Family Dollar Stores Inc. (FDO - Analyst Report) posted second-quarter fiscal 2015 earnings of 74 cents a share that came a penny ahead of the Zacks Consensus Estimate but fell 7.5% from 80 cents earned in the prior-year quarter. Stiff competition and margin contraction hurt the results.

To bring itself back on the growth trajectory, this self-service retail discount store chain had earlier announced a slew of measures to improve its 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, reduce inventory shrinkage, close underperforming outlets and being more rationale on new store opening to reap higher returns on investment. The company is undertaking initiatives to enhance store productivity and remains focused on enhancing sales.

Including fees associated to the pending merger with Dollar Tree Inc. (DLTR -Analyst Report), the earnings came in at 67 cents a share, substantially down from the year-ago quarter. 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.

Dollar Tree recently informed that Federal Trade Commission requires it to offload approximately 340 Family Dollar locations to finalize the deal, which is expected to conclude by May end.

Let’s Dig Further

Family Dollar posted a 3% increase in net sales to $2,798.3 million from the prior-year quarter, reflecting sales growth across Consumables (up 4.6%) and Seasonal & Electronics (up 0.9%). This was offset by decline witnessed in Home Products (down 2.7%) and Apparel and Accessories (down 1.9%). Total revenue came almost in line with the Zacks Consensus Estimate.

The strength witnessed in the Consumables category came on the back of growth across food and tobacco. Strong focus on consumables helped Family Dollar to drive business from budget-constrained consumers. The Consumables category accounted for 72.3% of second-quarter net sales compared with 71.1% in the prior-year quarter.

Comparable-store sales for this Matthews, NC based company grew marginally 0.5%, reflecting a jump in the number of customer transactions, partially offset by fall in the average customer transaction value.

Gross profit grew 3.2% to $931.1 million, whereas gross margin expanded 10 basis points to 33.3%. Family Dollar stated that adjusted operating profit for the quarter came in at $125.8 million, down 10.3% year over year. Adjusted operating margin shrunk about 70 basis points to 4.5%.

Other Financial Details

Family Dollar ended the quarter with cash and cash equivalents of $167.5 million, long-term debt of $299.1 million, and shareholders’ equity of $1,770.7 million. Capital expenditures for the first half of fiscal 2015 totaled $176.5 million.

Store Update

During the first half of fiscal 2015, Family Dollar opened 161 new outlets and shuttered 19 outlets taking the total store count to 8,184. The company also renovated, expanded or relocated 291 stores during the period.

Closing Comment

Despite the economy on the recovery path, consumers still remain cautious on their spending, buying only things that fulfill their basic needs. Consequently, we could see more competitive pricing and new products attracting shoppers. A price war would definitely eat away margins, which in turn would affect the company’s results. In order to remain competitive, it might be better to try out innovative ways to win over target consumers.

Family Dollar currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the retail industry includes Burlington Stores, Inc. (BURL) sporting a Zacks Rank #2 (Buy).