This summary is based on the third quarter fiscal 2008 earnings call conducted by Family Dollar Stores, Inc. (FDO) on July 2, 2008.
Management:
Investor Relations: Kiley F. Rawlins
Chief Financial Officer, Senior Vice President: Kenneth T. Smith
Chairman of the Board, Chief Executive Officer: Howard R. Levine
President, Chief Operating Officer: R. James Kelly
Key Investors Issues
- EPS were 46 cents per share compared to 40 cents per share last year.
- Net income was $64.7 million compared to $60.4 million last year.
- Net sales were $1.702 billion, or 2.9% above sales of $1.655 billion for the third quarter of fiscal 2007.
Third Quarter Highlights
Net income per share increased 15% to 46 cents compared with 40 cents per share in the third quarter of fiscal 2007 ended June 2, 2007.
Net income increased 7.1% to $64.7 million, compared with $60.4 million for the third quarter of fiscal 2007.
Net sales were $1.702 billion, or 2.9% above sales of $1.655 billion for the third quarter of fiscal 2007.
- Sales in comparable stores increased 0.1%. An increase in the average customer transaction offset lower customer traffic, as measured by the number of register transactions.
- Gross profit, as a percentage of sales, was 34.6% compared to 34.9% in the third quarter of fiscal 2007. The decline in gross profit, as a percentage of sales, during the quarter was a result of the effect of stronger sales of lower-margin consumable merchandise, which was partially offset by lower merchandise markdowns.
- Traffic and transaction trends improved. After a decline in March resulting from the shift in Easter, customer traffic and transaction trends stabilized.
- Consumable sales increased to approximately 63% of sales, as compared with approximately 59% of sales in the third quarter last year. Lower mark-downs helped to offset some of the impact of this mix shift.
- Inventories in all three of major discretionary categories declined year over year and at the end of the third quarter, average inventory per store was approximately 3% lower than average inventory per store at the end of the third quarter last year.
SG&A expense increased about 1% to approximately $488 million, compared with approximately $484 million last year.
Despite a flat comparison, SG&A expense as a percentage of sales declined approximately 60 basis points. Three factors that contributed to this strong performance are:
- The company continues to see the financial benefits of operational and process improvements, reflecting ongoing efforts to lower store level inventories, increase store manager retention, and improve operational processes. The company experienced lower workers’ compensation and general liability trends for the fourth consecutive quarter.
- The company incurred approximately $6 million of expense related to shareholder derivative actions during the third quarter of fiscal 2007. Consequently, professional fees were lower during the quarter this year.
- The company has maintained strong cost controls and has continued to see the benefits of investments it has made in centralized procurement and facility management programs.
The tax rate was 36.1% compared with 35% in the third quarter last year.
- The increase in the tax rate was primarily a result of changes in state income taxes. The tax rate in fiscal 2007 was positively impacted by a retroactive reinstatement of federal jobs tax credits.
- Working capital fell to approximately $238 million, reflecting the reclassification of approximately $234 million of auction rate securities to long-term assets. Due to the continued failure of auctions for these securities and the uncertainty regarding the timing of future liquidity, the investments were reclassified. ARS portfolio included primarily triple A rated bonds that are collateralized by student loans guaranteed by the federal government.
- Discretionary business, which represents a heavier mix of sales than some others in channel, has been more negatively impacted by environmental factors.
Year-to-Date Financial highlights
- Sales were $5.22 billion, or 0.3% above sales of $5.20 billion for the first three quarters of fiscal 2007. The first three quarters of fiscal 2008 included one less week of sales compared with the first three quarters of fiscal 2007. Sales in comparable stores (for the comparable 39-week period in both years) decreased 0.3%. The decrease in comparable store sales during the 39-week period was a result of lower customer traffic, as measured by the number of register transactions. The average customer transaction increased.
- The company opened 165 new stores and closed 50 stores.
- Gross profit, as a percentage of sales, was 33.8% compared to 34.3% in the first three quarters of fiscal 2007. Higher seasonal markdowns and stronger sales of lower-margin consumable merchandise contributed to lower gross profit, as a percentage of sales. In addition, lower comparable store sales as compared with the first three quarters of fiscal 2007 resulted in the de-leveraging of many costs, including inventory shrinkage.
- SG&A expenses, as a percentage of sales, were 28.4% compared with 28% in the first three quarters of fiscal 2007. The increase in SG&A expenses, as a percentage of sales, was primarily a result of lower comparable store sales performance and higher occupancy costs. The effect of these factors more than offset lower insurance expense and lower professional fees.
- The company’s inventories at May 31, 2008, were $1.005 billion, or 0.3% below inventories of $1.008 billion at June 2, 2007. Average inventory per store (excluding in-transit inventory) at the end of the third quarter was approximately 3% lower than the average inventory per store at the end of the third quarter of fiscal 2007.
- At May 31, 2008, the company had approximately $233.9 million ($240 at par) in tax exempt auction rate securities that were subject to failed auctions. The company’s ARS portfolio primarily consists of AAA rated bonds that are collateralized by student loans guaranteed by the federal government. While the auction failures limit the company’s ability to currently liquidate these investments at par, the company believes that operating cash flows and existing credit facilities will provide sufficient liquidity for the company’s ongoing operations and growth initiatives.
