Deep-discount chain Family Dollar (NYSE:FDO) has been experiencing some lackluster growth for its stores opened at least a year. The third quarter showed that comps barely nudged upward 1.5%, which resulted in the less-than-expected sales increase the company reported earlier this month.
Yet it was the depressed same-store sales that saw expenses account for a greater portion of revenues than they have previously been. Selling, general, and administrative expenses jumped 160 basis points to 29.3% of revenues. Included in that increase, however, were costs from the shareholder lawsuits for its stock options backdating scheme and some initiatives the company undertook to generate growth.
The bright spot with comps for Family Dollar was that May saw a 2.5% increase which suggested things were picking up. Management confirmed that in its release and said it expected June same-store sales to rise from 1% to 3% with similar growth expected for the entire quarter, while overall sales are anticipated to be up 5% to 7% from the year-ago period.
Family Dollar has been widely trailing rivals like Dollar Tree (NASDAQ:DLTR) and 99 Cents Only (NYSE:NDN) in generating higher comps numbers. While Family Dollar's inclusion of refrigerators and freezers has boosted sales of consumables, it has come at the expense of margins since such products offer slimmer profits.
Where Family Dollar and Dollar Tree have been adding coolers to their stores, and in general having success there, the same can't be said for Big Lots (NYSE:BIG). At one time the company had installed coolers, but ultimately removed them because of the drag on earnings the coolers were causing. They drive up foot traffic -- though Family Dollar didn't experience that this quarter -- and maybe even average ticket sales, but the cut into profits is pronounced wherever coolers are used.
And that's a problem for these dollar store chains when they have to compete against the likes of Wal-Mart (NYSE:WMT) and Target (NYSE:TGT). Even as some deep discounters liken the shopping experience in their stores to a "treasure hunt," the broad selection, low prices, and availability of name brand items is tough to beat at the mass market retailers. Cutting into your margins with tight-profit consumables may end up leading more dollar stores to consider whether coolers and freezers are worth the cost.
Chill out with these related Foolish articles:
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Fool contributor Rich Duprey owns shares of Wal-Mart but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. There's no discounting of the Motley Fool disclosure policy.
