Family Dollar's fiscal Q3 earnings fell to US$81.1M from US$120.9M a year ago as sales rose 3.3% to US$2.66B, comparable-store sales fell 1.8% as result of fewer customer transactions; Q3 sales strongest in consumables category

MATTHEWS, North Carolina , July 10, 2014 (press release) – Earnings Per Diluted Share of $0.71; Adjusted Diluted EPS of $0.85
Comparable Store Sales Decreased 1.8%
June Comparable Store Sales Approximately Flat
Management Reaffirms Guidance for Fourth Quarter of Fiscal 2014

Family Dollar Stores, Inc. (FDO) today reported that for the third quarter of fiscal 2014 ended May 31, 2014, net sales increased 3.3% to $2.66 billion. Net income per diluted share for the third quarter of fiscal 2014 was $0.71. Adjusted third quarter fiscal 2014 net income per diluted share was $0.85 as compared to $1.05 in the third quarter of fiscal 2013. This year’s adjusted fiscal third quarter results exclude the negative impact on diluted net income per common share of $0.14 related to the Company’s restructuring initiatives as part of its previously announced strategic actions to strengthen its value proposition, increase operational efficiencies and improve financial performance. The tables included in this press release provide a reconciliation of GAAP to non-GAAP measures.

“We are executing our previously announced restructuring initiatives to improve our performance,” said Howard R. Levine, Chairman and CEO. “Our recent investment to permanently lower prices is resonating with customers; we are seeing savings from our workforce optimization efforts; and we are on track to close approximately 370 underperforming stores by the end of the fiscal year. We remain confident that these steps will position the Company to improve our financial performance and deliver higher long-term shareholder returns.”

Third Quarter Results

“Our results continue to reflect the economic challenges facing our core customer and an intense competitive environment,” continued Levine. “We are pleased that our comparable store sales results in the third quarter in all four merchandise categories improved relative to our second quarter results. Although our sales results remain below our expectations, we are encouraged by the improving trends.”

Net sales for the third quarter ended May 31, 2014, increased 3.3% to $2.66 billion from $2.57 billion in the third quarter of fiscal 2013 ended June 1, 2013. Comparable store sales for the 13-week period decreased 1.8% as a result of fewer customer transactions, partially offset by an increase in the average customer transaction value. Sales in the third quarter of fiscal 2014 were strongest in the Consumables category, driven primarily by strong growth in refrigerated/frozen food and tobacco.

Gross profit for the third quarter of fiscal 2014 was $910.9 million or 34.3% of net sales. During the quarter, the Company implemented a series of restructuring initiatives, including plans to close approximately 370 underperforming stores across the chain by the end of fiscal 2014. As a result, the Company incurred a $1.5 million inventory write-down in an effort to sell through merchandise at stores scheduled to close.

Excluding the inventory write-down, adjusted third quarter fiscal 2014 gross profit increased 2.2% to $912.3 million, or 34.3% of net sales, compared to $892.5 million, or 34.7% of net sales, in the third quarter of fiscal 2013. As a percentage of sales, the impact on gross profit of stronger sales of lower-margin consumables, lower markups and higher markdowns was partially offset by lower inventory shrinkage.

Selling, general and administrative expenses (“SG&A”), as a percentage of net sales, were 28.8% in the third quarter of fiscal 2014 compared to 27.4% in the third quarter of fiscal 2013. Most expenses were deleveraged as a result of the decrease in comparable store sales. As a percentage of net sales, the impact on SG&A of higher store occupancy, labor and advertising costs was partially offset by lower incentive compensation expenses.

In the third quarter of fiscal 2014, the Company incurred a $23.0 million charge as part of its previously announced restructuring initiatives including planned store closures and workforce optimization. This restructuring charge consisted primarily of property and equipment impairments and termination benefits directly associated with the store closings and workforce optimization.

Operating profit in the third quarter of fiscal 2014 was $120.8 million. As discussed above, the Company’s third quarter fiscal 2014 operating profit includes $24.5 million of charges related to the Company’s restructuring activities. Excluding the charges, adjusted third quarter fiscal 2014 operating profit was $145.3 million, or 5.5% of net sales, compared with $188.4 million, or 7.3% of net sales, in the third quarter of fiscal 2013.

The effective tax rate was 33.1% for the third quarter of fiscal 2014 compared with 36.2% for the third quarter of fiscal 2013. The effective tax rate was lower primarily due to foreign tax benefits associated with the Company’s global sourcing efforts and increased tax benefits associated with federal jobs tax credits.

Net income for the third quarter of fiscal 2014 was $81.1 million. Adjusted third quarter fiscal 2014 net income was $96.5 million as compared to $120.9 million in the third quarter of fiscal 2013.

The Company’s merchandise inventories as of May 31, 2014, were $1.59 billion compared with $1.47 billion as of June 1, 2013. Average inventory per store at the end of the quarter was 2.1% higher than the average inventory per store at the end of the third quarter of fiscal 2013.

During the third quarter of fiscal 2014, the Company opened 111 new stores, closed 3 stores, and renovated, relocated or expanded 266 stores.

In the 39-week period ended May 31, 2014, capital expenditures were $307.2 million compared with $599.7 million in the 40-week period ended June 1, 2013. During the 39-week period, the Company spent $106.5 million related to new stores; $92.9 million on its store renovation program; $50.6 million on existing stores; $37.0 million related to corporate and technology investments; and $20.2 million on supply chain investments.

In the 39-week period ended May 31, 2014, the Company repurchased approximately 1.8 million shares of its common stock for a total cost of $125.0 million and paid $94.8 million in dividends to shareholders. As of May 31, 2014, the Company had authorization to purchase up to an additional $245.8 million of its common stock.

Strategic Plan Update

As part of its ongoing business review, the Company is taking deliberate actions to strengthen its value proposition, increase operational efficiencies and improve its financial performance. As previously announced, the Company has:

  • Lowered prices on nearly 1,000 basic items, investing more than $50 million, on an annualized basis, to deliver more compelling values to customers;
  • Reduced corporate overhead and re-aligned key organizational functions to improve execution and reinforce a commitment to being an efficient, low-cost retailer;
  • Launched a process to close approximately 370 underperforming stores in the second half of fiscal 2014; and
  • Made plans to slow new store growth beginning in fiscal 2015. The Company now expects to open 350-400 new stores in fiscal 2015, down from approximately 525 new stores in fiscal 2014.

In addition, the Company is investing in longer-term initiatives to drive more profitable growth. These initiatives include:

  • Building on efforts to capture more food trips, the Company intends to further expand its cooler program beginning in fiscal 2015;
  • Continuing to expand traffic-driving categories with a multi-year rollout of beer and wine, beginning in fiscal 2015; and
  • Leveraging the scale and considerable diversity of the chain to launch a multi-year clustering initiative designed to enhance store productivity.

The Company’s in-depth business review remains on-going, and the Board and management team continue to evaluate additional opportunities to drive efficiency in stores, and further increase value and convenience for the customer.

Outlook

For the fourth quarter of fiscal 2014, the Company expects that comparable store sales will be approximately flat and that earnings per diluted share will be between $0.75 and $0.85, excluding approximately $0.37 related to restructuring charges. Including the restructuring charges, the Company expects earnings per diluted share will be between $0.38 and $0.48.

For the 52-week year ending August 30, 2014, the Company expects that earnings per diluted share will be between $3.07 and $3.17, excluding approximately $0.51 per share related to restructuring charges. Including the restructuring charges, the Company expects earnings per diluted share will be between $2.56 and $2.66.

The Company's outlook for fiscal 2014 is based on the following assumptions which may or may not prove valid:

  • A low-single digit increase in net sales, excluding the impact of the extra week in fiscal 2013;
  • A low-single digit decline in comparable store sales;
  • Approximately 525 new store openings and approximately 400 store closings;
  • A decline in gross profit, as a percentage of sales;
  • SG&A expense de-leverage based on our comparable store sales outlook;
  • An effective income tax rate between 34.5% and 35.0%; and
  • Capital expenditures of between $450 million and $500 million.

Cautionary Statements

Certain statements contained in this press release are “forward-looking statements” that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address certain plans, activities or events which the Company expects will or may occur in the future and relate to, among other things, the state of the economy, the Company’s investment and financing plans, net sales, comparable store sales, store openings and closings, restructuring charges, restructuring initiatives, workforce optimization, gross profit, income tax rates, capital expenditures, cost of sales, SG&A expenses, earnings per diluted share, dividends and share repurchases. Various risks, uncertainties and other factors could cause actual results to differ materially from those expressed in any forward-looking statement. Consequently, all of the forward-looking statements made by the Company in this and in other documents or statements are qualified by factors, risks and uncertainties, including, but not limited to, those set forth under the headings titled “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” in the Company’s most recent Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission up to the date of this release.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release. The Company does not undertake to update or revise these forward-looking statements even if experience or future changes make it clear that projected results expressed or implied in such statements will not be realized, except as may be required by law.

In addition, the amounts and timing of all estimates are subject to change. The actual amounts and timing may vary materially based on various factors, including the timing of store closings; the timing and amount of sublease income and other lease expense; factors relating to real estate including sale proceeds; asset write-downs and other factors affecting inventory value; changes in management's assumptions; and other factors.

Earnings Conference Call Information

The Company plans to host a conference call with investors today, July 10, 2014, at 10:00 a.m. ET to discuss the results. The Company will also discuss business initiatives, plans and expectations for fiscal 2014. After some prepared remarks by management, participants will have an opportunity to ask questions. The Company’s responses to questions, as well as other matters discussed during the conference call, may include information that has not been disclosed previously.

If you wish to participate, please call (800) 890-0881 for domestic US calls and (719) 325-2295 for international calls at least 10 minutes before the call is scheduled to begin. The passcode for the conference call is 3827795 or “FAMILY DOLLAR.”

A live webcast of the conference call with accompanying slides can be accessed at the following link.

http://investor.familydollar.com/investors-relations/default.aspx

A replay of the webcast will be available at the address noted above after 11:00 a.m. ET, July 10, 2014.

About Family Dollar

For more than 54 years, Family Dollar has been providing value and convenience to customers in easy-to-shop neighborhood locations. Family Dollar’s mix of name brands and quality, private brand merchandise appeals to shoppers in more than 8,200 stores in rural and urban settings across 46 states. Helping families save on the items they need with everyday low prices creates a strong bond with customers, who often refer to their neighborhood store as “my Family Dollar.” Headquartered in Matthews, North Carolina, just outside of Charlotte, Family Dollar is a Fortune 300, publicly held company with common stock traded on the New York Stock Exchange under the symbol FDO. For more information, please visit www.familydollar.com.

FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
                 
    For the Third Quarter Ended
(in thousands, except per share amounts)   May 31, 2014

(13 Weeks)

  % of Net Sales June 1, 2013

(13 Weeks)

  % of Net Sales
                 
Net sales   $ 2,658,964   100.00 %   $ 2,573,506   100.00 %
                 
Cost of sales     1,746,625   65.69 %     1,681,048   65.32 %
                 
Cost of sales - restructuring     1,486   0.06 %     -   0.00 %
                 
Gross margin     910,853   34.26 %     892,458   34.68 %
                 
Selling, general and administrative expenses     767,049   28.85 %     704,038   27.36 %
                 
Restructuring     22,996   0.86 %     -   0.00 %
                 
Operating profit     120,808   4.54 %     188,420   7.32 %
                 
Investment income     58   0.00 %     91   0.00 %
                 
Interest expense     7,959   0.30 %     6,071   0.24 %
                 
Other income     8,400   0.32 %     7,196   0.28 %
                 
Income before income taxes     121,307   4.56 %     189,636   7.37 %
                 
Income taxes     40,160   1.51 %     68,698   2.67 %
                 
Net income   $ 81,147   3.05 %   $ 120,938   4.70 %
                 
Net income per common share - basic   $ 0.71       $ 1.05    
Weighted average shares - basic     113,829         114,977    
                 
Net income per common share - diluted   $ 0.71       $ 1.05    
Weighted average shares - diluted     114,150         115,478    
                 
Dividends declared per common share   $ 0.31       $ 0.26    
FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
                   
    For the First Three Quarters Ended
(in thousands, except per share amounts)   May 31, 2014

(39 Weeks)

  % of Net Sales   June 1, 2013

(40 Weeks)

  % of Net Sales
                   
Net sales   $ 7,875,276   100.00 %     $ 7,889,191   100.00 %
                   
Cost of sales     5,203,802   66.08 %       5,202,889   65.95 %
                   
Cost of sales - restructuring     1,486   0.02 %       -   0.00 %
                   
Gross margin     2,669,988   33.90 %       2,686,302   34.05 %
                   
Selling, general and administrative expenses     2,265,608   28.77 %       2,153,936   27.30 %
                   
Restructuring     22,996   0.29 %       -   0.00 %
                   
Operating profit     381,384   4.84 %       532,366   6.75 %
                   
Investment income     162   0.00 %       275   0.00 %
                   
Interest expense     22,256   0.28 %       19,968   0.25 %
                   
Other income     23,334   0.30 %       20,984   0.27 %
                   
Income before income taxes     382,624   4.86 %       533,657   6.76 %
                   
Income taxes     132,581   1.68 %       192,295   2.44 %
                   
Net income   $ 250,043   3.18 %     $ 341,362   4.33 %
                   
Net income per common share - basic   $ 2.19         $ 2.96    
Weighted average shares - basic     114,066           115,321    
                   
Net income per common share - diluted   $ 2.18         $ 2.95    
Weighted average shares - diluted     114,458           115,869    
                   
Dividends declared per common share   $ 0.83         $ 0.68    
FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
                 
        As of
        May 31,   June 1,
(in thousands, except per share and share amounts) 2014   2013
Assets            
Current assets:            
  Cash and cash equivalents   $ 163,734   $ 123,462
  Short-term investment securities     18,007     26,665
  Restricted cash and investments     33,979     57,897
  Merchandise inventories     1,591,562     1,474,410
  Deferred income taxes     32,798     71,305
  Income tax refund receivable     38,241     4,294
  Prepayments and other current assets     212,338     143,881
    Total current assets     2,090,659     1,901,914
                 
Property and equipment, net     1,786,911     1,832,178
Investment securities     16,646     23,366
Other assets     68,888     92,946
                 
Total assets   $ 3,963,104   $ 3,850,404
                 
Liabilities and Shareholders' Equity            
Current liabilities:            
  Short-term borrowings   $ 276,000   $ 219,000
  Current portion of long-term debt     16,200     16,200
  Accounts payable     676,079     680,118
  Accrued liabilities     327,999     351,422
  Income taxes     4,997     8,429
    Total current liabilities     1,301,275     1,275,169
                 
Long-term debt     484,188     500,237
Other liabilities     289,128     283,442
Deferred gain     206,761     214,179
Deferred income taxes     25,169     56,233
Commitments and contingencies        
                 
Shareholders' Equity:            
  Preferred stock, $1 par; authorized and unissued 500,000 shares            
         
 

Common stock, $.10 par; authorized

 600,000,000 shares

           
      12,062     12,000
  Capital in excess of par     325,623     293,523
  Retained earnings     1,724,871     1,497,311
  Accumulated other comprehensive loss     (1,515)     (1,441)
  Common stock held in treasury, at cost     (404,458)     (280,249)
  Total shareholders' equity     1,656,583     1,521,144
                 
Total liabilities and shareholders' equity   $ 3,963,104   $ 3,850,404
FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
               
          For the First Three Quarters Ended
(in thousands)   May 31, 2014

(39 Weeks)

June 1, 2013

(40 Weeks)

Cash flows from operating activities:        
  Net income   $ 250,043     $ 341,362  
 

Adjustments to reconcile net income to net cash provided by operating activities:

 
    Depreciation and amortization     195,671       176,895  
    Amortization of deferred gain     (12,642 )     (11,037 )
    Impairment on property and equipment - restructuring     19,041       -  
    Deferred income taxes     9,190       (682 )
    Excess tax benefits from stock-based compensation     (5,510 )     (13,360 )
    Stock-based compensation     12,639       13,015  
    Loss on disposition of property and equipment     8,335       5,018  
    Changes in operating assets and liabilities:        
      Merchandise inventories     (124,546 )     (48,247 )
      Prepayments and other current assets     (50,768 )     (96,249 )
      Other assets     9,385       (1,877 )
      Accounts payable and accrued liabilities     (33,042 )     (26,889 )
      Income taxes     (24,728 )     (27,723 )
      Other liabilities     (67 )     15,125  
            253,001       325,351  
               
Cash flows from investing activities:        
  Purchases of investment securities     (50,422 )     (43,475 )
  Sales of investment securities     63,715       22,638  
  Net change in restricted cash     390       63,161  
  Capital expenditures     (307,183 )     (599,685 )
  Net proceeds from sale-leaseback     32,538       163,520  
  Proceeds from dispositions of property and equipment     563       2,780  
            (260,399 )     (391,061 )
               
Cash flows from financing activities:        
  Short-term borrowings     1,916,000       1,753,000  
  Repayment of short-term borrowings     (1,640,000 )     (1,549,000 )
  Repayment of long-term debt     (16,200 )     (16,200 )
  Repurchases of common stock     (125,038 )     (74,954 )
  Changes in cash overdrafts     (29,138 )     31,495  
  Proceeds from exercise of employee stock options     13,794       17,572  
  Excess tax benefits from stock-based compensation     5,510       13,360  
  Payment of dividends     (94,795 )     (78,434 )
            30,133       96,839  
               
Net change in cash and cash equivalents     22,735       31,129  
Cash and cash equivalents at beginning of period     140,999       92,333  
Cash and cash equivalents at end of period   $ 163,734     $ 123,462  
FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES
Selected Additional Information
                     
RECONCILIATION OF NON-GAAP DISCLOSURES:            
        May 31, 2014   June 1, 2013   May 31, 2014   June 1, 2013
(in thousands, except per share amounts) (13 Weeks)   (13 Weeks)   (39 Weeks)   (40 Weeks)
                     
Gross profit       $ 910,853   $ 892,458   $ 2,669,988   $ 2,686,302
Restructuring charges - Cost of sales     1,486     -     1,486     -
Adjusted gross profit       $ 912,339   $ 892,458   $ 2,671,474   $ 2,686,302
                     
Operating profit       $ 120,808   $ 188,420   $ 381,384   $ 532,366
Restructuring charges - Cost of sales     1,486     -     1,486     -
Restructuring charges - SG&A     22,996     -     22,996     -
Adjusted operating profit     $ 145,290   $ 188,420   $ 405,866   $ 532,366
                     
Net income       $ 81,147   $ 120,938   $ 250,043   $ 341,362
After-tax impact of restructuring charges - Cost of sales   932     -     932     -
After-tax impact of restructuring charges - SG&A   14,423     -     14,423     -
Adjusted net income       $ 96,502   $ 120,938   $ 265,398   $ 341,362
                     
Diluted net income per common share   $ 0.71   $ 1.05   $ 2.18   $ 2.95
Per share impact of restructuring charges - Cost of sales   0.01     -     0.01     -
Per share impact of restructuring charges - SG&A   0.13     -     0.13     -
Adjusted diluted net income per common share $ 0.85   $ 1.05   $ 2.32   $ 2.95
NET SALES BY CATEGORY:            
    For the Third Quarter Ended
    May 31, 2014   June 1, 2013    
(in thousands)   (13 Weeks)   (13 Weeks)   % Change  
Consumables   $ 1,948,174     $ 1,866,714     4.4 %
Home products     260,129       264,268     -1.6 %
Apparel and accessories     210,860       206,523     2.1 %
Seasonal and electronics     239,801       236,001     1.6 %
TOTAL   $ 2,658,964     $ 2,573,506     3.3 %
             
    For the First Three Quarters Ended
    May 31, 2014   June 1, 2013    
(in thousands)   (39 Weeks)   (40 Weeks)   % Change  
Consumables   $ 5,753,716     $ 5,667,501     1.5 %
Home products     782,404       828,832     -5.6 %
Apparel and accessories     565,992       591,438     -4.3 %
Seasonal and electronics     773,164       801,420     -3.5 %
TOTAL   $ 7,875,276     $ 7,889,191     -0.2 %
             
             
STORES IN OPERATION:            
   

For the First Three Quarters Ended

   
    May 31, 2014   June 1, 2013    
    (39 Weeks)   (40 Weeks)    
Beginning Store Count     7,916       7,442      
New Store Openings     355       380      
Store Closings     (25 )     (21 )    
Ending Store Count     8,246       7,801      
Total Square Footage (000s)     71,031       67,016      
Total Selling Square Footage (000s)     59,488       55,994      
INCREASE     6.2 %     7.8 %    

 

Contact:
Family Dollar Stores, Inc.
INVESTOR CONTACT:
Kiley F. Rawlins, CFA, 704-708-2858
krawlins@familydollar.com
or
MEDIA CONTACT:
Bryn R. Winburn, 704-708-1653
bwinburn@familydollar.com



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