While it is true that many Americans have moved into the ranks of being considered millionaires, the lower-income portion of the country has been taking a worse beating than boxer Roy Jones Jr. Family Dollar (NYSE:FDO) CEO Howard Levine admitted today, "Fiscal 2004 was a difficult year as the economy was not favorable for Family Dollar's low and low-middle customer base."

With that negative trend in play, Family Dollar reported fourth-quarter earnings of $0.26 per share, which was in line with the analysts' consensus estimate but below last year's earnings of $0.28 per share. The deep discounter's net sales were up 9.6%, while its same-store sales were up only 0.7%. For fiscal 2004, net sales increased 11.2%, and same-store sales were up 1.9%.

Family Dollar continues to be productive in selling basic consumable merchandise, but it still is having problems moving more discretionary items, such as hanging apparel and domestics, off the shelves. The company grew inventory levels by 5.5% in fiscal 2004 as part of its effort to improve store-level presentations and sales during the key holiday period. Family Dollar opened 500 new stores and closed 61 other stores, giving it a total of 5,466 stores in 44 states at fiscal year-end.

The company plans to implement various initiatives in fiscal 2005 to combat recent weakness, including an "urban initiative" to improve stores in urban areas; supplementing its basic merchandise assortment with "treasure hunt" merchandise designed to create a buzz in the stores; placing coolers for perishable food in stores starting in January 2005; and adding 500 to 560 new stores and closing 60 to 70 underperforming stores, mostly in urban markets. The extensive cost of these initiatives are expected to push fiscal 2005 earnings down to between $1.59 to $1.63 per share, from the previous consensus estimate of $1.70 per share.

Family Dollar expects the impact of the initiatives to push same-store sales growth by fiscal 2005 year-end to a range of 3% to 5%, from the 0.7% gain in the fourth quarter of fiscal 2004. First-quarter same-store sales are expected to be in the flat to 2% growth range. With the company seemingly fighting for every sale with competitors Dollar General (NYSE:DG), Dollar Tree (NASDAQ:DLTR), Big Lots (NYSE:BLI), and in many cases Wal-Mart (NYSE:WMT), it hopes to improve on its average transaction of $8.70.

Even though external conditions have impacted the company's operations, what's on the inside is as fluffy as the cream filling in a Twinkie. With $149.6 million in cash and no debt, the company was able to repurchase 5.6 million of its shares in fiscal 2004 and increase its cash dividend by nearly 14% (marking the 28th consecutive year of dividend increases). The shares, which are trading at 17 times the fiscal 2005 estimate of $1.61 per share, appear to be fairly valued relative to the company's low double-digit growth rate and its decent 1.23% dividend yield.

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Phil Wohl spent more than 12 years on Wall Street and enjoys shopping every now and then at deep-discount retailers. He does not own shares of any of the company mentioned.