This is a summary of the second quarter fiscal 2009 earnings call conducted by Family Dollar Stores, Inc. (FDO) on April 8, 2009.
Executives:
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Vice President of IR and Communications: Kiley F. Rawlins
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Chairman and CEO: Howard R. Levine
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President and COO: R. James Kelly
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CFO: Kenneth T. Smith
Key Investor Issues:
- Profit climbed to $84.1 million, or 60 cents per share, from $63.3 million, or 45 cents per share, last year.
- Sales rose to $1.99 billion from $1.83 billion, helped by demand for consumables.
- Same-store sales jumped 6.4%.
- For the third quarter the company expects net sales will increase between 7% and 9% and same-store sales will rise 5% to 7%.
Second Quarter Highlights:
Over the last 18 months, the economic environment has changed significantly. Energy costs have fluctuated more than 100% and unemployment rates have almost doubled. Last year, the federal government provided more than $100 billion in stimulus money to consumers and is just beginning to roll out a second relief package. Most consumers, not just low income consumers, have been affected by these changes. While discretionary incomes have benefited from lower gasoline prices and government stimulus packages, unemployment and the contraction of credit markets has had the opposite effect.
Family Dollar Stores reported second quarter earnings of $0.60 per diluted share compared with $0.45 per diluted share in the second quarter last year, up 33%.
Strong top line growth and better than expected gross margin performance resulted in approximately 150 basis points of expansion of operating margin during the quarter. For the quarter, net sales increased 8.7% and comp sales increased 6.4%. Consumables continued to be the primary driver of sales during the quarter, increasing approximately 13% on a comp basis.
Sales results in more discretionary categories were mixed.
While sales of apparel continued to be soft, sales in the seasonal and electronics category increased approximately 6% on a comp basis, and sales of home products stabilized during the quarter.
From a mix standpoint, consumables increased to approximately 61% of sales as compared to approximately 57% of sales last year. Despite this significant mix shift, gross profit as a percentage of sales increased approximately 100 basis points in the quarter as compared with the second quarter last year.
Markdowns, inventory shrinkage and freight expense were all lower as compared to the second quarter last year, and purchase mark-ups were higher. These improvements more than offset the margin effect of higher sales of lower margin and consumable merchandise.
Similar to the trends in the first quarter, markdowns in the quarter were lower as compared to the second quarter last year.
Stronger sales particularly in seasonal categories and a continued focus in managing inventory risk resulted in lower seasonal markdowns. These improvements offset the impact of increased markdowns related to the Consumer Product Safety Improvement Act of 2008. This legislation went into effect in February, 2009 and addresses a number of consumer product safety issues including the permissible levels of lead and phthalates in products. In response to the new legislation Family Dollar Stores incurred approximately $8 million in unplanned markdowns during the quarter. These markdowns were more than offset by lower seasonal markdowns.
Lower inventory shrinkage was also a noteworthy benefit to profitability in the second quarter this year.
Higher store manager retention, lower inventory and more discretionary categories and improved analytics in monitoring processes have resulted in significant improvements in shrink. At the end of the second quarter, average inventory per store increased modestly as compared with inventory per store at the end of the second quarter last year.
Reflecting a continued focus on managing risk, inventory levels in more discretionary categories were significantly lower at the end of the second quarter this year as compared with the second quarter of fiscal 2008.
SG&A expense as a percentage of sales decreased 40 basis points to 27% of sales in the second quarter this year as compared with 27.4% of sales in the second quarter last year.
Reflecting the effect of the 6.4% comp in the second quarter and the continued focus on expense control, most expenses including labor and occupancy costs were leveraged in the quarter.
Tax rate in the second quarter was 36.4% compared with 34.4% in the second quarter last year.
