Family Dollar Stores Inc. (FDO - Analyst Report) posted fourth-quarter fiscal 2014 earnings of 73 cents a share that missed the Zacks Consensus Estimate of 77 cents, and plunged 15.1% from 86 cents earned in the prior-year quarter. Management blamed the quarter’s debacle on stiff competition and cautious consumer spending.

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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 rational on new store openings to reap higher returns on investment.

The company, in fiscal 2015, plans to extend its cooler facilities, roll out products such as wine and beer to draw traffic, and undertake initiatives to enhance store productivity. However, it warned of initial hiccups in the first quarter but a gradual pickup as the year progresses.

Including restructuring charges and fees associated with the pending merger with Dollar Tree Inc. (DLTR - Analyst Report), the earnings came in at 30 cents a share, substantially down from 88 cents in 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.

Let’s Dig Further

Family Dollar posted a 4.5% increase in net sales to $2,614.1 million from the prior-year quarter, reflecting sales growth across Consumables (up 5.1%), Apparel and Accessories (up 4%) and Seasonal & Electronics (up 6%). The improvement was offset by a decline witnessed in Home Products (down 1.6%). Total revenue also came ahead of the Zacks Consensus Estimate of $2,577 million.

The strength witnessed in the Consumables category came on the back of robust growth across refrigerated and frozen food and tobacco. Strong focus on consumables helped Family Dollar to drive business from budget-constrained consumers. The Consumables category accounted for 74.6% of fourth-quarter net sales compared with 74.2% in the prior-year quarter.

Comparable-store sales for this Matthews, NC based company inched up 0.3% on a rise in average consumer transaction value, partly offset by lower customer transactions.

Adjusted gross profit climbed 1% to $871.7 million, whereas gross margin contracted 120 basis points to 33.3%. The sturdy sales of lower-margin carrying consumables and lower markups, were partly offset by a fall in inventory shrinkage and lower markdowns.

Family Dollar stated that adjusted operating profit for the quarter came in at $115.1 million, down 23.6% year over year. Operating margin shrunk about 160 basis points to 4.4%.

Other Financial Details

Family Dollar ended the quarter with cash and cash equivalents of $139.8 million, long-term debt of $484.2 million, and shareholders’ equity of $1,665.7 million. Capital expenditures for fiscal 2014 totaled $436.3 million.

During the fiscal year, Family Dollar bought back approximately 1.8 million shares for an aggregate amount of $125 million and paid dividend of $130.1 million.

Store Update

During fiscal 2014, Family Dollar opened 526 new outlets and closed 400 stores taking the total store count to 8,042. The company also renovated, expanded or relocated 738 stores. In fiscal 2015, the retailer plans to open about 375 new stores and close 40 locations. The company plans to renovate, expand or relocate 775 outlets in fiscal 2015.

In the quarter under review, the company opened 171 outlets and closed 375 stores.

Closing Comment

The economy is still not completely out of the woods and consumers will 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 - Snapshot Report) sporting a Zacks Rank #1 (Strong Buy).