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Family Dollar Reports Second Quarter 2014 Financial Results, Announces Immediate Strategic Actions

04/10/2014
  • Comparable Store Sales Decreased 3.8%
  • Earnings Per Diluted Share of $0.80, Including At Least a $0.05 Negative Impact from Winter Weather
  • Company Conducts In-Depth Business Review and Implements Actions to Improve Financial Performance Including: Investment to Lower Prices, Reduction of Cost Structure, Closing of Approximately 370 Stores and Slowing of New Store Growth

MATTHEWS, N.C.--(BUSINESS WIRE)-- Family Dollar Stores, Inc. (NYSE: FDO) today reported that for the second quarter of fiscal 2014 ended March 1, 2014, net sales were $2.7 billion as compared to $2.9 billion in the second quarter of fiscal 2013 ended March 2, 2013. Earnings per diluted share in the second quarter of fiscal 2014 were $0.80 as compared to $1.21 in the second quarter of fiscal 2013. Consistent with the National Retail Federation Calendar, the second quarter of fiscal 2014 included 13 weeks as compared to 14 weeks in the second quarter of fiscal 2013. The Company estimates that this extra week contributed approximately $189 million in sales and $0.07 of earnings per diluted share in the second quarter of fiscal 2013. The Company estimates that the negative financial impact in the second quarter of fiscal 2014 from the adverse winter weather was at least $0.05 of earnings per diluted share.

“Our second quarter results did not meet our expectations,” said Howard R. Levine , Chairman and CEO. “The 2013 holiday season was challenged by a more promotional competitive environment and a more financially constrained consumer. In addition, like many retailers, our second quarter results were significantly impacted by severe winter weather, which resulted in numerous store closings, disrupted merchandise deliveries and higher than expected utility and store maintenance expenses.”

“Notwithstanding the macro-economic pressure, competitive environment and severe weather, we are not satisfied with our results, and we hold ourselves accountable for improving our performance,” said Levine. “To that end, we have initiated an in-depth business review to identify opportunities to strengthen our value proposition, increase operational efficiencies and improve financial performance.”

“While this business review is ongoing, we are taking immediate, strategic actions to improve our performance. First, we have made a significant investment to lower prices on about 1,000 basic items. Second, we are reducing our cost structure through the optimization of our workforce. Third, we will close approximately 370 underperforming stores. Once complete, our workforce reduction efforts and store closures are expected to result in $40 million to $45 million of annualized operating profit benefit, beginning in the third quarter of fiscal 2014. Lastly, we intend to slow new store growth beginning in fiscal 2015 to improve our return on investment. We are confident that these steps will position Family Dollar to deliver stronger returns for our shareholders,” concluded Levine.

Fiscal 2014 Second Quarter and First Half Results

Net sales for the second quarter ended March 1, 2014, decreased 6.1% to $2.7 billion from $2.9 billion in the second quarter of fiscal 2013 ended March 2, 2013. Consistent with the National Retail Federation Calendar, the second quarter of fiscal 2014 included 13 weeks as compared to 14 weeks in the second quarter of fiscal 2013. The Company estimates that this extra week contributed approximately $189 million in sales in fiscal 2013. Excluding the impact of the extra week, the Company estimates that sales in the second quarter of fiscal 2014 would have increased 0.4% compared to the second quarter of fiscal 2013. Sales in the second quarter of fiscal 2014 were strongest in the Consumables category, driven primarily by strong growth in refrigerated and frozen food and tobacco. Comparable store sales for the 13-week period ended March 1, 2014, decreased 3.8% as a result of decreased customer transactions, partially offset by an increase in the average customer transaction value.

Gross profit for the second quarter of fiscal 2014 decreased 6.7% to $902.3 million, or 33.2% of net sales, compared to $967.1 million, or 33.4% of net sales, in the second quarter of fiscal 2013. As a percentage of sales, the impact of stronger sales of lower-margin consumables and higher markdowns was partially offset by higher markups, lower freight expense and lower inventory shrinkage.

Selling, general and administrative expenses, as a percentage of net sales, were 28.1% in the second quarter of fiscal 2014 compared to 25.9% in the second quarter of fiscal 2013. The expense de-leverage in the second quarter of fiscal 2014 was primarily driven by the decrease in comparable store sales. As a percentage of net sales, higher store occupancy and store payroll expenses were partially offset by lower advertising and incentive compensation expenses.

The effective income tax rate was 35.3% for the second quarter of fiscal 2014 compared with 35.6% for the second quarter of fiscal 2013.

Net income for the second quarter of fiscal 2014 was $90.9 million compared to net income of $140.1 million for the second quarter of fiscal 2013. Excluding the impact of the extra week, the Company estimates that net income in the second quarter of fiscal 2013 would have been $132.0 million.

The Company’s merchandise inventories at March 1, 2014, were $1.7 billion compared with $1.5 billion at March 2, 2013. Average inventory per store at the end of the second quarter of fiscal 2014 was 2.1% higher than the average inventory per store at the end of the second quarter of fiscal 2013.

In the first half of fiscal 2014, capital expenditures were $219.7 million compared with $409.7 million in the first half of fiscal 2013. In the first half of fiscal 2014, the Company spent $76.4 million related to new stores; $54.4 million on its store renovation program; $38.4 million on existing stores; $38.1 million related to corporate and technology investments; and $12.4 million on supply chain investments.

During the first half of fiscal 2014, the Company opened 244 new stores, closed 22 stores and renovated, relocated or expanded 319 stores.

In the first half of fiscal 2014, the Company repurchased approximately 1.8 million shares of its common stock for a total cost of $125.0 million and paid $59.5 million in dividends to shareholders. As of March 1, 2014, the Company had authorization to purchase up to an additional $245.8 million of its common stock.

Immediate Strategic Actions

As part of the Company’s review to identify opportunities to strengthen our value proposition, increase operational efficiencies and improve financial performance, the Company is executing a series of immediate strategic actions.

These actions include:

  • Investing significantly to lower prices on nearly 1,000 basic items to deliver even more compelling values to customers.
  • Reducing corporate overhead and re-aligning key organizational functions to improve execution and reinforce the Company’s commitment to being an efficient, low-cost retailer.
  • Closing approximately 370 underperforming stores in the second half of fiscal 2014.
  • Slowing new store growth beginning in fiscal 2015. The Company now plans to open 350-400 new stores in fiscal 2015, down from approximately 525 new stores in fiscal 2014. The reduction is designed to improve return on investment by capitalizing on insights regarding location, competitive dynamic and cost structure.

The Company expects to record an estimated $85 million to $95 million restructuring charge in the second half of fiscal 2014 related to the workforce reductions and store closures. This charge was not included in the earnings outlook previously provided by the Company.

The Company estimates that the impact from the workforce reductions and store closures will deliver $40 million to $45 million of annualized operating profit benefit, beginning in the third quarter of fiscal 2014. These savings are included in the Company’s fiscal 2014 earnings outlook.

“Our mission is to deliver compelling, everyday values for our customers, and executing on this promise requires an unwavering commitment to being a low-cost operator. We are taking a number of important steps through our immediate strategic actions to improve our operational efficiency and deliver better financial returns,” said Howard R. Levine , Chairman and CEO. “Family Dollar has ample opportunities for growth. As the environment remains challenging, we are adjusting our growth plans to ensure that we are allocating resources to initiatives with the highest potential for value creation. We are confident that these steps will position the Company better, enable us to improve our execution, and deliver higher shareholder returns.”

Outlook

For the third quarter of fiscal 2014, the Company expects that comparable store sales will decline in the low-single-digit range and that earnings per diluted share will be between $0.85 and $0.95 per share, excluding approximately $0.13 per share related to restructuring charges. Including the restructuring charges, the Company expects earnings per diluted share will be between $0.72 and $0.82.

For the fourth quarter of fiscal 2014, the Company expects that comparable store sales will be flat to up slightly 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 $3.05 and $3.25, excluding approximately $0.50 per share related to restructuring charges. Including the restructuring charges, the Company expects earnings per diluted share will be between $2.55 and $2.75.

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 36.0% and 36.5%; 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, 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, April 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, April 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 8,100 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 Second Quarter Ended
(in thousands, except per share amounts)  

March 1, 2014
(13 Weeks)

   

% of Net
Sales

   

March 2, 2013
(14 Weeks)

   

% of Net
Sales

         
Net sales $ 2,716,621 100.00 % $ 2,893,997 100.00 %
 
Cost of sales   1,814,327     66.79 %   1,926,947     66.58 %
 
Gross profit 902,294 33.21 % 967,050 33.42 %
 
Selling, general and administrative expenses   762,037     28.05 %   750,073     25.92 %
 
Operating profit 140,257 5.16 % 216,977 7.50 %
 
Investment income 46 0.00 % 109 0.00 %

 

Interest expense 7,374 0.27 % 6,775 0.23 %
 
Other income   7,528     0.28 %   7,426     0.26 %
 
Income before income taxes 140,457 5.17 % 217,737 7.52 %
 
Income taxes   49,588     1.83 %   77,592     2.68 %
 
Net income $ 90,869 3.34 % $ 140,145 4.84 %
 
Net income per common share - basic $ 0.80 $ 1.21
Weighted average shares - basic 113,788 115,455
 
Net income per common share - diluted $ 0.80 $ 1.21
Weighted average shares - diluted 114,141 115,920
 
Dividends declared per common share $ 0.26 $ 0.21
 

 
FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
      For the First Half Ended
(in thousands, except per share amounts)

March 1, 2014
(26 Weeks)

   

% of Net
Sales

   

March 2, 2013
(27 Weeks)

   

% of Net
Sales

       
Net sales $ 5,216,312 100.00 % $ 5,315,685 100.00 %
 
Cost of sales   3,457,177     66.28 %   3,521,841     66.25 %
 
Gross profit 1,759,135 33.72 % 1,793,844 33.75 %
 
Selling, general and administrative expenses   1,498,559     28.73 %   1,449,898     27.28 %
 
Operating profit 260,576 5.00 % 343,946 6.47 %
 
Investment income 104 0.00 % 184 0.00 %
 
Interest expense 14,297 0.27 % 13,897 0.26 %
 
Other income   14,934     0.29 %   13,788     0.26 %
 
Income before income taxes 261,317 5.01 % 344,021 6.47 %
 
Income taxes   92,421     1.77 %   123,597     2.33 %
 
Net income $ 168,896 3.24 % $ 220,424 4.15 %
 
Net income per common share - basic $ 1.48 $ 1.91
Weighted average shares - basic 114,186 115,486
 
Net income per common share - diluted $ 1.47 $ 1.90
Weighted average shares - diluted 114,613 116,057
 
Dividends declared per common share $ 0.52 $ 0.42
 

 
FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
      As of
(in thousands, except per share and share amounts) March 1, 2014     March 2, 2013

Assets

Current assets:
Cash and cash equivalents $ 157,199 $ 117,816
Short-term investment securities 15,007 12,783
Restricted cash and investments 34,031 71,517
Merchandise inventories 1,660,798 1,533,954
Deferred income taxes 32,736 71,970
Income tax refund receivable 34,769 12,872
Prepayments and other current assets   197,226     129,767  
Total current assets 2,131,766 1,950,679
 
Property and equipment, net 1,778,153 1,705,161
Investment securities 16,557 23,444
Other assets   76,328     92,698  
 
Total assets $ 4,002,804   $ 3,771,982  
 

Liabilities and Shareholders' Equity

Current liabilities:
Short-term borrowings $ 296,000 $ 182,223
Current portion of long-term debt 16,200 16,200
Accounts payable 745,747 736,238
Accrued liabilities 319,053 338,838
Income taxes   4,943     8,428  
Total current liabilities 1,381,943 1,281,927
 
Long-term debt 484,150 500,199
Other liabilities 290,279 281,341
Deferred gain 210,835 218,245
Deferred income taxes 28,172 65,598
Commitments and contingencies
 
Shareholders' Equity:

Preferred stock, $1 par; authorized and unissued 500,000 shares

Common stock, $.10 par; authorized 600,000,000 shares

12,060 11,995
Capital in excess of par 322,424 288,225
Retained earnings 1,679,010 1,406,262
Accumulated other comprehensive loss (1,611 ) (1,561 )
Common stock held in treasury, at cost   (404,458 )   (280,249 )
Total shareholders' equity   1,607,425     1,424,672  
 
Total liabilities and shareholders' equity $ 4,002,804   $ 3,771,982  
 

 
FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
      For the First Half Ended
(in thousands)

March 1, 2014
(26 Weeks)

   

March 2, 2013
(27 Weeks)

Cash flows from operating activities:  
Net income $ 168,896 $ 220,424
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 126,835 115,973
Amortization of deferred gain (8,422 ) (6,971 )
Deferred income taxes 12,219 7,465
Excess tax benefits from stock-based compensation (5,434 ) (12,891 )
Stock-based compensation 10,151 9,436

Loss on disposition of property and equipment, including impairment

7,015 3,695
Changes in operating assets and liabilities:
Merchandise inventories (193,782 ) (107,791 )
Prepayments and other current assets (35,679 ) (82,158 )
Other assets 1,644 (1,125 )
Accounts payable and accrued liabilities 48,706 12,421
Income taxes (21,310 ) (36,303 )
Other liabilities   1,085     13,197  
   
Net cash provided by (used in) operating activities   111,924     135,372  
 
Cash flows from investing activities:
Purchases of investment securities (45,490 ) (20,439 )
Sales of investment securities 62,238 14,000
Net change in restricted cash 139 48,405
Net proceeds from sale-leaseback 19,222 163,520
Capital expenditures (219,691 ) (409,735 )
Proceeds from dispositions of property and equipment   344     908  
   
Net cash provided by (used in) investing activities   (183,238 )   (203,341 )
 
Cash flows from financing activities:
Short-term borrowings 1,318,000 1,150,223
Repayment of short-term borrowings (1,022,000 ) (983,000 )
Repayment of long-term debt (16,200 ) (16,200 )
Repurchases of common stock (125,038 ) (74,954 )
Change in cash overdrafts (26,328 ) 36,726
Proceeds from exercise of employee stock options 13,157 16,312
Excess tax benefits from stock-based compensation 5,434 12,891
Payment of dividends   (59,511 )   (48,546 )
     
Net cash provided by (used in) financing activities   87,514       93,452  
 
Net change in cash and cash equivalents 16,200 25,483
Cash and cash equivalents at beginning of period   140,999     92,333  
Cash and cash equivalents at end of period $ 157,199   $ 117,816  
 

 
FAMILY DOLLAR STORES, INC., AND SUBSIDIARIES
Selected Additional Information
 
 
NET SALES BY CATEGORY:          
For the Second Quarter Ended
(in thousands)

March 1, 2014
(13 Weeks)

   

March 2, 2013
(14 Weeks)

% Change
Consumables $ 1,932,446 $ 2,011,502 -3.9 %
Home products 281,779 322,229 -12.6 %
Apparel and accessories 183,608 206,889 -11.3 %
Seasonal and electronics   318,788     353,377   -9.8 %
TOTAL $ 2,716,621 $ 2,893,997 -6.1 %
 
For the First Half Ended
(in thousands)

March 1, 2014
(26 Weeks)

March 2, 2013
(27 Weeks)

% Change
Consumables $ 3,805,542 $ 3,800,787 0.1 %
Home products 522,275 564,564 -7.5 %
Apparel and accessories 355,132 384,915 -7.7 %
Seasonal and electronics   533,363   565,419   -5.7 %
TOTAL $ 5,216,312 $ 5,315,685 -1.9 %
 
 
STORES IN OPERATION:
For the First Half Ended

March 1, 2014
(26 Weeks)

March 2, 2013
(27 Weeks)

Beginning Store Count 7,916 7,442
New Store Openings 244 251
Store Closings   (22 )   (18 )
Ending Store Count 8,138 7,675
Total Square Footage (000s) 69,928 65,859
Total Selling Square Footage (000s) 58,533 55,022
INCREASE 6.4 % 7.5 %
 

Source: Family Dollar Stores, Inc.

Family Dollar Stores, Inc.

INVESTOR CONTACT:

Kiley F. Rawlins, 704-708-2858

CFA

krawlins@familydollar.com

or

MEDIA CONTACT:

Bryn R. Winburn, 704-708-1653

bwinburn@familydollar.com