Highlights From FDO's Q4 Conference Call: Customer Base Continues Expanding; Same-Store Sales Increased 5.5% Y-o-Y

Family Dollar Stores, Inc. (NYSE: FDO) reported Q4 EPS of $0.66, $0.03 better than the analyst estimate of $0.63. Revenue for the quarter came in at $2.13 billion versus the consensus estimate of $2.12 billion.

Highlights From FDO's Q4 Conference Call:

• Family Dollar Stores, Inc. sees FY2012 EPS of $3.50-$3.75, versus the consensus of $3.57. Comps expected to be up 4 to 6%.
  
• Family Dollar Stores, Inc. sees Q1 2012 EPS of $0.65-$0.73, versus the consensus of $0.66. Comps to increase 4 to 6%.
  
• (Howard R. Levine) We reported another year of strong earnings growth with earnings per diluted share increasing 19.1% to $3.12 per share.
  
• Importantly, we made meaningful progress in our efforts to accelerate revenue growth, expand operating margin, and optimize our capital structure.
  
• Our customer base is expanding and our relationship with our customers is getting stronger.
  
• As a result comp store sales increased 5.5% for the year. This performance combined with the addition of 238 net new stores resulted in an acceleration of revenue growth to 8.7%.
  
• Finally, we optimized our balance sheet and increased shareholder returns. In fiscal '11, we repurchased $670 million of the company's common stock and distributed approximately $83 million in dividends.
  
• We are pursuing an ambitious growth agenda to expand our market share and drive greater financial returns and we continue to build our leadership team to better support our growth aspirations.
  
• (Kenneth T. Smith) As expected, fourth quarter sales were strong. With comp sales increasing 5.6% on top of a 6.1% increase last year.
  
• Although gross margin was pressured a bit more than anticipated in the quarter, better than expected SG&A leverage resulted in 32 basis points of operating margin expansion in the quarter.
  
• Net sales in the fourth quarter increased 9.1% to $2.1 billion. The 5.6% increase in comp store sales was driven both by increases in customer traffic and average customer ticket.
  
• Looking at the cadence of business through the quarter, June and July were fairly consistent while August accelerated nicely. During the quarter, we opened 94 new stores and closed 14 stores compared to 75 openings and 14 closings in the fourth quarter of fiscal 2010.
  
• From a category perspective,From a category perspective, sales for the quarter were strongest in our Consumables and Seasonal and Electronics categories.
  
• Consumable sales increased 12% year-over-year reflecting our expanded assortment of food and health and beauty aids across the chain.
  
• Seasonal and Electronic sales were also very strong in the quarter increasing 9.2% over last year.
  
• As a percentage of sales, gross profit declined 68 basis points to 34%. Although we are driving more favorable purchase markups through our investments and price management capabilities, private brands and global sourcing, the impact of stronger sales of lower margin Consumables pressured gross margins. In addition, inventory shrinkage and promotional markdowns increased slightly during the quarter.
  
• To introduce these changes to customers we leveraged a number of promotional tools. As a result, sales of Consumables increased to 69.1% of sales in the quarter compared to 67.3% last year, a mix shift of 182 basis points and promotional markdowns increased slightly during the quarter.
  
• Turning to expenses, SG&A expense increased 5.3% to $594 million. As a percentage of sales, SG&A expense decreased 101 basis points to 27.8% in the fourth quarter of 2011 as compared to 28.8% in the fourth quarter of 2010.
  
• Moving on with the P&L, operating profit in the fourth quarter increased 15.1% to $131.8 million. Operating profit, as a percentage of sales, expanded to 6.2% as compared to 5.9% in the fourth quarter of 2010.
  
• The effective tax rate in the fourth quarter was 36% compared with 33.8% in the fourth quarter of 2010.
  
• Net sales for the year increased 8.7% to $8.5 billion and comp store sales increased 5.5%.
  
• Interest expense in fiscal 2011 increased to $22.4 million compared with $13.3 million in fiscal 2010. As a reminder, we issued $300 million of senior unsecured notes in the second quarter of fiscal 2011.
  
• Merchandise inventories at the end of the year were 12.3% higher than at the end of fiscal 2010. The average inventory per store increased about 9% driven primarily by our planned expansion of food and health and beauty aids.
  
• At the end of fiscal 2011, the company had the authorization to purchase up to an additional $87.3 million of its common stock. I would note that our Board of Directors has authorized the additional repurchases of $250 million of our common stock. For most account fiscal 2011 was another strong year. We invested aggressively, delivered double-digit earnings per share growth and improved returns.
  
• Levine) After increasing our pace of new store openings last year by 50%, we intend to increase new store growth again this year by more than 50%. A year ago, we announced our intention to return to square footage growth of 5% to 7% by fiscal 2013.
  
• With the progress achieved in building the pipeline in fiscal _11, I'm pleased to report that we expect to achieve our goals in fiscal _12, a year earlier than originally planned. This year, we planned to open 450 to 500 new stores including our first stores in California which we expect to open before Christmas.
  
• I'm especially pleased with the growth we have seen in our private brand consumables which increased 26% this year. Private brands now represent about 25% of our total sales. Private brand consumables have grown to about 16% of sales.
  
• In fiscal _11 we opened offices in Hong Kong and Shenzhen and today these teams are helping us strengthen and expand our supplier network. We also invested in new tools to help us manage the product development lifecycle better. As a result of these investments, we increased our direct imports in fiscal _11 by about 24%. As store labor is one of our largest expenses, improving the productivity of workforce is critical to maintaining a low cost structure.
  
• (Q&A) Hi, a couple of things. You talked about revitalizing the non-consumables business, obviously Consumables traffic is terrific. Can you go into that a little deeper particularly in this economy there's obviously someone to patient on what people can spend on that side of the store? But it looks like there is a big opportunity to take the existing traffic in Consumables and get people to put another item or two in their basket. So is - maybe there is tangible example or two, how you think you can do that here over the next year and capitalize on the existing consumables traffic? (A) Thank you for the question. First I agree with you. I think we do have an opportunity to leverage the traffic on the Consumables sides and try to gain more sales in some of the discretionary categories. I think as everybody knows, it is tough out there and what we have seen particularly with the low income consumer is they have really retracted their purchase in some of the discretionary categories and really focused on basic needs and we believe that that is a headwind that we're facing but nevertheless continue to believe we have opportunity to improve both sales in apparel and home as well as the seasonal categories. And as we look into approaching the holiday season, we're very excited about this assortment that we put together there. While we do believe that it's going to be a challenging Christmas, I think our merchants and marketing teams have worked very hard to put together great toy selection great crematory selection, our home selection I think is outstanding and we're supporting that with strong promotional plans throughout the holiday season. So we continue to believe that we will face some additional traffic coming in our store. We've really work hard to leverage that to that to get her to come over to the other side of the store and take advantage of some of the great values that we are offering on the discretionary side.

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