Family Dollar Stores, Inc. (FDO)
Q3 2011 Earnings Call Transcript
June 29, 2011 10:00 a.m. ET

Executives

Kiley F. Rawlins – Vice President of Investor Relations and Communications
Howard R. Levine – Chairman and Chief Executive Officer
R. James Kelly – President and Chief Operating Officer
Kenneth T. Smith – Chief Financial Officer

Analysts

Bernard Sosnick – Gilford Securities
Adrianne Shapira – Goldman Sachs
Jack Balis – Focus Research
Laura Champine – Cowen and Company
Daniel Binder – Jefferies & Company
Mark Montagna – Avondale Partners
Joseph Feldman – Telsey Advisory Group
Anthony Chukumba – BB&T Capital Markets
Dan Wewer – Raymond James
Adam Sindler – Deutsche Bank

Presentation

Operator

Good morning. My name is Evan [ph] and I will be your conference facilitator today. I would like to welcome everyone to the Family Dollar earnings conference call. All lines have been placed on mute to prevent any background noise. After the company''s prepared remarks, there will be a brief question-and-answer period. The question-and-answer queue will not be available until after the company has concluded their prepared remarks. So please wait until after the speakers have finished their remarks before attempting to enter the queue. 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 expenditures as well as our expectations for future financial performance. While these statements address plans or events that 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 filings. 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 statements 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 a review of our results for the third quarter and the first three quarters of fiscal 2011. Then we will 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 would like to turn the call over to Ken Smith. Ken?

Kenneth T. 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 a penny 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 comps store sales was driven by both increased customer traffic and a higher average ticket.

During the quarter, we opened 60 new stores and closed five stores compared with 39 openings and four 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 in 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.