Family Dollar Stores goes up against the Wal(-Mart).

• Position: Discount houses - On the Market - Company profile

Family Dollar Stores goes up against the Wal(-Mart)

Every family history has its Golden Age. For Family Dollar Stores Inc., that era extended right up until the middle '80s. The end is marked in the family album by the exodus of Lewis and Howard Levine -- cousin and son, respectively, of company founder Leon Levine -- in September 1987.

Life goes on, as always, after the breakup. But these days, the going is tougher for Family Dollar (NYSE-FDO).

"They had a good concept, but in the '80s they lost their competitiveness," says Michael Mead, an analyst who follows Family Dollar for Scott & Stringfellow in Richmond, Va. "They got complacent, and they let their [gross profit] margins drift up."

For years, Family Dollar had a huge segment of the discount-retail trade in the Southeast nearly to itself. Leon Levine founded the company in 1959 at age 22 with an inspired gimmick: nothing in the store priced above a dollar. Today, the upper limit is $17.99.

But discount, off-price, budget retailing -- by whatever name -- became the rage of the '80s. And the master of the game, Wal-Mart Inc. of Bentonville, Ark., invaded Family Dollar's turf in the early 1980s. Retailers across the Southeast fell victim to competition from Wal-Mart's satellite links to warehouses, computer links to suppliers and truckload prices.

Like other retailers, Family Dollar bit the bullet and matched Wal-Mart's prices, but the cost was great. The company introduced its "everyday low price" marketing strategy in the spring of 1987 to pull more traffic into its 1,400 stores. Sales picked up, but earnings plummeted 20 percent in fiscal year 1987 to 86 cents a share.

Dissension over marketing strategy and Chairman Leon Levine's $1.8 million salary led to the resignations of Lewis Levine as president and Howard Levine as senior vice president of merchandising. Leon Levine took a pay cut to $350,000 and hired Ralph D. Dillon from a national hardware chain to run things.

"They're doing the correct things to turn it around," says Dan Wewer, who follows the company for Robinson-Humphrey Co. in Atlanta. "But it's going to take longer than a lot of people anticipated."

Christmas was a disappointment. Family Dollar's earnings in the first quarter, which ended Dec. 31, rose 14 percent on a 17 percent sales increase. But same-store sales in December were off 4 percent.

"We were below our plan, but there were some reasons for that," says George Mahoney, the company's secretary and general...