Q4 2011 Earnings Call
February 23, 2012 11:00 am ET
Melissa C. Plaisance - Senior Vice President of Finance & Investor Relations
Steven Burd -
Robert L. Edwards - Chief Financial Officer and Executive Vice President
Mike Otway - Jefferies & Company, Inc., Research Division
John Heinbockel - Guggenheim Securities, LLC, Research Division
Meredith Adler - Barclays Capital, Research Division
Kelly A. Bania - BofA Merrill Lynch, Research Division
Edward J. Kelly - Crédit Suisse AG, Research Division
Karen F. Short - BMO Capital Markets U.S.
Charles X. Grom - Deutsche Bank AG, Research Division
Charles Edward Cerankosky - Northcoast Research
Stephen W. Grambling - Goldman Sachs Group Inc., Research Division
Mark Wiltamuth - Morgan Stanley, Research Division
Andrew P. Wolf - BB&T Capital Markets, Research Division
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Melissa C. Plaisance
Good morning, everyone, and thank you for joining us for our fourth quarter and full year 2011 earnings conference call. With me today this morning is Steve Burd, our Chairman, President and CEO; and Robert Edwards, Executive Vice President and Chief Financial Officer.
I'd like to remind you that management will be making statements during this call that include forward-looking statements within the meaning of the federal securities laws. Forward-looking statements contain information about future operating or financial performance. Forward-looking statements are based on our current expectations and assumptions, and involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated. However, we undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise. For a list and description of these risks and uncertainties, please see our filings with the SEC.
And with that, I'd like to turn the call over to Steve.
Thank you, Melissa. So let me start with net income. Net income for the quarter was just under $216 million. This compares with a number from last year of just under $230 million. Expressed in earnings per share, we made $0.67 per share in the quarter contrasted with $0.62 from one year ago.
Let's start with a couple of highlights for the quarter. I'll start with the fact that we exceeded the consensus estimates, as estimated by First Call, by at least $0.02. ID sales matched the performance that we had in the third quarter. Our gross margin rate was lower than last year but almost entirely the result of the LIFO charge, which I'll talk more about later. Our O&A expenses, as usual, were very well controlled. And then lastly, we took advantage of a low share price and purchased 43.3 million shares in the quarter.
So let me start with sales. Total sales increased 6.2% versus last year. This strong increase in reported sales is largely the result of 3 factors:
The first is high fuel sales. We had a 19% increase in price per gallon. That wouldn't be unique to us. It was basically unique to the marketplace. Or not unique, but it was a common marketplace price increase. And we, perhaps unique to the marketplace, had a 10% increase in gallons. Overall, in the U.S., gallons are down about 3% or 4%.
Secondly, we had a change in the reporting for gift cards. Again, we started mentioning this a couple of quarters ago, so we haven't quite cycled that.
And then the third explanation is that ID sales increased. Now ID sales, excluding fuel, increased 1.5% on the quarter.
Inflation, as we measure it, and everybody measures it just a little bit differently, was higher than the third quarter. You may recall in the third quarter we said that our inflation was about 4%. Here in the fourth quarter, it was 4.7%.
Volume did decline in the quarter. That's going to be common, I think, to the vast majority of retailers. I know it's common to the CPG world. But the good news is our market share, as we measure it -- again, we do a sector market share measurement because we can get more precise on that. Our market share was exactly flat with last year.
We believe the volume declines are the direct result of both rising fuel prices and rising food inflation. We've talked about this before. I'm sure in the Q&A we'll talk about it again.
Turning to gross margin. Our gross margin rate, adjusting for both fuel sales and the Blackhawk accounting change, was down 41 basis points. Were it not for a $42 million year-over-year change in the LIFO charge, our gross margin decline would have been only 6 basis points. This large swing in our LIFO charge is the direct result of transitioning from a year of unprecedented deflation to a year of above-normal inflation. A change of this magnitude is not likely to be repeated anytime soon since it's kind of -- I might even -- it's the first time in 20 years. It could be the 100-year storm.
Turning to O&A expenses. O&A expenses, expressed as a percentage of sales, declined 98 basis points. Excluding fuel sales and the Blackhawk accounting changes, the O&A expense ratio declined or, if you will, actually improved 7 basis points. The largest positive changes occurred in property gains, the vast majority of which were planned, not only planned for the year but planned to be happening in large part in the fourth quarter; secondly, labor costs; and third, depreciation.
The negative impacts included an increase in Blackhawk's O&A expenses, which is basically about making an investment in building a future income stream. And what we call PL and PD expenses, that stands for property liability and property damage -- translation, slips and falls by customers in our stores -- would be the dominant piece of that. And then we had some additional IT costs to support the just for U rollout.