Family Dollar Q4 2014 earnings: Dollar drama is draining the chain.

Family Dollar’s New Strategy: “Magical” Price Points and Lots of Alcohol

Family Dollar’s New Strategy: “Magical” Price Points and Lots of Alcohol

Moneybox
A blog about business and economics.
Oct. 10 2014 2:08 PM

Family Dollar’s New Strategy: “Magical” Price Points and Lots of Alcohol

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Dollar drama has taken a toll on Family Dollar.

Photo by Joe Raedle/Getty Images

It's been a rough few months for Family Dollar. The discount retailer is currently trying to ward off a hostile takeover from Dollar General, while sealing a merger deal with another dollar store chain, Dollar Tree. The mess has hardly done wonders for its business. On Thursday, Family Dollar reported that its profit tumbled 66 percent in the fourth quarter and same-store sales edged up a mere 0.3 percent. During that period, it shuttered 375 underperforming stores and lost money to inventory markdowns, restructuring fees, and merger expenses.

Sales at Family Dollar are growing in one area: tobacco and refrigerated/frozen foods. But the company's management isn't exactly pleased about this. Because those items have low profit margins, the sudden spike in purchases of them by consumers has actually put more pressure on Family Dollar's own margins. "What we are really focused on is keeping those businesses going strong, but also growing some of these margin areas to offset some of the impact there," Family Dollar CEO Howard Levine said on the quarterly earnings call. That might help explain why Levine said Family Dollar will speed up its rollout of beer and wine—high-margin items—in the coming year. Alcoholic beverages are currently sold in about 500 Family Dollar stores, and supposed to hit 1,500 more over the next 12 months.

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Before that rollout happens, a big test for Family Dollar—not to mention every other retailer—will be the coming holidays. The previous year, holiday sales largely disappointed, and Family Dollar was no exception. But Levine spent a good portion of the call reassuring investors that this time around, the company is positioned to have a "very competitive holiday season." He added that the store is more focused on "everyday values" and the "magical $1 price point." (Family Dollar is not a "true" dollar store, but rather sells its inventory at a range of relatively cheap prices.) "Things are on track," Levine said. "We feel very good about the flow of our goods and are well-positioned for the holiday season."

That's all well and good, but even that "magical" price point and upcoming sales of alcohol can't necessarily make up for the bigger economic challenges facing the company. Dollar stores in general have been hard hit in recent years as the recovery has inched along and drained low-income consumers of their spending money. When things don't look great for the main Family Dollar consumer, they don't look great for Family Dollar either. Levine acknowledged as much with what is now a familiar refrain of his: "Our core customer is still struggling."

Alison Griswold is a Slate staff writer covering business and economics.