Family Dollar FY 4Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Last FY was really difficult

” From a financial standpoint, fiscal ’14 was one of the most difficult years in our company’s history. Comp store sales declined 2.1% and earnings on an adjusted basis and excluding the extra week last year declined about 19%. While our long term positioning and growth prospects remain strong, our results were pressured on multiple fronts throughout the year.”

Discretionary purchases have continued to struggle

“While discretionary purchases continued to be constrained by economic pressures facing our customers, we’re encouraged by the recent sales trends in all three discretionary categories and we’re confident that we will carry this momentum into fiscal ’15 and deliver a stronger holiday season.”

Low income consumer still struggling

” Our core customer is still struggling. Low income is still not getting the jobs like higher income folks are and in fact some of the data we even questioned as so many people have dropped out of the job market but all that being said, we’re prepared for that.”

You have to manage the pace of change

” think we had a significant management change a few years ago and as part of that there were a lot of other changes and when you look at a business and you have management changes like that coming from different retailers with different ideas and thoughts and you know our effort to try to continue to improve our business, I think we got caught up in that a bit much and what I learned is when you have change like that you have to pace it, you have to think it through a little bit. ”

We do think we’re seeing some improvement in the last 90 days

“I actually think the last 90 days while we are not happy at all with the earnings that we posted that we are seeing improved results in our sales, we do think we’re getting traction in some of these other key metrics and obviously we’ve got work to do on the margin side of things and we think we’ve got the initiatives in place to begin to see stabilization of the margin effort out there.”

Everyone is trying to drive traffic

“Generally I would say pricing is fairly rational but it’s very competitive. I think my observations are that all retailers particularly those in the discount side are looking to drive traffic into their stores and the way retailers do that is by promoting consumables so you see a lot of great pricing in the laundry area for example, across our competitive front”

Family Dollar 1Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

Difficult environment

“our results continue to be pressured by difficult competitive economic environment. Our core low income customers continue to deal with elevated unemployment levels cuts to government benefits and volatility in energy prices and they are tightly managing their spending as a result.”

Comp sales decline on fewer transactions, lower traffic

“our results continue to be pressured by difficult competitive economic environment. Our core low income customers continue to deal with elevated unemployment levels cuts to government benefits and volatility in energy prices and they are tightly managing their spending as a result.”

June got off to a pretty good start

” the month of June got off to a pretty good start, we were delighted with the July 4th weekend, particularly some of the seasonal sales and some of the apparel sales that we saw there”

The low end consumer may have slipped back some

“The low end consumer has not benefited in this recovery at all in fact I think have slipped further back. Unemployment trends remain high. The government cutbacks continue, there is quite a bit of healthcare uncertainty coming from this unbelievably cold winter, heating prices, heating oil and gas prices are moving upwards. So there is, it’s a tough playing field out there.”

Urban stores doing a little worse than rural

“What I can tell you is our rural stores are doing better than our urban stores. We think a lot of that has to do with some of the challenges that are in these intercity markets and some of these major urban centers. The folks in those markets are having a hard time finding jobs and are struggling and I think it’s impacted our business a little more than it would be in rural area where I think things are little more stable.”

The store traffic data that retailers quote comes from Nielsen

“We’ll get a lot of that information from Nielsen. And so while we see it’s certainly in our own register data, we also get the market perspective from Nielsen and IRI.”

Store occupancy and labor make up 2/3 of SG&A

“two-thirds of our SG&A expense is essentially fixed and it relates to store occupancy and store labor. And so those are the expenses that are basically fixed and they are tied very much to square footage growth. There are probably other expenses as well, but those are the big ones. But you know utilities and things like that would also be tied to square footage growth.”

Family Dollar 4Q13 Earnings Call notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Lowering prices, cutting workforce, closing stores and slowing sqft growth

“First, we are investing significantly to lower prices to provide more compelling values for our customers. Second, we are optimizing our workforce to improve execution and better align resources. Third, we intend to close approximately 370 underperforming stores. And lastly, we plan to slow square footage growth beginning in fiscal 2015.”

Operating margins pressured, returns on capital weakening

“With regard to new store openings, we have decided to slow down new store growth beginning in fiscal 2015. New stores have always delivered the highest return on investment for Family Dollar, but as our operating margin has contracted and our capital investment has increased, our return on investment trends have been pressured. To improve these trends, we have reevaluated our site selection criteria and refined our real estate models to reflect the current sales environment and sales insights from store openings over the last three years.”

They’re still opening lots of stores

“We are on track to open approximately 525 new stores this year, but next year, we will reduce new store openings to 350 to 400 stores and focus on opening stores that will deliver us the highest ROIC.”

Sales down 6%

“Total sales decreased 6.1% to $2.7 billion and comparable store sales decreased 3.8%. As a reminder, we estimate the extra week last year contributed approximately $189 million in sales. Excluding the impact of the extra week, total sales in the quarter would have increased 0.4% compared to the second quarter of fiscal 2013”

Don’t think this is a reflection of saturation

it doesn’t necessarily suggest that we are worried at this point about saturation in the marketplace. We still think that we have plenty of opportunities out there to open new stores, but as we adjust our financial performance in the business and think hard about our capital allocation, we want to make sure that we are refocusing our store investment on those that are going to deliver the highest return.”

We are a chain of chains

“with 8,000 stores we are really a chain of chains and these stores across the country have different demand characteristics and different demographics and just completely different characteristics.”

Taking price to meet competition, not undercut

“frankly, we are not looking to undercut competition in this thing. In most cases, it is coming down to the competition, but clearly this is an ongoing process and there will be more opportunities for us to invest in price’

Real estate landscape has changed

“et me start off by saying the world has changed over the last several years. Existing shopping centers don’t offer us what we need and our assortment what we want to do with the store today. Often times, very regular, not a regular shapes not the right sizes, there is grocery competition that doesn’t want us in their shopping centers. And this has been ongoing for a number of years and it has actually been a real positive for us that developing our own sites with freestanding locations where we have plenty of parking, really emphasizing the convenience component of our business with easy in, easy out, it is critically important to us.”

Digital marketing very effective

“we have been doing digital, email blast, et cetera for a few years now and it just continues to grow. You would be surprised how highly our customer index is to smartphones today. Well over 50% and climbing every day. So it is a very effective and efficient way to reach customers to notify them of things. What we are talking about doing is just continuing to grow what has already been set up as part of our marketing effort.”

Family Dollar 4Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

Not happy with results

“While we are convinced that we are making the right long-term investments, we are not happy with our recent financial results.”

Business needs stabilizing

“priorities are stabilizing the business, reenergizing our focus on providing customers with exciting values and reaccelerating traffic into our stores. It will take time to reverse the recent trends, especially given the challenging environment, but I have confidence in our team.”

Low end consumer still getting hit

“Over the last 2 years, I think we’ve seen a growing bifurcation of households. Higher-income households who have benefited from market gains, better employment opportunities or improvements in the housing markets have become more comfortable and confident in their financial situation. But our core lower-income customers have faced high unemployment levels, higher payroll taxes and more recently, reductions in government assistance programs. All of these factors have resulted in incremental financial pressure and reduction in overall spend in the market.”

This seems like a lot of new stores

“This year, we plan to open 525 new stores.”

Pretty candid about reasons for executive departure

“we announced that Mike Bloom has left the company. While we’ve made some progress during Mike’s tenure, we weren’t happy with our financial results. Ultimately, Mike and I were not aligned on our merchandising strategy and we decided to make a change.”

Comps Declined, fewer transactions

“Comparable store sales decreased to 2.8%…The decrease in comp sales was primarily due to fewer customer transactions.”

Note the calendar shift

“As a reminder, the comp store sales period this year included 6 fewer selling days during the holiday season as compared to last year. We believe this shift negatively impacted our comp store sales in the first quarter this year.”

On the plus side, GM stable, slightly higher

” gross margin expanded 14 basis points, as compared with the first quarter of fiscal 2013.”

Guiding for continued negative comps

“Reflecting our December results, we now expect comp store sales in the second quarter will decline in the low-single-digit range.”

A consumer that’s living paycheck to paycheck

“ne of the things that is critically to our unique customer who is absolutely living paycheck to paycheck, standing for an everyday low price proposition is critically important.”

New stores still performing well so no need to trim new openings

“if we were to see our new returns slip, we would certainly consider a reduction there. To explain why we are so bullish on new stores is because our new stores are performing well.”

Reading between the lines, sounds like change at the President position two years ago has caused some internal struggle over strategy: EDLP vs. Promotions.

” I think if anything, one of the benefits that we’ve seen over the last 2 years is how important it is to maintain and have a consistent merchandising strategy. It’s not only confusing to the customer, it’s confusing to our teams internally.”

The Macro is going to be difficult

“I will tell you the way we’re thinking about it is the playing field is going to be difficult. The macroenvironment, as we talked about, is going to be challenging and we can’t do anything about that.”

Traffic deteriorated in November and December

“I think the way we looked at it was September and October were okay. What we saw was a deteriorating trend particularly the last couple of weeks of November, when discretionary sales became more important, as well as through the month of December when traffic started to decelerate.”

Family Dollar FY 3Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

Macro Outlook/Customer Trends/Competitive Environment

“It’s tough out there right now for our customers, and their spending remains constrained. From our most recent Nielsen Homescan panel data, we know that our customers’ spend in the total market has declined over the past year. However, at Family Dollar, we continue to gain share of her wallet.”

“the economic backdrop remains very challenging for our customer. She’s stretching her budget and forced to make choices. She’s coming to us for her basic needs, and we’re gaining share in those businesses.”

“We continue to plan our discretionary categories conservatively. We are managing our receipts and optimizing space.”

“This year is proving to be more challenging than we had originally planned. While we continued to invest for the long term, we have adapted to the slower sales environment. Our team has repositioned the company by focusing on what we can control. We have taken a more aggressive stance on managing expenses. We are controlling and improving inventory productivity. We are stabilizing gross margin, and we are driving operational efficiencies.”

“we are seeing some stabilization in our discretionary business”

“whether it’s bedding or housewares, we’re seeing some really good stabilization in those businesses.”

“we see nothing new [in promotional activity]. There’s no new additional frequency in circulars. But the example is Walmart has been extremely promotional, several events during a week, midweek, weekend, but rational. So nothing new that has been new in the last several months. But it’s a heavy promotional environment out there, and — but rational is how I would characterize it.”

Operational Insights

“Addressing shrink is a good example of where we are looking to drive efficiency. We believe that there is a relationship between shrink, inventory levels and store manager turnover”

“Exclusive agreements in segments where there is low customer loyalty, like batteries, are good for our customers, our stores and our profitability…for example, last quarter, we signed an agreement with Procter & Gamble to make Duracell batteries our only national brand in all of our stores.”

“we looked back, it was over 1,000 SKUs that we’ve added. And we knew that once we added those SKUs that we would have some higher inventory levels than we typically would prefer and typically what we’ve shown historically…. The team has worked really hard on improving the assortment, culling out some of the SKUs that have not performed well, adding other SKUs that will replace those to continue to be more relevant to our customer. But at the end of the day, what we’re most pleased with is we are more relevant to our customers. We have a better and improved assortment and look to continue to grow and manage that.”

“the reality is at some point, your labor costs do become relatively fixed because at some point, you have to have people with basic level of labor to operate the stores. Occupancy also is a fixed cost. So when you consider those 2 large buckets of spending being relatively fixed, and that represents about 2/3 of our SG&A, it’s very hard to comp that or to lever that as our comps get pressured.”

[what they’re looking for in new executives] “It’s about understanding small-box retail. It’s about understanding, having an in-depth understanding of our consumer and how they’re evolving; our competition, how they’re evolving; our mix, how it’s evolving; our marketing collaboration between marketing and supply chain. And to me, it’s all about leadership, and I don’t know if it’s necessarily rocket science. But I think it’s those types of qualities that we are looking for. Someone’s got a deeper understanding of our business.”