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Family Dollar Profit Rises, but Cautious on 2008

Family Dollar Stores posted a 17 percent increase in quarterly profit Thursday after year-ago results were hurt by a charge and said it was taking a cautious approach to 2008.

"Volatile gasoline prices that burdened our customers in 2007 will most likely continue in 2008 and the inflationary pressures we have seen in key consumables like food show no sign of abating," Chief Executive Officer Howard Levine said on a call with analysts.

"What is even harder to predict is the fallout of the recent mortgage crisis and a slowdown in the housing market," he said.

The discount retailer forecast September sales at its stores open at least a year to be flat to up 1 percent.

Previously it forecast September same-store sales to rise between 1 percent and 3 percent.

"I think the story is the top line continues to be really pretty weak," said Mitchell Kaiser, an analyst with Piper Jaffray. "They're going to have to get traffic back into their stores."

Net income rose to $37.8 million, or 26 cents per share, in its fourth quarter ended Sept. 1 from $32.3 million, or 21 cents per share, a year earlier. The year-ago results included a charge of $10.5 million for stock-based compensation.

Most recently, the company forecast a profit of 24 to 27 cents per share, while analysts, on average, were expecting earnings of 25 cents per share, according to Reuters Estimates.

Family Dollar evised its quarterly outlook multiple times.

In June it said it expected earnings of 26 cents to 29 cents a per share, but in August it said it expected a profit of 19 cents to 22 cents a share. It provided its most current forecast in September.

Trying to Improve Sales

Dollar stores like Family Dollar and Dollar Tree Stores tend to cater to lower-income shoppers who are most vulnerable to higher food and fuel prices.

To offset rising gas prices, discount retailers have said that customers have cut down on shopping trips and that appears to still be the case with Family Dollar shoppers.

"We continue to believe that our customers are consolidating trips in response to economic pressures and the volatility of gasoline prices," Chief Financial Officer Kenneth Smith said on a call with analysts.

He said customer transactions declined slightly for the year while the average transaction size increased approximately 1 percent to $9.69.

For the quarter, sales rose more than 3 percent, to $1.632 billion from $1.578 billion a year ago, helped by demand for food and seasonal merchandise, primarily toys.

Gross profit margin, as a percentage of sales, was 33.1 percent, up from 32.4 percent a year ago. It said improved merchandise mark-ups and lower shrinkage -- which measures inventory lost to events like employee theft and shoplifting -- offset higher seasonal markdowns.

Family Dollar is trying to improve sales by resetting merchandise displays and adding more food items to lure shoppers into its stores more frequently.

The retailer, which prices most of its merchandise below $10, is installing coolers so it can sell perishable items like milk and eggs. It is also stocking more quick-preparation and ready-to-eat products.

For its fiscal year ending Aug. 30, 2008, Family Dollar said it will expand the selling space for food in approximately 2,800 stores and install refrigerated coolers in roughly 575 stores.

For its fiscal year, Family Dollar forecast earnings per share of $1.74 to $1.85. Analysts are expecting earnings of $1.81.

It shares were down 3.1 percent, or 86 cents, to $26.58 in afternoon New York Stock Exchange trading. Family Dollar shares were down 6.4 percent this year through Wednesday.

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