Family Dollar 2005 Annual Report Download - page 4

To Our Shareholders
value
2
As a fello w Shareholder, this is a difficult letter to write.
While we achieved a record $5.8 billion in sales in fiscal
2005, a 10.3% increase above 2004, net income was $217.5
million, a decrease of 15.7%
— our first decline in earnings
since 1995. Despite these disappo inting financial results,
I am more excited than ever abo ut our Company’s future
pro spects and o ur ability to create value for our Customers,
for our Associates, and for you, our Shareholders.
We now operate appro ximately 6,000 sto res, and we
believe there is ample opportunity to grow the size of our
chain to better serve our expanding customer base. New
geo graphical markets like California remain future gro wth
oppo rtunities, and our Urban Initiative creates additional
store expansion opportunities in large metropolitan markets,
which are largely under-served by other retailers. Our target
Customer, the low and lower-middle inco me population,
has experienced significant gro wth. Over the last five years,
the number of people making less than $25,000 in annual
household inco me has increased more than ten percent,
and the number of families with income below the
po verty level has grown almost eight percent. Clearly,
an increasing number of people
need the values that
Family Dollar offers.
As I reflect on our performance in 2005, I believe that
two factors affected our results: a challenging eco no mic
enviro nment and an aggressive investment agenda.
First, while our operational performance can always be
better, the eco no mic environment for our low and lower-
middle inco me Customer was challenging last year.
The average co st of gasoline continued to soar in 2005,
capturing a larger share of
our Customers‘ already
strained budgets. As
energy co sts increased,
our Customers had less
disposable inco me and
bought fewer discretionary
items. In respo nse, we
continued to increase
the value and selectio n
of basic consumable
merchandise, like
perishable foo d, so that
we could capture a larger portion of o ur Customers’
limited wallet.
Seco nd, we invested aggressively in our business to
deliver greater long-term value for o ur Customers, our
Associates and o ur Shareho lders. During o ur 46-year
histo ry, we have made significant investments that affected
short-term results but ultimately delivered long-term gains.
For example, in 1995, we made strategic investments
in suppo rt o f o ur everyday low pricing strategy which
had an adverse impact o n o ur financial results that year
—
net inco me declined 7.9%. Although not as quantifiable
then, the long-term benefits are now clear: our Customers
benefited from lower prices, o ur Associates benefited
fro m less complicated merchandising strategies, and our
earnings grew at a do uble-digit rate in the ensuing years.
During 2005, we again made significant investments
in o ur business to create greater value fo r our Customers,
our Associates, and our Shareholders. To drive higher sales
and stro nger profitability in bo th bullish and bearish
econo mic environments, we invested in four strategic
initiatives last year: the installation of refrigerated coolers
for the sale o f perishable foo d; the Urban Initiative; o ur
Treasure Hunt merchandise program; and new stores.
We remain confident that these initiatives create a strong
foundation for o ur future growth. But that do esn’t mean
that every initiative performed equally well. In 2006, we
will increase investment in those initiatives that performed
well in 2005 to drive additional returns, and we will refine
and enhance initiatives that have not yet met o ur
expectations, so that we may accelerate investment for
higher returns in the future.
We are po sitioning Family Do llar to satisfy those fill-in
food shopping trips that our Customers make frequently. At
the beginning of 2005, we had planned to install refrigerated
coo lers for the sale of perishable food in 500 stores.
However, our Customers reacted so quickly and po sitively to
the pro gram that we doubled our initial plan and installed
55% 59% 62% 66% 67% 68%
’00 ’01 ’02 ’03 ’04 ’05
Percentage of Consumer
Households that Shopped
in a Dollar Store
Source: ACNielsen Homescan Consumer Insight s 2005