total sales but only 1.9% growth in its comparable-store sales. Management seemed to be pleased with the flow of household chemicals, paper products, and food, but was not glowing about the sluggish sales of hanging apparel, domestics, gifts, and seasonal goods.

Family Dollar management believes that urban markets "offer the greatest opportunities for improvement in our store operations," leading to the addition of 500 to 560 new stores in fiscal 2005 and the closing of 50 to 60 stores outside of these markets. The company is starting to get a handle on how to merchandise products in these markets, and future results should reveal whether it's on the right track.

The crowded retail landscape, with players such as Dollar General (NYSE: DG), Wal-Mart (NYSE: WMT), and Target (NYSE: TGT), probably made it necessary for Family Dollar to shift its focus away from suburban America. The firm is holding its own and has taken steps to become a more successful specialty niche retailer.

The shares, which have recovered from a May swoon, are trading at 17.5 times earnings of $1.82 per share expected for fiscal 2005. Based on a 15% short-term growth rate and relatively softer competition in the company's urban market, Family Dollar appears to be fairly valued here.

Fool contributor Phil Wohl spent more than 12 years on Wall Street and now concentrates his writing on more fictional characters. He has no stake in any firm mentioned above.