Family Dollar Stores (FDO)

Q2 2011 Earnings Call

March 30, 2011 10:00 am ET

Executives

Kenneth Smith - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Kiley Rawlins - Vice President of Investor Relations & Communications

Howard Levine - Executive Chairman, Chief Executive Officer and Member of Equity Award Committee

R. Kelly - President and Chief Operating Officer

Analysts

Bernard Sosnick - Gilford Securities Inc.

Aram Rubinson - Nomura Securities Co. Ltd.

David Mann - Johnson Rice & Company, L.L.C.

Meredith Adler - Barclays Capital

Sachin Shah - ICAP

Scott Kaufman-Ross

Austin Pauls

Deborah Weinswig - Citigroup Inc

Laura Champine - Cowen and Company, LLC

Michael Baker - Deutsche Bank AG

Presentation

Operator

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Good morning. My name is Sandra, and I will be your conference facilitator today. I would like to welcome everyone to the Family Dollar Earnings Conference Call. [Operator Instructions] 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. Good morning, everyone, and thank you for joining us today. For those of you who have dialed in, please note that we've posted accompanying slides on the 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 which 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, March 30, 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 second quarter and first half of fiscal 2011. Then we'll 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. In consideration of others on the call, please limit your question to one question and one follow-up question, if necessary. Remember that the queue for the question and answer session will not be available until after we have finished our prepared remarks.

Now I'd like to turn the call over to Ken Smith. Ken?

Kenneth Smith

Thanks, Kiley. This morning, we reported diluted earnings per share increased 21% to $0.98 compared with $0.81 in the second quarter last year, reflecting the effect of our stock repurchase program.

Net income for the quarter was $123.2 million, an increase of 9.8% over last year. While revenue growth was near the low end of our original expectation, improved purchase markups, combined with benefits from cost improvement initiatives, resulted in modest operating margin expansion during the quarter.

As we reported a few weeks ago, net sales for the quarter increased 8.3% to $2.3 billion. Comp store sales for the quarter increased 5.1%. Sales momentum increased through the quarter, with February sales benefiting from early spring-like conditions. Although customer traffic continued to be the biggest driver of sales, average customer ticket increased modestly, reflecting strong Valentine's Day sales and early sales of spring seasonal merchandise.

During the second quarter, we opened 61 new stores and closed 25 stores, compared with 43 openings and 19 closings in the second quarter of fiscal 2010. We remain on track to open our plan of 300 new stores this year. Even as we accelerate the pace of openings, we continue to improve new store profitability and returns.

Turning to sales by category. Sales in all merchandise categories increased compared to the second quarter of last year. Building on the momentum we saw in the first quarter, Consumables and Seasonal delivered the largest increases in sales during the quarter, while the sales in Home and Apparel posted more modest increases.

As a percentage of sales, Consumables increased to 62.2% of sales in the second quarter compared with 60.8% of sales last year. Despite the adverse mix shift, gross margin as a percentage of sales increased about 20 basis points to 35.7% of sales. The increase in gross margin was primarily a result of lower shrink expense, which more than offset higher freight expense. I would note that this is the 10th consecutive quarter of shrink improvement.

In addition, the impact of stronger sales of lower margin Consumables was offset by higher purchase markups. We continue to focus on improving our purchase markups through better price management, the expansion of private brands and our global sourcing efforts.

Markdowns in the quarter showed modest improvement, reflecting stronger seasonal sales and improved merchandise planning processes. We are actively reinvesting most of these savings to support promotional activities.

Total SG&A expense for the quarter increased 8.5% to $607 million compared to about $560 million last year. This expense growth was driven by the successful execution of our targeted revenue growth investments such as our renovation program, expanded store operating hours and the acceleration of new store growth. We continue to manage core SG&A expense growth in the 2% to 3% range.

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