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| FDO > SEC Filings for FDO > Form 10-Q on 7-Jan-2009 | All Recent SEC Filings |
7-Jan-2009
Quarterly Report
The following discussion summarizes the significant factors affecting our consolidated results of operations and financial condition for the thirteen-week periods ended November 29, 2008, and December 1, 2007 ("first quarter of fiscal 2009" and "first quarter of fiscal 2008", respectively). This discussion should be read in conjunction with, and is qualified by, the financial statements included in this Report, the financial statements for the fiscal year ended August 30, 2008 ("fiscal 2008"), and Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contained in our Annual Report on Form 10-K for fiscal 2008. This discussion should also be read in conjunction with the "Cautionary Statement Regarding Forward Looking Statements" set forth following this MD&A, and the "Risk Factors" set forth in Part I, Item 1A of our Annual Report on Form 10-K for fiscal 2008.
Results of Operations
First Quarter Results and Fiscal 2009 Outlook
During the first quarter of fiscal 2009, as compared with the first quarter of fiscal 2008, our net sales increased 4.2% to $1.8 billion, our net income increased 14.1% to $59.3 million, and our diluted net income per common share increased 13.5% to $0.42. Sales in comparable stores (stores open more than 13 months) for the first quarter of fiscal 2009, which were reported for the 13-week period ending November 29, 2008, compared with the 13-week period ending December 1, 2007, increased 2.1%. Despite the difficult economic environment, we were able to produce strong results during the first quarter of fiscal 2009 as a result of increased sales of consumable merchandise and improvements in cost of sales, as a percentage of net sales. The various components affecting our results for the first quarter of fiscal 2009 are discussed in more detail below.
During the first quarter of fiscal 2009, we focused on driving revenues, mitigating risk and managing costs through the following key initiatives:
• In conjunction with our Food Strategy, we continued the expansion of our assortment of traffic-driving consumables, providing customers with more of what they need in a challenging economic environment.
• To strengthen the Family Dollar brand with customers and to reinforce the values we offer, we increased our marketing and promotional events.
• We continued the roll-out of our Store of the Future initiative, upgrading the technology platform in approximately 600 additional stores. As of November 29, 2008, approximately 3,000 stores were operating on the Store of the Future platform. In today's economic environment, more families are relying on the federal government's food stamp program. To leverage this opportunity, we plan to accelerate our Store of the Future roll-out to approximately 2,300 stores during fiscal 2009 to facilitate the acceptance of food stamps. At the end of fiscal 2009, we expect to have approximately 4,700 stores operating on the Store of the Future platform.
• Through our price optimization work, the continued development of our private label offering and global sourcing efforts, we worked to offset the impact of the shift in the merchandise mix to more lower-margin consumable merchandise.
• Reflecting the uncertainty that exists in the current economic environment, we continued our measured pace of new store openings so that we can focus on improving our returns on existing assets. We opened 65 stores and closed 19 stores.
Based on the operating results for the first quarter of fiscal 2009, as discussed below, and our plans for the remainder of the year, we currently expect diluted net income per common share to be between $1.63 and $1.81 for fiscal 2009, compared to $1.66 in fiscal 2008. We currently expect diluted net income per common share to be between $0.48 and $0.52 for the second quarter of fiscal 2009, compared to $0.45 in the second quarter of fiscal 2008. We currently expect sales in comparable stores to increase 3% to 5% in the second quarter of fiscal 2009 and 2% to 4% in fiscal 2009.
Net Sales
Net sales in the first quarter of fiscal 2009 were $1.8 billion, an increase of 4.2% ($70.8 million), as compared with an increase of 5.2% ($82.8 million) in the first quarter of fiscal 2008. The increase in the first quarter of fiscal 2009 was attributable, in part, to increased sales in comparable stores (stores open more than 13 months) of 2.1%, with the balance of the increase primarily relating to sales from new stores opened as part of our store growth program. The increase in sales in comparable stores resulted from an increase in customer traffic, as measured by the number of register transactions in comparable stores and an increase in the dollar value of the average customer transaction. Sales during the first quarter of fiscal 2009 were strongest in Consumables, driven primarily by sales of food. Sales in more discretionary categories continued to be weak, reflecting the current economic environment. In addition, sales during the first quarter of fiscal 2009 were adversely impacted by one less week of holiday sales (post-Thanksgiving sales) resulting from a later Thanksgiving this year and the movement of our first of the month advertising circular into the second quarter of fiscal 2009.
The average number of stores in operation during the first quarter of fiscal 2009 was 2.2% higher than the average number of stores in operation during the first quarter of fiscal 2008. We had 6,617 stores in operation at the end of the first quarter of fiscal 2009, compared with 6,477 stores in operation at the end of the first quarter of fiscal 2008, representing an increase of 2.2%.
Cost of Sales
Cost of sales increased 2.9% in the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008. This increase primarily reflected the additional sales volume between years. Cost of sales, as a percentage of net sales, was 65.0% in the first quarter of fiscal 2009 and 65.8% in the first quarter of fiscal 2008. The decrease in cost of sales, as a percentage of net sales, was due primarily to lower seasonal markdowns, lower freight expense, lower inventory shrinkage, and higher purchase mark-ups, which more than offset the effect of stronger sales of lower-margin consumable merchandise. Our continued focus on improving inventory productivity and managing inventory risk led to lower seasonal markdowns. We believe that lower inventory levels, in conjunction with improvements in store manager retention, also contributed to improvements in inventory shrinkage. Freight expense benefited from lower diesel costs and increased transportation productivity and efficiency. The increase in purchase mark-ups was due primarily to our price optimization work and global sourcing efforts.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased 6.3% in the first quarter of fiscal 2009, compared with the first quarter of fiscal 2008. The increases in these expenses were due primarily to additional costs arising from the continued growth in the number of stores in operation. SG&A expenses, as a percentage of net sales, were 29.8% in the first quarter of fiscal 2009 and 29.2% in the first quarter of fiscal 2008. The increase in SG&A expenses, as a percentage of net sales, was due primarily to an increase in insurance expense (approximately 0.6% of net sales) and an increase in occupancy costs (approximately 0.3% of net sales). Most other costs in the first quarter of fiscal 2009, including payroll expenses, were leveraged as a result of a 2.1% increase in comparable store sales and our focus on expense control. The increase in insurance expense, as a percentage of net sales, is due primarily to the effect of a significant decrease in insurance expense during the first quarter of fiscal 2008. We began to see a reduction in workers' compensation and general liability expenses during the first quarter of fiscal 2008 as a result of improvements in processes, inventory productivity, and store manager retention. While we continued to see favorable trends in the number of workers' compensation and general liability claims during the first quarter of fiscal 2009, the impact on our insurance expense was not as favorable, primarily due to an increase in the severity of the claims. In addition, property damage from hurricanes Gustav and Ike and a limited number of large medical claims resulted in higher insurance expense during the first quarter of fiscal 2009. We expect insurance expense, as a percentage of net sales, to continue to increase during the remainder of fiscal 2009, as compared to fiscal 2008. The increase in occupancy costs, as a percentage of net sales, is due primarily to increases in store rental expenses, primarily property taxes, and an increase in utility costs.
Interest Income
Interest income increased 72.6% ($1.5 million) in the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008. The increase in interest income was due to an increase in investment securities and interest rates.
Interest Expense
Interest expense decreased 30.2% ($1.4 million) in the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008. There were no borrowings under our revolving credit facilities during the first quarter of fiscal 2009, resulting in a decrease in interest expense. During the first quarter of fiscal 2008, we incurred $1.5 million in interest expense related to our revolving credit facilities.
Income Taxes
The effective tax rate was 36.1% for the first quarter of fiscal 2009 compared with 37.1% for the first quarter of fiscal 2008. The decrease in the effective tax rate was primarily the result of certain federal jobs tax credits available during the first quarter of fiscal 2009 but not available during the first quarter of fiscal 2008, and an increase in tax-exempt interest income.
Liquidity and Capital Resources
We have consistently maintained a strong liquidity position. Cash provided by operating activities during the first quarter of fiscal 2009 was $7.1 million as compared to $54.7 million in the first quarter of fiscal 2008. These amounts have enabled us to fund our regular operating needs, capital expenditure program, cash dividend payments, and interest payments, as well as a significant portion of our share repurchases. We believe operating cash flows and existing credit facilities will provide sufficient liquidity for our ongoing operations and growth initiatives.
On December 18, 2008, we entered into an unsecured revolving credit facility with a syndicate of lenders for short-term borrowings of up to $250 million. The credit facility replaces our $250 million unsecured revolving credit facility that was scheduled to mature on January 29, 2009. The credit facility has an initial term of 364 days and includes two one-year extensions that require lender consent. The credit facility also includes a one year term-out option that does not require lender consent. Any borrowings under the credit facility accrue interest at a variable rate based on short-term market interest rates.
We also maintain a $350 million unsecured revolving credit facility expiring on August 24, 2011. Any borrowings under this credit facility also accrue interest at a variable rate based on short-term market interest rates. Outstanding standby letters of credit ($196.6 million as of November 29, 2008) reduce the borrowing capacity of the $350 million credit facility.
There were no borrowings under the credit facilities during the first quarter of fiscal 2009. The credit facilities contain certain restrictive financial covenants, which include a consolidated debt to consolidated capitalization ratio, a fixed charge coverage ratio, and a priority debt to consolidated net worth ratio. As of November 29, 2008, we were in compliance with all such covenants.
Our inventories at the end of the first quarter of fiscal 2009 were 2.7% lower than at the end of the first quarter of fiscal 2008. Inventory per store at the end of the first quarter of fiscal 2009 was approximately 4.5% lower than inventory per store at the end of the first quarter of fiscal 2008, excluding merchandise in transit to the distribution centers. The decrease in inventory per store resulted from our continued focus on inventory productivity.
Capital expenditures for the first quarter of fiscal 2009 were $28.2 million, compared with $36.6 million for the first quarter of fiscal 2008. Capital expenditures for fiscal 2009 are expected to be between $150 and $170 million and relate primarily to new store openings; existing store expansions, relocations and renovations; distribution center improvements; and expenditures related to store technology infrastructure.
In the first quarter of fiscal 2009, we opened 65 stores, closed 19 stores and expanded, relocated, or renovated 12 stores. We occupy most of our stores under operating leases. Store opening, closing, expansion, relocation, and renovation plans, as well as overall capital expenditure plans, are continuously reviewed and may change.
During the first quarter of fiscal 2009, we did not purchase any shares of our common stock. We purchased 2.9 million shares of our common stock during the first quarter of fiscal 2008 at a cost of $80.7 million. As of November 29, 2008, we had outstanding authorizations to purchase a total of $133.0 million of our common stock.
Cash flows from operating activities
Cash provided by operating activities decreased $47.6 million during the first quarter of fiscal 2009 as compared to the first quarter of fiscal 2008. The decrease was due primarily to changes in the income tax refund receivable balance. We received a tax refund during the first quarter of fiscal 2008 in connection with the formation of our captive insurance subsidiary. As a result, the income tax refund receivable balance decreased $44.4 million in the first quarter of fiscal 2008 compared to a decrease of $7.0 million during the first quarter of fiscal 2009.
Cash flows from investing activities
During the first quarter of fiscal 2009, we had a cash outflow of $27.7 million, compared to a cash inflow of $30.9 million in the first quarter of fiscal 2008. The change is due primarily to changes in the purchase/sale of investment securities. Due to liquidity issues surrounding our auction rate securities, we did not have any material purchases or sales of investment securities during the first quarter of fiscal 2009. However, during the first quarter of fiscal 2008, we sold a significant amount of investments in order to pay down our credit facility borrowings and repurchase shares of our common stock. These sales offset our purchases of investment securities and our capital expenditures and created a cash inflow during the first quarter of fiscal 2008. See Note 2 to the Consolidated Condensed Financial Statements included in this Report for more information on our auction rate securities.
Cash flows from financing activities
During the first quarter of fiscal 2009, we had a cash inflow of $14.7 million, compared to a cash outflow of $77.7 million during the first quarter of fiscal 2008. The change is due primarily to a change in cash overdrafts and a change in revolving credit facility borrowings/repayments. During the first quarter of fiscal 2009, cash overdrafts increased $30.8 million, compared to a decrease of $34.3 million during the first quarter of fiscal 2008. In addition, we did not incur any credit facility borrowings during the first quarter of fiscal 2009, compared to a net borrowing of $53.5 million in the first quarter of fiscal 2008.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for the first annual period beginning after November 15, 2007. The effective date has been delayed for non-financial assets and liabilities to the first annual period beginning after November 15, 2008. We adopted SFAS 157 during the first quarter of fiscal 2009. See Note 2 to the Consolidated Condensed Financial Statements included in this Report for more information on our adoption of SFAS 157.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 permits all entities the option to measure many financial instruments and certain other items at fair value. If a company elects the fair value option for an eligible item, then it will report unrealized gains and losses on those items at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We did not elect the fair value option under SFAS 159.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS 162 became effective November 15, 2008. The adoption of SFAS 162 did not have a material impact on our financial statements.
Critical Accounting Policies
Our financial statements have been prepared in accordance with accounting policies generally accepted in the United States of America. Our discussion and analysis of our financial condition and results of operations are based on these financial statements. The preparation of these financial statements requires the application of accounting policies in addition to certain estimates and judgments by our management. Our estimates and judgments are based on currently available information, historical results and other assumptions we believe are reasonable. Actual results could differ from these estimates.
There have been no changes to the Critical Accounting Policies outlined in our Annual Report on Form 10-K for fiscal 2008.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained in this Report, or in other public filings, press releases, or other written or oral communications made by Family Dollar or our representatives, which are not historical facts, are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address our plans, activities or events which we expect will or may occur in the future and may include express or implied projections of revenue or expenditures; statements of plans and objectives for future operations, growth or initiatives; statements of future economic performance; or statements regarding the outcome or impact of pending or threatened litigation. These forward-looking statements may be identified by the use of the words "plan," "estimate," "expect," "anticipate," "probably," "should," "project," "intend," "continue," and other similar terms and expressions. Various risks, uncertainties and other factors may cause our actual results to differ materially from those expressed or implied in any forward-looking statements. Factors, uncertainties and risks that may result in actual results differing from such forward-looking information include, but are not limited to those listed in Part I, Item 1A of our Annual Report on Form 10-K for fiscal 2008, as well as other factors discussed throughout this Report, including, without limitation, the factors described under "Critical Accounting Policies" in Part I, Item 2 above, or in other filings or statements made by us. All of the forward-looking statements in this Report and other documents or statements are qualified by these and other factors, risks and uncertainties.
You should not place undue reliance on the forward-looking statements included in this Report. We assume no obligation to update publicly any 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 evaluating forward-looking statements, you should consider these risks and uncertainties, together with the other risks described from time to time in our other reports and documents filed with the Securities and Exchange Commission ("SEC").
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