Family Dollar Stores, Inc. (FDO)

F3Q10 (Qtr End 05/29/10) Earnings Call Transcript

July 7, 2010 10:00 am ET

Executives

Kiley Rawlins – VP, IR and Communications

Ken Smith – SVP and CFO

Howard Levine – Chairman and CEO

Jim Kelly – President and COO

Analysts

Charles Grom – JP Morgan Securities

Deborah Weinswig – Citigroup Global Markets

Dan Wewer – Raymond James & Associates

Wayne Hood – BMO Capital Markets

Mark Miller – William Blair & Company

Joseph Parkhill – Morgan Stanley

Scot Ciccarelli – RBC Capital Markets

Bernard Sosnick – Gilford Securities

Presentation

Operator

Good morning. My name is Courtney and I will be your conference facilitator today. I would like to welcome everyone to the Family Dollar earnings conference call. Today’s conference is being recorded. If you have any objections you may disconnect at this time. All lines have been placed on a 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 the prepared remarks. So, please wait until after the speakers have finished their remarks to be – before attempting to enter the queue. I would now like to introduce Ms. Kiley Rawlins, Vice President of Investor Relations and Communications. Miss Rawlins, you may begin your conference.

Kiley Rawlins

Thank you, Courtney, and good morning everyone. Thank you for joining us today. Before we begin you should note 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 statements 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, July 7th, 2010. We have no obligation to update or revise our forward-looking statement 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 will begin our discussion this morning with the review of our results for the third quarter of fiscal 2010. 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. Please 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?

Ken Smith

Thanks, Kiley. This morning we reported diluted earnings per share for the third quarter of $0.77, a 24% increase over the third quarter of fiscal 2009. Strong revenue growth combined with continued productivity improvements resulted in 100 basis points of operating margin expansion during the quarter.

As Howard will discuss further in a moment, we are making investments to drive revenue growth, specifically, we are expanding our assortment of traffic-driving consumables and increasing our marketing efforts. These changes, combined with the completion of significant initiatives, including our point-of-sale refresh and expanded operating hours resulted in an increase in net sales of 8.4% and an increase in comp sales of 7% for the quarter.

Customer traffic continued to be the primary driver of comp sales. As expected, sales of consumables accelerated nicely during the quarter. I would note that sales of discretionary categories were more volatile throughout the quarter, but increased overall.

Gross profit, as a percentage of sales increased 40 basis points in the quarter. This improvement was a result of lower markdowns and lower inventory shrink. As a reminder, we have benefited from diesel costs for the last several quarters. Today, diesel is measurably higher than last year, but I am pleased to report that our supply chain teams were able to mitigate the impact of significantly higher diesel cost through continued productivity and efficiency improvements. While we continue to see benefits from our global sourcing and private-label investments, we have reinvested many of these cost savings to enhance the quality and appeal of our assortment.

SG&A expense as a percentage of sales decreased 60 basis points during the quarter. Reflecting the effect of the 7% comp increase in the quarter and our continued focus on driving productivity improvements, most expenses, including occupancy costs were leveraged in the quarter. I would note that we continue to benefit from favorable trends in our workers’ compensation and general liability costs. The net impact during the third quarter was about 30 basis points of leverage.

We also continue to see returns from our energy management efforts, which resulted in lower utility expenses during the quarter. Partially offsetting these improvements was the impact of our investments in revenue-driving initiatives, including expanded operating hours, our space realignment efforts, and increased advertising.

Our effective tax rate was a bit higher this quarter at 37.6% compared with 35.8% in the third quarter last year. The higher tax rate as a percentage of pre-tax income was primarily a result of changes in our liabilities for uncertain tax positions, changes in state income taxes, and fewer federal jobs tax credits.

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