Family Dollar Stores Inc. (FDO - Analyst Report) posted third-quarter fiscal 2015 earnings of 74 cents a share that fell short of the Zacks Consensus Estimate of 82 cents and declined 12.9% from 85 cents earned in the prior-year quarter. Higher cost of sales and increased selling, general and administrative expenses hurt margins, thereby impacting the bottom line.

To bring itself back on the growth trajectory, this self-service retail discount store chain had earlier announced a slew of measures. These were designed to improve the company’s operational and financial performances.

Management reduced prices of approximately 1,000 basic items and disclosed plans to add value-based products, optimize the cost structure by lowering headcount, reducing inventory shrinkage, closing underperforming outlets, and being more rational about new store openings to reap higher returns on investment. The company is undertaking initiatives to improve store productivity and remains focused on enhancing sales.

Including fees related to the pending merger with Dollar Tree Inc. (DLTR - Analyst Report), the company’s earnings came in at 70 cents a share, a penny below the year-ago quarter figure. Family Dollar decided to stick to Dollar Tree and rejected Dollar General Corporation’s (DG - Analyst Report) buyout offer on grounds of difficulty to win over antitrust regulatory concerns. The giant that will arise will have the ability to generate sales of over $18 billion and reach out to more consumers through its vast network of stores.

The merger is expected to conclude early this month. Dollar Tree had previously informed that it has entered into a deal to offload approximately 330 Family Dollar outlets to Sycamore Partners, as required by the Federal Trade Commission to go ahead with the planned merger.

Delving Deeper

Family Dollar reported a 2.6% increase in net sales to $2,728.2 million from the prior-year quarter figure, reflecting sales growth across Consumables (up 3.8%), and Apparel and Accessories (up 2%). This was offset by a decline witnessed in Home Products (down 3.4%) and Seasonal & Electronics (down 0.4%). Total revenue came ahead of the Zacks Consensus Estimate of $2,718 million.

Strong focus on consumables helped Family Dollar to derive business from budget-constrained consumers. The Consumables category accounted for 74.2% of third-quarter net sales compared with 73.3% in the prior-year quarter.

Comparable-store sales for this Matthews, NC-based company improved a marginal 0.7%, reflecting a jump in the number of customer transactions, partially offset by a fall in average customer transaction value.

Adjusted gross profit grew 3.4% to $943.2 million, whereas adjusted gross margin expanded 30 basis points to 34.6%. Family Dollar stated that adjusted operating profit for the quarter came in at $131 million, down 9.9% year over year. Adjusted operating margin shrunk about 70 basis points to 4.8%.

Other Financial Details

Family Dollar ended the quarter with cash and cash equivalents of $216 million, long-term debt of $299.1 million, and shareholders’ equity of $1,854.1 million. Capital expenditures for the first three quarters of fiscal 2015 totaled $253.8 million.

Store Update

During the first nine months of fiscal 2015, Family Dollar opened 245 new outlets and shuttered 26 outlets, taking the total store count to 8,261. The company also renovated, expanded or relocated 433 stores during the period.

Closing Comment

Though the economy is on the path to recovery, consumers remain cautious on their spending, purchasing only things that fulfill their basic needs. Consequently, we could witness more competitive pricing and new product launches to attract shoppers. A price war would definitely dent margins.

Zacks Rank

Family Dollar currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the retail industry is Target Corp. (TGT - Analyst Report) carrying a Zacks Rank #2 (Buy).