Family Dollar Stores Inc (>> Family Dollar Stores, Inc.) posted a lower-than-expected quarterly profit on Thursday, sending its shares tumbling 7 percent as its push to sell more everyday items including soft drinks and cigarettes attracted more customers but hurt profitability.
The company also lowered its forecast for the year and said December sales, which came in after the quarter ended, were hurt as shoppers limited their discretionary spending.
The discount chain began selling cigarettes and other tobacco products, Pepsi drinks, gift cards, magazines and other merchandise in recent months to better compete against chains such as Dollar General Corp (>> Dollar General Corp.).
While the additions have helped draw more traffic, those items tend to carry lower profit margins. Gross profit margin fell to 34.1 percent in the quarter from 35.3 percent a year earlier, the company said.
Larger price cuts also hurt margins, which fell more than expected, according to J.P. Morgan analyst Matthew Boss.
The results, including December same-store sales, also spotlight the impact of price competition from Dollar General and Wal-Mart Stores Inc (>> Wal-Mart Stores, Inc.) and pressure on the lower-income consumers that may worsen given payroll tax increases this year, Boss said in a note to clients.
Wal-Mart's and Dollar General's shares were down 0.6 percent and 1.5 percent, respectively.
Dollar General's profit was $80.3 million, or 69 cents a share, in the fiscal first-quarter that ended November 24, compared with a profit of $80.4 million, or 68 cents, a year earlier.
Analysts on average forecast 75 cents a share, according to Thomson Reuters I/B/E/S.
Sales rose 12.7 percent to $2.42 billion. Analysts on average forecast $2.38 billion.
Sales at stores open at least a year rose 6.6 percent. The company had forecast an increase of 4 percent to 6 percent.
But December's same-store sales rose only 2.5 percent
Sales of "consumables" such as food and beauty products - by far the chain's largest category - rose 18.5 percent in the first quarter, the company said.
Family Dollar forecast second-quarter earnings of $1.18 to $1.28 per share on same-store sales growth of 4 percent to 5 percent. The average of analysts' estimates was for a profit of $1.37 per share, according to Thomson Reuters I/B/E/S.
The combination of strong consumables sales growth, softness in December discretionary sales and additional discretionary mark-downs "will likely result in gross margin pressures similar to, or slightly more than what we saw in the first quarter," Chief Financial Officer Mary Winston said on a conference call with analysts.
For the year, Family Dollar said it expects earnings of $3.95 to $4.20 per share, below its prior forecast of $4.10 to $4.40. Analysts on average forecast $4.24 a share.
Family Dollar's shares were down 7 percent at $57.04 in morning trading on the New York Stock Exchange after dropping as low as $54.95 early in the session.
(Reporting by Brad Dorfman and Jessica Wohl in Chicago and Lisa Baertlein in Los Angeles; Editing by Maureen Bavdek)