This summary is based on the second quarter fiscal 2008 earnings call conducted by Family Dollar Stores Inc. (FDO) on April 4, 2008.
Key Investors Issues
- The earnings per share dropped to 45 cents from 60 cents in the prior year quarter.
- Quarterly revenue dropped from $1.947 billion in last year to $1.833 billion.
- The company expects EPS for Q3 to be between 39 cents and 44 cents.
- The company expects to open about 200 new stores and close approximately 75 stores in fiscal 2008.
Second Quarter Fiscal 2008 Financial Highlights
Family Dollar Stores reported net income of $63.3 million for the second quarter of fiscal 2008 ended March 1, 2008, a 13-week period, compared with $90.5 million for the second quarter of fiscal 2007 ended March 3, 2007, a 14-week period.
Net income per diluted share in the second quarter of fiscal 2008 was 45 cents compared with 60 cents per diluted share in the second quarter of fiscal 2007.
The company’s customers continue to react to the current economic environment by limiting their discretionary spending. This was particularly apparent in the company’s stores during this past holiday season. In addition, the second quarter performance was pressured by both the loss of one week of holiday sales and one less week of sales as compared with the second quarter of fiscal 2007.
Net sales for the second quarter of fiscal 2008 were $1.833 billion, or 5.9% below sales of $1.947 billion in last year.
The second quarter of fiscal 2008 included one less week of holiday sales and one less week of sales compared with the second quarter of fiscal 2007. Comparing results for the same 13-week period year over year, net sales increased 3.2%, and sales in comparable stores were approximately flat. 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 32.7% in the second quarter of fiscal 2008 compared to 33.5% in the second quarter of fiscal 2007.
Higher seasonal markdowns contributed to lower gross profit, as a percentage of sales, in the second quarter of fiscal 2008. In addition, lower net sales during the quarter resulted in the de-leverage of many costs, including freight expense and inventory shrinkage.
At the end of the second quarter, inventory per store was approximately 1% lower than at the end of the second quarter last year.
This was driven primarily by a double-digit production in apparel inventories. This is the eighth consecutive quarter of inventory improvement.
Selling, general and administrative (SG&A) expenses declined 1.3% to $502.6 million compared to $509.2 million in the prior year.
As a percentage of sales, SG&A expenses were 27.4% in the second quarter of fiscal 2008 compared with 26.1% in the second quarter of fiscal 2007. The increase in SG&A expenses, as a percentage of sales, was primarily a result of lower net sales during the quarter. In addition, higher store occupancy expenses more than offset lower insurance expense and lower professional fees.
During the quarter, most operating expenses were deleveraged, reflecting low comp sales performance and offsetting the benefit from lower professional fees. In addition, there were two offsetting expense items reflected in the results.
- The firm has worked to lower store level inventory, increase store manager retention and improve its processes, it has experienced lower workers’ compensation claims. This trend has been consistently better for several quarters. Working with outside actuary, the company has reduced its workers’ compensation liabilities to better reflect its claim experience.
- Offsetting the impact of lower workers’ compensation trends was an adjustment related to store rental expenses, primarily property tax, insurance, and common area maintenance expenses. The firm is creating a more proactive facility management platform, which includes the implementation of a new lease management system. The utilization of this system will enable the firm to manage occupancy costs better over the longer term but has created some timing differences during the implementation period as the firm refines its accrual estimates for certain store rental expenses.
The tax rates for the second quarter and first half of fiscal 2008 decreased to 34.4%.
The decline in the second quarter was primarily a result of a decrease in FIN-48 liabilities and changes in state income taxes.
As food is an important shopping trip driver, the firm continues to expand and refine its food assortment to leverage the opportunity to provide both value and convenience to customers, especially in today’s environment of rising energy and food costs.
Continuing the initiatives the firm began last year, the firm has expanded the selling space for food in an additional 2,700 stores this year and approximately 1,500 stores now accept food stamps. In addition, the company has strengthened its every day assortment of quick prep and ready-to-serve products in all stores, introducing larger family sizes and emphasizing private label and value brands. Clearly the customers appreciate the changes that the firm has made in assortment, as food continues to be the biggest driver of sales.
The firm has also made investments in other key traffic driving consumable areas, including household paper and home cleaning products.
