Family Dollar Stores Inc. (NYSE: FDO) reported first-quarter fiscal 2013 results before markets opened this morning. The discount retailer reported diluted earnings per share (EPS) of $0.69 on revenues of $2.42 billion. In the same period a year ago, Family Dollar Stores reported EPS of $0.68 on revenue of $2.15 billion. Today’s results also compare to the Thomson Reuters consensus estimates for EPS of $0.75 and $2.38 billion in revenue.

The company’s CEO said:

While the near-term economic environment remains difficult to predict, I continue to be excited about the long-term opportunity for our business. We are seeing tangible benefits from our margin-enhancing investments in global sourcing and private brands …

The company basically spent more on promoting an increase in store traffic. The strategy worked too well perhaps:

Early results from our sales-driving initiatives exceeded our expectations in the first quarter, resulting in more gross margin pressure than anticipated. This mix pressure, combined with expected headwinds from insurance expense, resulted in earnings that were at the low end of our guidance.

Gross margins fell from 35.26% in the same period a year ago to 34.14%. Operating profit also declined year-over-year, from 6.05% a year ago to 5.24% this year, and net profit fell from 3.74% to 3.32%. How the company’s “margin-enhancing investments” are producing tangible benefits remains something of a mystery.

Shares are down 4.9% in premarket trading this morning, at $60.90, in a 52-week range of $53.03 to $74.73. Thomson Reuters had a consensus analyst price target of around $72.62 before today’s results were announced.

Paul Ausick

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