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Family Dollar warns of cautious shoppers

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On Thursday, shares of Family Dollar sank around 13 percent after the company said quarterly profits fell short of expectations and lowered its forecast for the year. Several retail watchers focused on the payroll tax increase of the fiscal cliff deal, which will drain money from the paychecks of rich and poor alike. With low income shoppers taking home less money, some retail experts believe discount stores will suffer.

“It’s definitely going to hurt,” says Maggie Gilliam of the retail consulting firm Gilliam & Co. “It’s money that would have gone straight into spending by people of more moderate means.”

Others question how significant the overall impact of the payroll tax will be. Low income shoppers may in fact spend less, but that lost spending could be replaced by new customers seeking savings to make up for the skimpier paychecks.

“People that have a little bit higher income that normally don’t shop at a Family Dollar may start going to a Family Dollar,” says Brian Yarbrough, who follows Family Dollar for the investment firm Edward Jones.

Even if the payroll tax turns out to be a wash, Family Dollar has more to worry about. Like a lot of discount stores, the store has remodeled to make room for stocking more food. That helped boost traffic and sales. But it also created a problem.

“Food does have a lower margin than home items or apparel items,” Yarbrough notes.

There are more shoppers, but they’re buying less profitable stuff. The hope is that food buyers would grab other items while they’re in the store. But it hasn’t all worked out as Family Dollar would like.

“Our customers remain cautious,” Family Dollar chairman and CEO Howard Levine told investors Thursday morning.

That caution wiped out a year’s worth of Family Dollar stock gains in a day, and is part of an overall trend that has brought the once high-flying shares of other dollar stores down to Earth.

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