More evidence of why Walmart is worried

Family Dollar reported quarterly results after the market closed Thursday and offered a reminder why Walmart suppliers who participated in last month’s Connecting Northwest Arkansas Supplier Survey ranked dollar stores as the greatest competitive threat to Walmart in the next five years.

In case you missed the survey, (it is available for download by clicking here) 79.4% of the nearly 200 Walmart suppliers who responded cited dollar stores (Dollar General and Family Dollar, specifically) as the greatest competitive threat to Walmart, easily outdistancing Target at 55.7%, Amazon.com at 47.9% and Kroger at 37.1%.

What makes such companies as Family Dollar so concerning is their ongoing expansion and ability to siphon trips away from Walmart. That was the case again with Family Dollar in the company’s first quarter, as it rate of sales and profit growth was nothing special, more on that later, but a 4.1% same-store sales increase was the result of increased transactions sizes and higher customer counts.

That has been the case in prior quarters as well, and with more shoppers visiting Family Dollar stores more often, its store base continues to growth at a rapid clip. During the quarter, another 101 stores were opened, pushing the company’s store count to more than 7,100 units, or roughly 3,000 fewer units than Dollar General, which is on the brink of 10,000 stores.

Family Dollar could eventually reach that level too as the first quarter saw the opening of its first stores in California and a tenth distribution center. During the remainder of this year the company plans to open between 450 and 500 new stores while closing 80 to 100 stores and spending $550 million to $600 million to do so.

Family Dollar has a lot going for it between new store expansion and favorable trends in customer traffic and transaction size, but sales and profits are growing at a single digit pace and gross margins have declined due to a greater sales contribution from consumables. First quarter sales increased 7.6% to a little more than $2.1 billion and net income grew 8.1% to $80.4 million while the gross margin rate declined to 35.3% from 36%. The lower margins were offset however by an even larger decline in expenses with selling, general and administrative costs dropping to 29% of sales compared with 29.9% the prior year.