Save Your (Family) Dollars

Gross margin in the quarter rose to 33.5% from 32.9% a year earlier. The gain is impressive when you take into account that consumables, a relatively new product category, have lower margins than other types of goods.

Consumables formed the fastest-growing category in the quarter, with sales up 15.6% in the quarter. Although the consumables have lower gross margins, they add gross margin dollars, because Family Dollar's core customers -- shoppers in the lower-income category -- tend to spend more of their income on food and make frequent fill-in shopping trips as opposed to spending one large chunk of their paycheck at somewhere like Costco (COST Quote).

When asked on the company's conference call about the state of the lower-income consumer, Family Dollar CEO Howard Levine said that demographic "is always stressed and always strained." That said, the rise in the minimum wage should help that group of consumers and spill over to Family Dollar and its peers.

On the flip side, rising gas prices hurt lower-income customers disproportionately to the rest of the population. More dollars spent on filling up tanks likely means less treasure-hunting at Family Dollar. And this treasure hunt is critical to Family Dollar if it wants to improve margins, since products such as apparel and home goods typically carry a higher gross margin than other items.

Fairly Priced

Compared with its peers, Family Dollar is less expensive on a price-to-earnings and forward P/E basis. However, when you take expected growth into account, the stock is trading right in line with the group.