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| FDO > SEC Filings for FDO > Form 10-Q on 8-Apr-2009 | All Recent SEC Filings |
8-Apr-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 February 28, 2009, and March 1, 2008 ("second quarter of fiscal 2009" and "second quarter of fiscal 2008", respectively) and the twenty-six-week periods ended February 28, 2009, and March 1, 2008 ("first half of fiscal 2009" and "first half 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
Overview and Fiscal 2009 Outlook
During the first half of fiscal 2009, as compared with the first half of fiscal 2008, our net sales increased 6.6% to $3.7 billion, our net income increased 24.5% to $143.4 million, and our diluted net income per common share increased 24.4% to $1.02. Comparable store sales (stores open more than 13 months) for the first half of fiscal 2009 increased 4.4%, compared with the first half of fiscal 2008. Our strong results during the first half of fiscal 2009 resulted from strong sales of consumable merchandise and improvements in cost of sales, as a percentage of net sales. While the economic environment remained difficult for our customers during the first half of fiscal 2009, we believe our customers benefited from lower gasoline prices. In addition, we believe our strategy of providing both value and convenience continues to resonate well with budget-minded consumers. The various components affecting our results for the first half of fiscal 2009 are discussed in more detail below.
During the first half of fiscal 2009, we focused on driving revenues, mitigating risk and managing costs through the following key initiatives:
¡ We continued the expansion of our assortment of traffic-driving consumables, providing customers with more of what they need in a challenging economic environment. Due to the success of these efforts and the increasing demand for consumable merchandise, we plan to continue the expansion of our consumable assortment. To accommodate this growth, we plan to continue adjusting the space in our stores, expanding space for high growth categories and improving merchandise adjacencies while also reducing space for underperforming categories.
¡ To strengthen the Family Dollar brand with customers and to reinforce the values we offer, we focused on increasing the productivity and returns of our advertising and customer communications and improving our in-store execution of promotional events.
¡ We continued the roll-out of our Store of the Future initiative, upgrading the technology platform in approximately 1,100 additional stores. As of February 28, 2009, approximately 3,500 stores were operating on the Store of the Future platform, and we expect to have approximately 4,700 stores operating on the platform at the end of fiscal 2009. The Store of the Future platform facilitates the acceptance of additional payment types, including credit cards and food stamps, and includes a number of on-line tools designed to provide our store managers with better analytics and work flow management.
¡ Through our price management work, the continued development of our private label offering, and our 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 122 stores and closed 50 stores.
Based on the operating results for the first half 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 $1.90 and $2.00 for fiscal 2009, compared to $1.66 in fiscal 2008. We currently expect diluted net income per common share to be between $0.54 and $0.58 for the third quarter of fiscal 2009, compared to $0.46 in the third quarter of fiscal 2008. We currently expect sales in comparable stores to increase 5% to 7% in the third quarter of fiscal 2009 and 3% to 5% for all of fiscal 2009.
Net Sales
Net sales increased 8.7% in the second quarter of fiscal 2009, as compared with the second quarter of fiscal 2008. The increase in the second quarter of fiscal 2009 was due primarily to a 6.4% increase in comparable store sales, with the balance of the increase relating to sales from new stores opened as part of our store growth program. Comparable store sales includes stores that have been open more than 13 months. Stores that have been renovated, relocated, or expanded are included in the comparable store sales calculation to the extent that they had sales during comparable weeks in each year. The increase in comparable store sales 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 second quarter of fiscal 2009, on a comparable store basis, were strongest in Consumables, driven primarily by sales of food. Sales in more discretionary categories were mixed. While sales of Apparel and Accessories continued to be soft, sales in Seasonal and Electronics increased and Home Products were approximately flat, all on a comparable store basis.
The average number of stores in operation during the second quarter of fiscal 2009 was 2.1% higher than the average number of stores in operation during the second quarter of fiscal 2008.
Cost of Sales
Cost of sales increased 7.1% in the second quarter of fiscal 2009, compared with the second quarter of fiscal 2008. This increase primarily reflected the additional sales volume between years. Cost of sales, as a percentage of net sales, was 66.3% in the second quarter of fiscal 2009 and 67.3% in the second quarter of fiscal 2008. The decrease in cost of sales, as a percentage of net sales, was due primarily to lower seasonal markdowns, lower inventory shrinkage, lower freight expense, and higher purchase mark-ups, which more than offset the effect of stronger sales of lower-margin consumable merchandise. Strong sales during the second quarter of fiscal 2009, particularly in Seasonal and Electronics, and our continued focus on managing inventory risk, resulted in lower seasonal markdowns. We believe that inventory shrinkage benefited from higher store manager retention, lower levels of discretionary merchandise and improved analytics and monitoring processes. 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 management work, including zone pricing and price optimization.
The Consumer Product Safety Improvement Act of 2008 was signed into law in August 2008. The new legislation addresses a number of consumer product safety issues, including the permissible levels of lead and phthalates in certain products. During the second quarter of fiscal 2009, we incurred markdowns of approximately $8.0 million in response to the new legislation.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased 6.9% in the second quarter of fiscal 2009, compared with the second quarter of fiscal 2008. The increases in these expenses were due in part 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 27.0% in the second quarter of fiscal 2009 and 27.4% in the second quarter of fiscal 2008. The decrease in SG&A expenses, as a percentage of net sales, was due primarily to a decrease in occupancy costs (approximately 0.7% of net sales) and payroll expenses (approximately 0.3% of net sales), offset partially by higher incentive compensation (approximately 0.5% of net sales) and higher insurance expense (approximately 0.3% of net sales). Most costs in the second quarter of fiscal 2009, including occupancy costs and payroll expenses, were leveraged as a result of a 6.4% increase in comparable store sales and our continued focus on expense control. Occupancy costs also benefited from a decrease in store rental expenses. During the second quarter of fiscal 2008, we increased our accrual estimates for store rental expenses (primarily property tax, insurance and common area maintenance expenses) in connection with the implementation of our lease administration system and the increased visibility to the underlying lease information. We did not record similar adjustments during the second quarter of fiscal 2009. The increase in insurance expense was due primarily to a decrease in our actuarily determined insurance liabilities during the second quarter of fiscal 2008. We began to see favorable trends in workers' compensation and general liability claims during the first and second quarters of fiscal 2008, resulting in a decrease in our actuarily determined insurance liabilities. While we continued to see favorable trends in the number of workers' compensation and general liability claims during the second quarter of fiscal 2009, the impact on our insurance expense was not as favorable as the second quarter of fiscal 2008. The increase in incentive compensation was due to certain adjustments to bonus and other performance-based compensation accruals to reflect our strong performance during the second quarter of fiscal 2009.
Interest income decreased 53.2% ($1.8 million) in the second quarter of fiscal 2009 compared with the second quarter of fiscal 2008. The decrease in interest income was due to a decrease in interest rates.
Interest Expense
Interest expense was approximately flat in the second quarter of fiscal 2009 compared with the second quarter of fiscal 2008.
Income Taxes
The effective tax rate was 36.4% for the second quarter of fiscal 2009 compared with 34.4% for the second quarter of fiscal 2008. The increase in the effective tax rate was primarily the result of changes in our liabilities for uncertain tax positions and a decrease in tax-exempt interest income during the second quarter of fiscal 2009. The effective tax rate in the second quarter of fiscal 2008 benefited from a decrease in liabilities for uncertain tax positions resulting from the expiration of the statute of limitations with respect to uncertain tax positions and settlements with taxing authorities. We did not experience similar benefits from our liabilities for uncertain tax positions during the second quarter of fiscal 2009.
Year-to date Results
Net Sales
Net sales increased 6.6% in the first half of fiscal 2009, as compared with the first half of fiscal 2008. The increase in the first half of fiscal 2009 was due primarily to a 4.4% increase in comparable store sales, with the balance of the increase primarily relating to sales from new stores opened as part of our store growth program. Comparable store sales includes stores that have been open more than 13 months. Stores that have been renovated, relocated, or expanded are included in the comparable store sales calculation to the extent that they had sales during comparable weeks in each year. The increase in comparable store sales 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 half of fiscal 2009, on a comparable store basis, were strongest in Consumables, driven primarily by sales of food. Sales in more discretionary categories continued to be soft, reflecting the current economic environment.
The average number of stores in operation during the first half of fiscal 2009 was 2.2% higher than the average number of stores in operation during the first half of fiscal 2008. We had 6,643 stores in operation at the end of the first half of fiscal 2009, compared with 6,509 stores in operation at the end of the first half of fiscal 2008, representing an increase of 2.1%.
Cost of Sales
Cost of sales increased 5.1% in the first half of fiscal 2009 compared with the first half of fiscal 2008. This increase primarily reflected the additional sales volume between years. Cost of sales, as a percentage of net sales, was 65.7% in the first half of fiscal 2009 and 66.6% in the first half of fiscal 2008. The decrease in cost of sales, as a percentage of net sales, was due primarily to lower seasonal markdowns, lower inventory shrinkage, lower freight expense, and higher purchase mark-ups, which more than offset the effect of stronger sales of lower-margin consumable merchandise. As a result of the shift in the merchandise sales mix to more consumable merchandise and our continued focus on managing inventory risk, we lowered inventory levels in our discretionary merchandise categories, which resulted in lower seasonal markdowns. We believe that inventory shrinkage benefited from higher store manager retention, lower levels of discretionary merchandise and improved analytics and monitoring processes. 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 management work, including zone pricing and price optimization.
The Consumer Product Safety Improvement Act of 2008 was signed into law in August 2008. The new legislation addresses a number of consumer product safety issues, including the permissible levels of lead and phthalates in certain products. During the first half of fiscal 2009, we incurred markdowns of approximately $8.0 million in response to the new legislation.
Selling, general and administrative ("SG&A") expenses increased 6.6% in the first half of fiscal 2009, compared with the first half of fiscal 2008. The increases in these expenses were due in part 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 28.3% in both the first half of fiscal 2009 and the first half of fiscal 2008. Most expenses, as a percentage of net sales, in the first half of fiscal 2009, including occupancy costs (approximately 0.3% of net sales) and payroll expenses (approximately 0.2% of net sales), were leveraged as a result of a 4.4% increase in comparable store sales and our continued focus on expense control. Higher insurance expense (approximately 0.4% of net sales) and higher incentive compensation (approximately 0.3% of net sales) offset all of the benefit, as a percentage of net sales. Occupancy costs also benefited from a decrease in store rental expenses. During the first half of fiscal 2008, we increased our accrual estimates for store rental expenses (primarily property tax, insurance and common area maintenance expenses) in connection with the implementation of our lease administration system and the increased visibility to the underlying lease information. We did not record similar adjustments during the first half of fiscal 2009. The increase in insurance expense was due primarily to a decrease in our actuarily determined insurance liabilities during the first half of fiscal 2008. We began to see favorable trends in workers' compensation and general liability claims during the first half of fiscal 2008, resulting in a decrease in our actuarily determined insurance liabilities. While we continued to see favorable trends in the number of workers' compensation and general liability claims during the first half of fiscal 2009, the impact on our insurance expense was not as favorable as the first half of fiscal 2008. The increase in incentive compensation was due to certain adjustments to bonus and other performance-based compensation accruals to reflect our strong performance during the first half of fiscal 2009.
Interest Income
Interest income decreased 4.9% ($0.3 million) in the first half of fiscal 2009 compared with the first half of fiscal 2008. The decrease in interest income was due to a decrease in interest rates.
Interest Expense
Interest expense decreased 17.6% ($1.4 million) in the first half of fiscal 2009 compared with the first half of fiscal 2008. There were no borrowings under our revolving credit facilities during the first half of fiscal 2009, resulting in a decrease in interest expense. During the first half of fiscal 2008, we incurred $1.6 million in interest expense related to our revolving credit facilities.
Income Taxes
The effective tax rate was 36.3% for the first half of fiscal 2009 compared with 35.6% for the first half of fiscal 2008. The increase in the effective tax rate was primarily the result of changes in our liabilities for uncertain tax positions and a decrease in tax-exempt interest income during the first half of fiscal 2009. The effective tax rate in the first half of fiscal 2008 benefited from a decrease in liabilities for uncertain tax positions resulting from the expiration of the statute of limitations with respect to uncertain tax positions and settlements with taxing authorities. We did not experience similar benefits from our liabilities for uncertain tax positions during the first half of fiscal 2009.
Liquidity and Capital Resources
We have consistently maintained a strong liquidity position. Cash provided by operating activities during the first half of fiscal 2009 was $253.5 million as compared to $274.6 million in the first half 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 ($187.5 million as of February 28, 2009) reduce the borrowing capacity of the $350 million credit facility.
Our inventories at the end of the first half of fiscal 2009 were 3.7% higher than at the end of the first half of fiscal 2008. Inventory per store at the end of the first half of fiscal 2009 was approximately 1.6% higher than inventory per store at the end of the first half of fiscal 2008. The increase in inventory per store was due to an increase in consumable merchandise, resulting from increased sales volume and anticipation of an expansion of our consumable assortment during the second half of fiscal 2009. Inventory levels in more discretionary categories decreased.
Capital expenditures for the first half of fiscal 2009 were $61.8 million, compared with $64.4 million for the first half of fiscal 2008. Capital expenditures for fiscal 2009 are expected to be between $160 and $180 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 half of fiscal 2009, we opened 122 stores, closed 50 stores and expanded, relocated, or renovated 20 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 half of fiscal 2009, we did not purchase any shares of our common stock. We purchased 3.7 million shares of our common stock during the first half of fiscal 2008 at a cost of $97.7 million. As of February 28, 2009, 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 $21.1 million during the first half of fiscal 2009 as compared to the first half of fiscal 2008. The decrease was due primarily to changes in merchandise inventories and the income tax refund receivable, offset by changes in accounts payable and accrued liabilities and an increase in net income. The changes in merchandise inventories, accounts payable and accrued liabilities, and net income were all in the ordinary course of business. The changes in the income tax refund receivable are due to a tax refund received during the first quarter of fiscal 2008 in connection with the formation of our captive insurance subsidiary. As a result of the refund received, the income tax refund receivable balance decreased $41.7 million in the first half of fiscal 2008 compared to a decrease of $7.0 million during the first half of fiscal 2009.
Cash flows from investing activities
During the first half of fiscal 2009, we had a cash outflow from investing activities of $56.1 million, compared to a cash outflow of $107.5 million in the first half of fiscal 2008. The change is due primarily to changes in the purchase/sale of investment securities. Due to the recent volatility in the financial markets and the liquidity issues surrounding our auction rate securities, we did not purchase any investment securities during the first half of fiscal 2009 and only liquidated $5.6 million of investment securities. During the first half of fiscal 2008, we had a net cash outflow of $43.4 million related to investment securities. 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 half of fiscal 2009, we had a cash outflow from financing activities of $56.6 million, compared to a cash outflow of $174.4 million during the first half of fiscal 2008. The change is due primarily to a decrease in purchases of our common stock. During the first half of fiscal 2009 we did not purchase any shares of our common stock, compared to the purchase of $97.7 million of common stock in the first half of fiscal 2008.
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.
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 . . .
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