By Brad Dorfman
CHICAGO (Reuters) - Family Dollar Stores Inc
The outlook came even as the company posted higher-than-expected earnings for its third quarter, which ended on May 29.
Family Dollar, which prices most of its merchandise at $10 or less, has benefited from consumers seeking out cheap food and other everyday items amid high unemployment and fears that the economy is headed for a second dip into recession.
But the company also forecast a possible slowing in the pace of growth in same-store sales -- a key measure for retailers -- in the current quarter from the previous period.
Other discounters, including Walmart, have noted that while some consumers picked up spending a bit earlier this year, their core customer has still suffered from the weak economy and is buying mostly necessities.
Walmart has also cut prices on thousands of items, especially food and other staples, to attract customers who had moved to stores like Family Dollar to find even lower prices.
"The environment remains challenging for consumers, and customers continue to buy close to need," Family Dollar Chief Executive Officer Howard Levine said in a statement.
For the third quarter, the company reported earnings of $104.4 million, or 77 cents a share, up from $87.7 million, or 62 cents a share, a year earlier.
Analysts on average forecast 76 cents a share, according to Thomson Reuters I/B/E/S.
For the fourth quarter, the retailer forecast earnings of 46 cents to 51 cents a share. Analysts were expecting 53 cents.
"We think it's best to take a more conservative approach to (the fourth quarter) and (fiscal year 2011) on the heels of what appears to be a more cautious consumer amid a jobless economic recovery," JPMorgan analyst Charles Grom said in a research note.
Grom cut his fourth-quarter earnings estimate to 51 cents a share from 58 cents and his 2011 estimate to $2.90 from $3.05.
Family Dollar also said June same-store sales were up an estimated 5.5 percent and forecast a 5 percent to 7 percent increase for the quarter.
Grom said that comparisons ease in July and August, so there is a chance the company could beat that forecast. He suggested investors use any weakness in the stock to accumulate shares of Family Dollar.
In the third quarter, same-stores sales rose 7 percent, and total sales rose 8.4 percent to $2 billion.
Family Dollar shares were down 7.8 percent at $36.36 in morning New York Stock Exchange trading. The stock rose more than 2 percent on Tuesday after Citigroup raised it to "buy" from "hold."
(Additional reporting by Viraj Nair in Bangalore; Editing by Lisa Von Ahn)
(Reporting by Brad Dorfman, editing by Dave Zimmerman)
