This summary is based on the fourth quarter fiscal 2008 earnings call conducted by Family Dollar Stores, Inc. (FDO) on October 3, 2008.
Management:
VP IR: Kiley Rawlins
Sr. VP & CFO: Kenneth Smith
President & COO: R. James Kelly
CEO: Howard Levine
Key Investors Issues
- EPS were 38 cents a share compared to 26 cents a share last year.
- Earnings rose to $53.2 million compared to $37.8 million in the same period a year ago.
- Sales rose 8.2% to $1.77 billion.
Fourth Quarter Highlights
Earnings were 38 cents per share compared with 26 cents per share in the fourth quarter of fiscal 2007.
- Robust top line growth together with strong expense control resulted in a 34% increase in operating profit.
- This performance combined with the lower tax rate resulted in a 41% increase in net income.
- Net revenues increased 8.2% while comparable store sales increased 5.6%.
- Building on the trend established in the third quarter consumables continued to be the primary driver of sales, increasing approximately 10% on a comparable store sales basis. The sales performance of more discretionary categories improved from trends experienced in the third quarter.
- The seasonal and electronics category improved from the third quarter trend comping in the mid single-digits, while the apparel and home categories were less negative.
- Gross profit as a percentage of sales was better then expected, declining only about 15 basis points.
- Lower markdowns and lower shrink offset much of the impact of a higher mix of consumable sales and higher transportation expense.
- The improvements combined with generate belt-tightening efforts resulted in an increase of only 4.4% in SG&A expense. As a percentage of sales SG&A expense declined approximately 100 basis points. The expense leverage provided by the 5.6% comparable store sales increase more then offset the investments made in the increased promotional programs.
- Tax rate was lower then the fourth quarter of fiscal 2007 adding about 1 cent to earnings per share results. The lower tax rate was primarily a result of adjustments in certain income tax reserves.
- Despite the difficult environment business continues to generate strong cash flows. In fiscal 2008 the company generated approximately $516 million in operating cash flow more than adequate to fund approximately $168 million in capital expenditures and approximately $67 million in dividend payments.
- The average price of gasoline is approximately 35% higher then a year ago. Unemployment rates for low income consumers has increased more then 175 basis points over last year and consumer confidence has fallen dramatically.
- Wage growth has slowed while inflation has increased rapidly.
Fiscal 2008 Highlights
- The company earned $1.66 per share compared with $1.62 per share in fiscal 2007.
- Net income was $233.1 million compared with $242.9 million in fiscal 2007.
- Sales performance resulted in an overall increase of 1.2% in comparable store sales. Net sales were $6.98 billion or 2.2% above sales of $6.83 billion in fiscal 2007.
- The increase in comparable store sales was driven by a higher average customer purchase. The number of transactions was approximately flat.
- Gross profit as a percentage of sales declined approximately 40 basis points. This decline was primarily a result of stronger sales of low margin consumables, which as a percentage of sales, increased approximately 225 basis points in fiscal 2008 as compared with fiscal 2007.
- The company continued to aggressively limit inventory risk in more discretionary categories. At the end of fiscal 2008 average inventory per store was approximately 6% lower then average inventory per store at the end of fiscal 2007.
- This reduction was the result of double-digit inventory declines in each of three discretionary categories. The company had expense control. The profits improvements from investments in facility management, and centralized procurement have enabled to lower infrastructure costs.
- SG&A expense as a percentage of sales increased approximately 10 basis points. As a result of 1% increase in comparable store sales for the year, many of expenses were deleveraged. Lower insurance costs and lower professional fees have provided some relief from the effect of the low comparable store sales increase and higher occupancy costs.
First Quarter 2009 Outlook
- The company expects net sales to increase 4% to 6% and the comparable store sales to increase 2% to 4%.
- The company expects that strong sales of consumables combined with tight expense control will result in earnings per share for the first quarter of fiscal 2009 of between 38 cents and 42 cents compared with 37 cents in the first quarter of fiscal 2008.
Fiscal 2009 Outlook
- The company expects net sales to increase 3% to 5% in fiscal 2009. This revenue target assumes approximately 125 net new stores and the comparable store sales increase of between 1% and 3%.
- The company expects that strong sales of consumable merchandise, weakness in more discretionary categories and volatile diesel costs will pressure gross margin again in fiscal 2009. But the company anticipates that benefits from lower markdowns, global sourcing and better shrink could offset much of this pressure.
- Despite the impact of rising utility and labor costs the company is targeting operating expense leverage at around a 2% increase in comparable store sales. Reflecting these expectations the company expects earnings per share to be between $1.58 and $1.78 in fiscal 2009.
Key questions from the fourth quarter earnings call conducted by Family Dollar Stores, Inc. on October 3, 2008.
Mark Miller (William Blair & Company):
Can you discuss Family Dollar’s marketing strategy in an environment where we can expect that promotions probably only going to increase and particularly as we head into the holidays, and intensive ad circulars could be forthcoming on Black Friday?
