Updated from 9:53 a.m. EST

Shares of discount retailer Family Dollar Stores ( FDO) rose Tuesday after the company issued second-quarter results that edged out Wall Street's consensus estimate and later clarified its outlook for new store openings in fiscal-year 2004.

The company cited strong sales at both new and existing stores for the quarterly results, noting that both sales and earnings were company records for a second quarter.

Earnings rose 12% to $81.4 million, or 47 cents a share, in the quarter ended March 1, compared with $72.7 million, or 42 cents a share, in the prior-year quarter. Analysts were expecting 46 cents a share. Total sales increased 11.7% to $1.4 billion.

The Matthews, N.C.-based company said customers bought more basic consumer goods in January and February, which boosted sales.

"The second quarter is the most significant from a markdown perspective," Family Dollar said on a post-earnings conference call with analysts. "Christmas and fall apparel are marked down to ensure timely liquidation."

Shares of the company were lately up $1.67, or 5.1%, at $34.58, but they are well of their 52-week high of $44.13 reached on Nov. 4.

For fiscal-year 2004, Family Dollar revised its new store opening estimate to 525 to 565 stores, 66% of which are to be in urban markets. The estimate is down from a previous expectation of 565 stores, however. While the company said it does have 565 stores slotted to be opened, it believes various risks could cause that number to change.

The company said on the conference call that it expects to be 30 stores behind on its store opening schedule because it thinks March and April openings will "slip below plan." Family Dollar plans to make up difference in the fourth quarter.

Family Dollar said it will continue to focus on openings stores in urban areas, but explained that the lead times for opening urban stores are "less predictable" than when opening in rural environments.

In small and mid-sized towns "lead times are much tighter and much more predictable," the company said. "We run into far few issues with permitting, inspections and all the things that disrupt a lead time in opening in urban markets."

As a result, more resources will be allocated to open sites in rural areas as operating results in small and mid-sized towns have been improving.

The company opened 95 new stores during the quarter and closed 22. Capital expenditure spending year to date is $68 million this year, vs. $81 million last year. Total capex spending in 2004 will be $250 million, vs. an original guidance of $270 million.

Family Dollar noted that its future pipeline for store openings is getting slower going into fiscal-year 2005, which it will address in its June conference call.

The company said its model fits well with sites that formerly housed drugstores, possibly referring to J.C. Penney's ( JCP) decision last year to consider options for its waning Eckerd drugstore chain.

"We regularly review excess property lists," the company said. "We would view that positively as a number of stores become available."

Expenses as a percent of sales in the second quarter rose to 24.6%, compared with 24.1% in the same quarter last year. Family Dollar said the increase was offset by a gain in gross profit margin as a percentage of sales, which was 33.8%, up from 33.2% last year. The company cited improved initial margins on merchandise via better sourcing of goods and a decrease in markdowns.

When asked if the low-end customer is feeling increasingly financially healthy, Family Dollar said: "We have not seen any material change in our customers behavior other than what saw during the Christmas holiday season where more discretional type purchases made up December."

Looking to the second half of 2004, which ends Aug. 28, the company confirmed its previous guidance for an EPS increase of 14% to 16%, which assumes that sales in existing stores will increase 3% to 5%.

The company said that existing-store sales in the third-quarter months of March and May are expected to at the higher end of that range, while April's are planned to be slightly below the low end of the range. So far, Easter results are "about on plan," the company said.

Analysts are expecting 46 cents a share in the third quarter of 2004 and 32 cents a share in the fourth quarter. The company earned 40 cents a share in the third quarter last year and 28 cents a share in the fourth quarter.

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