This morning, deep discounter Family Dollar (NYSE:FDO) reported second-quarter sales of $1.6 billion, a 13.1% increase from a year ago, but the company couldn't squeeze one more penny from all those extra dollars. Net income came in essentially flat for the quarter, but thanks to stock buybacks, per-share earnings managed to climb modestly to $0.48 -- in line with expectations.
Family Dollar is still suffering from a pronounced shift in its sales mix. Shoppers continue to fill their baskets with low-margin consumables while leaving higher-margin discretionary items on the shelves. With customers sticking primarily to the essentials and freight costs also taking a larger toll, gross margins slipped a full point to 32.8%.
Industry leader Dollar General (NYSE:DG) has faced a similar problem in recent quarters but has fought back by pushing through higher markups on its merchandise.
Last week, the company announced a solid 31% increase in net income on margins that climbed 70 basis points to 30.0%.
Aside from the disappointing mix, Family Dollar's revenues looked strong. Not only was traffic on the rise but also those shoppers rung up a 3.7% larger average ticket. The double-digit rise in revenues was aided by the introduction of 190 new locations through the first half of the fiscal year, but a healthy 4.5% same-store sales gain also deserves much of the credit. The comp improvement outpaced Dollar General's 3% rise, as well as the 3.8% decline that 99 Cents Only (NYSE:NDN) last reported -- where things have apparently gone downhill since.
The record high gas prices that have crimped the disposable income of Family Dollar's predominantly low-income customers should abate eventually. In the meantime, the company is banking on an ambitious 500-store expansion plan this year, as well as an initiative to improve performance in urban stores. Furthermore, the company has installed refrigerated coolers in several hundred stores (still nowhere near Dollar General's 7,000) to increase visits for perishable items. After all, shoppers will stop in to pick up milk and eggs more often than they will for laundry detergent or toothpaste.
Family Dollar often seems to be a step behind Dollar General and may not have the upbeat earnings outlook of its larger rival. However, it has showed fairly good results in the face of difficult operating conditions, reaffirming the versatility that has allowed for 25 consecutive years of dividend increases.
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Fool contributor Nathan Slaughter owns none of the companies mentioned.
