Family Dollar Stores, Inc. (FDO)

FDO 
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Exchange: NYSE
Industry: Consumer Services
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Family Dollar Stores (FDO)

Q3 2011 Earnings Call

June 29, 2011 10:00 am ET

Executives

Kenneth Smith - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Kiley Rawlins - Vice President of Investor Relations & Communications

Howard Levine - Executive Chairman, Chief Executive Officer and Member of Equity Award Committee

R. Kelly - President and Chief Operating Officer

Analysts

Bernard Sosnick - Gilford Securities Inc.

Daniel Wewer - Raymond James & Associates, Inc.

Joseph Feldman - Telsey Advisory Group

Daniel Binder - Jefferies & Company, Inc.

Mark Montagna - Avondale Partners, LLC

Jack Balos - Midwood Research

Adrianne Shapira - Goldman Sachs Group Inc.

Adam Sindler - Deutsche Bank AG

Anthony Chukumba - BB&T Capital Markets

Laura Champine - Cowen and Company, LLC

Presentation

Operator

Good morning. My name is Evan, and I will be your conference facilitator today. I would like to welcome everyone to the Family Dollar Earnings Conference Call. [Operator Instructions] I would now like to introduce Ms. Kiley Rawlins, Vice President of Investor Relations and Communications. Ms. Rawlins, you may begin your conference.

Kiley Rawlins

Thank you, Evan. Good morning, everyone, and thank you for joining us today. For those of you who have dialed in, please note that we have posted accompanying slides on our Investor Relations Page of our website.

Before we begin, you should know that our comments today will include forward-looking statements regarding various operating initiatives, sales and profitability metrics and capital expenditure, as well as our expectations for future financial performance. While these statements address plans or events which we expect will or may occur in the future, a number of factors, as set forth in our SEC filings and press releases, could cause actual results to differ from our expectations. We refer you to, and specifically incorporate, the cautionary and risk statement contained in today's press release and in our SEC filing. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today, June 29, 2011. We have no obligation to update or revise our forward-looking statement, except as required by law, and you should not expect us to do so.

With me on the call this morning are Howard Levine, Chairman and CEO; Jim Kelly, President and COO; and Ken Smith, Chief Financial Officer. We'll begin our discussion this morning with the review of our results for the third quarter and the first 3 quarters of fiscal 2011. Then we'll take a few minutes to discuss our plans and outlook for the rest of the year. Following our prepared remarks, you will have an opportunity to ask questions. Remember that the queue for the question-and-answer session will not be available until after we have finished our prepared remarks.

Now I'd like to turn the call over to Ken Smith. Ken?

Kenneth Smith

Thanks, Kiley. This morning, we reported that diluted earnings per share for the third quarter increased 18% to $0.91 compared with $0.77 last year. Softer-than-expected sales, particularly in seasonally sensitive categories and greater-than-expected gross margin pressure, resulted in earnings per share that was $0.01 below our original guidance. Despite these pressures, I would note that strong expense control resulted in modest operating margin expansion for the quarter.

Let's start our discussion with sales. Net sales for the quarter increased 7.8% to $2.2 billion compared with $2 billion in the third quarter last year. Comparable store sales for the quarter increased 4.7%. The increase in comp store sales was driven by both increased customer traffic and a higher average ticket. During the quarter, we opened 60 new stores and closed 5 stores compared with 39 openings and 4 closings in the third quarter of fiscal 2010.

From a category perspective, sales were strongest in Consumables and Home Products, which increased 10.6% and 8.2%, respectively. Sales of Apparel and Seasonal merchandise varied widely by region, reflecting the volatility of this year's transition to the spring season. In areas with more normalized weather patterns, our spring merchandise performed well. And more recently, these categories have responded as hot weather has become more prevalent. From a mix standpoint, Consumables increased to 67.3% of sales compared to 65.6% of sales last year.

Turning to gross margin. Gross profit as a percentage of sales decreased 36 basis points to 36.2% of sales. The decline in gross margin was primarily a result of the impact of stronger sales of lower-margin Consumables, increased promotional markdowns and higher freight expense. These pressures were partially offset by benefits from our continued investments and price management capabilities, private brands and global sourcing, as well as lower inventory shrinkage.

Although EDLP continues to be the foundation of our pricing strategy, we are increasingly leveraging promotional capabilities, as well as other programs to drive traffic. For example, we finished the winter season well, but our spring season began more slowly than expected. To create additional excitement, we selectively promoted our Seasonal assortment this quarter.

As expected, higher freight costs continued to pressure gross margin. Through network optimization and expanded backhaul programs, we have been able to mitigate some of the pressure from higher diesel prices, which on average this quarter, were 33% higher than last year.

Expenses were well managed during the quarter. Total SG&A expense increased 6.3% to approximately $595 million compared to about $560 million last year. As a percentage of sales, SG&A expense in the quarter decreased about 40 basis points as compared with the third quarter of fiscal 2010. Most expenses were leveraged in the quarter. As a percentage of sales, lower incentive compensation expense and lower store labor expense offset investments to support revenue growth.

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