Add
FDO to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| FDO > SEC Filings for FDO > Form 10-Q on 8-Jul-2009 | All Recent SEC Filings |
8-Jul-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 May 30, 2009, and May 31, 2008 ("third quarter of fiscal 2009" and "third quarter of fiscal 2008", respectively) and the thirty-nine-week periods ended May 30, 2009, and May 31, 2008 ("first three quarters of fiscal 2009" and "first three quarters 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 also should be read in conjunction with the "Cautionary Statement Regarding Forward Looking Statements" set forth following this MD&A, the "Risk Factors" set forth in Part I, Item 1A of our Annual Report on Form 10-K for fiscal 2008, and the "Risk Factors" set forth in
Results of Operations
Overview and Fiscal 2009 Outlook
During the first three quarters of fiscal 2009 as compared with the first three quarters of fiscal 2008, our net sales increased 7.1% to $5.6 billion, our net income increased 28.5% to $231.2 million, and our diluted net income per common share increased 28.1% to $1.64. Comparable store sales (stores open more than 13 months) for the first three quarters of fiscal 2009 increased 5.0% compared with the first three quarters of fiscal 2008. Our strong results during the first three quarters of fiscal 2009 were due primarily to 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 three quarters of fiscal 2009, we believe our strategy of providing both value and convenience continues to resonate well with budget-minded consumers. During the first three quarters of fiscal 2009, we experienced an increase in customer traffic and the dollar value of the average transaction. Our customer research suggests that our core low-income customer is shopping us more frequently and spending more when they shop at our stores. In addition, we are seeing growth in the number of shopping trips from more middle-income customers. We also believe our customers are benefiting from lower gasoline prices and certain government stimulus programs. The various components affecting our results for the first three quarters of fiscal 2009 are discussed in more detail below.
During the first three quarters 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. During the fourth quarter of fiscal 2009, we plan to initiate efforts to re-align space in our stores to accommodate strong customer demand and improve the in-store shopping experience. We expect that approximately 40% of the chain will be impacted by these efforts during the fourth quarter of fiscal 2009.
¡ 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 1,700 additional stores. As of May 30, 2009, approximately 4,100 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 148 stores and closed 65 stores.
Based on the operating results for the first three quarters 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 $2.03 and $2.07 for fiscal 2009 compared to $1.66 in fiscal 2008. We expect our results for the fourth quarter of fiscal 2009 as compared to the fourth quarter of fiscal 2008 to be negatively impacted by the anniversary of the government stimulus checks that were distributed during the fourth quarter of fiscal 2008. In addition, we expect to incur incremental expense in the fourth quarter of fiscal 2009 as we initiate efforts to re-align space in our stores. We currently expect diluted net income per common share to be between $0.39 and $0.43 for the fourth quarter of fiscal 2009 compared to $0.38 in the fourth quarter of fiscal 2008. We currently expect sales in comparable stores to increase 2% to 4% in the fourth quarter of fiscal 2009 and 4% to 5% for all of fiscal 2009.
Third Quarter Results
Net Sales
Net sales increased 8.3% in the third quarter of fiscal 2009 as compared with the third quarter of fiscal 2008. The increase in the third quarter of fiscal 2009 was due primarily to a 6.2% 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 third 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 and Home Products increased, all on a comparable store basis.
The average number of stores in operation during the third quarter of fiscal 2009 was 1.8% higher than the average number of stores in operation during the third quarter of fiscal 2008.
Cost of Sales
Cost of sales increased 5.7% in the third quarter of fiscal 2009 compared with the third quarter of fiscal 2008. This increase primarily reflected the additional sales volume between years. Cost of sales, as a percentage of net sales, was 63.8% in the third quarter of fiscal 2009 and 65.4% in the third quarter of fiscal 2008. The decrease in cost of sales, as a percentage of net sales, was due primarily to lower freight expense and lower inventory shrinkage. In addition, higher purchase mark-ups more than offset the effect of stronger sales of lower-margin consumable merchandise. Freight expense benefited from lower diesel costs and increased transportation productivity and efficiency. We believe that inventory shrinkage benefited from higher store manager retention, lower levels of discretionary merchandise and improved analytics and monitoring processes. The increase in purchase mark-ups was due primarily to our price management work, including zone pricing and price optimization.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased 8.3% in the third quarter of fiscal 2009 compared with the third 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 and additional costs to support higher sales volume. SG&A expenses, as a percentage of net sales, were 28.7% in both the third quarter of fiscal 2009 and the third quarter of fiscal 2008. Most costs in the third quarter of fiscal 2009, including payroll costs and occupancy costs, were leveraged as a result of a 6.2% increase in comparable store sales and our continued focus on expense control. As a percentage of net sales, a decrease in payroll costs (approximately 0.4% of net sales) and occupancy costs (approximately 0.2% of net sales) offset higher incentive compensation (approximately 0.4% of net sales) and higher insurance expense (approximately 0.1% of net sales). 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 third quarter of fiscal 2009. The increase in insurance expense was due primarily to a decrease in our actuarilly determined insurance liabilities during the third quarter of fiscal 2008. We began to see favorable trends in workers' compensation and general liability claims during the first three quarters of fiscal 2008, resulting in a decrease in our actuarilly determined insurance liabilities. While we continued to see favorable trends in the number of workers' compensation and general liability claims during the third quarter of fiscal 2009, the impact on our insurance expense was not as favorable as the third quarter of fiscal 2008.
Interest Income
Interest income decreased 70.4% ($2.1 million) in the third quarter of fiscal 2009 compared with the third 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 third quarter of fiscal 2009 compared with the third quarter of fiscal 2008.
Income Taxes
The effective tax rate was 35.8% for the third quarter of fiscal 2009 compared with 36.1% for the third quarter of fiscal 2008. The decrease in the effective tax rate was due primarily to changes in state income taxes and changes in our liabilities for uncertain tax positions, offset partially by lower tax-exempt interest income.
Year-to date Results
Net Sales
Net sales increased 7.1% in the first three quarters of fiscal 2009 as compared with the first three quarters of fiscal 2008. The increase in the first three quarters of fiscal 2009 was due primarily to a 5.0% 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 three quarters 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 three quarters of fiscal 2009 was 2.0% higher than the average number of stores in operation during the first three quarters of fiscal 2008. We had 6,654 stores in operation at the end of the first three quarters of fiscal 2009 compared with 6,545 stores in operation at the end of the first three quarters of fiscal 2008, representing an increase of 1.7%.
Cost of Sales
Cost of sales increased 5.3% in the first three quarters of fiscal 2009 compared with the first three quarters of fiscal 2008. This increase primarily reflected the additional sales volume between years. Cost of sales, as a percentage of net sales, was 65.1% in the first three quarters of fiscal 2009 and 66.2% in the first three quarters of fiscal 2008. The decrease in cost of sales, as a percentage of net sales, was due primarily to lower freight expense, lower inventory shrinkage, and lower seasonal markdowns. In addition, higher purchase mark-ups offset the effect of stronger sales of lower-margin consumable merchandise. Freight expense benefited from lower diesel costs and increased transportation productivity and efficiency. We believe that inventory shrinkage benefited from higher store manager retention, lower levels of discretionary merchandise and improved analytics and monitoring processes. 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, especially during the first half of fiscal 2009. 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 three quarters of fiscal 2009, we incurred markdown expense of approximately $8.8 million in response to the new legislation.
Selling, General and Administrative Expenses
SG&A expenses increased 7.2% in the first three quarters of fiscal 2009 compared with the first three quarters 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 and additional costs to support higher sales volume. SG&A expenses, as a percentage of net sales, were 28.4% in both the first three quarters of fiscal 2009 and the first three quarters of fiscal 2008. Most costs in the first three quarters of fiscal 2009, including payroll costs and occupancy costs, were leveraged as a result of a 5.0% increase in comparable store sales and our continued focus on expense control. As a percentage of net sales, a decrease in payroll costs (approximately 0.3% of net sales) and occupancy costs (approximately 0.2% of net sales) offset higher incentive compensation (approximately 0.3% of net sales) and higher insurance expense (approximately 0.3% of net sales). 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 three quarters of fiscal 2009. The increase in insurance expense was due primarily to a decrease in our actuarilly determined insurance liabilities during the first three quarters of fiscal 2008. We began to see favorable trends in workers' compensation and general liability claims during the first three quarters of fiscal 2008, resulting in a decrease in our actuarilly determined insurance liabilities. While we continued to see favorable trends in the number of workers' compensation and general liability claims during the first three quarters of fiscal 2009, the impact on our insurance expense was not as favorable as the first three quarters of fiscal 2008.
Interest Income
Interest income decreased 28.1% ($2.4 million) in the first three quarters of fiscal 2009 compared with the first three quarters of fiscal 2008. The decrease in interest income was due to a decrease in interest rates.
Interest Expense
Interest expense decreased 13.7% ($1.5 million) in the first three quarters of fiscal 2009 compared with the first three quarters of fiscal 2008. There were no borrowings under our revolving credit facilities during the first three quarters of fiscal 2009, resulting in a decrease in interest expense. During the first three quarters of fiscal 2008, we incurred $1.7 million in interest expense related to our revolving credit facilities.
Income Taxes
The effective tax rate was 36.1% for the first three quarters of fiscal 2009 compared with 35.8% for the first three quarters of fiscal 2008. The increase in the effective tax rate was due primarily to a decrease in tax-exempt interest income and changes in our liabilities for uncertain tax positions, offset partially by changes in state income taxes and an increase in certain federal jobs tax credits.
Liquidity and Capital Resources
We have consistently maintained a strong liquidity position. Cash provided by operating activities during the first three quarters of fiscal 2009 was $323.4 million compared to $339.3 million in the first three quarters of fiscal 2008. These amounts have enabled us to fund our regular operating needs, capital expenditure program, cash dividend payments, interest payments, and 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 replaced 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 ($197.7 million as of May 30, 2009) reduce the borrowing capacity of the $350 million credit facility.
There were no borrowings under the credit facilities during the first three quarters 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 May 30, 2009, we were in compliance with all such covenants.
Our inventories at the end of the first three quarters of fiscal 2009 were 3.0% higher than at the end of the first three quarters of fiscal 2008. Inventory per store at the end of the first three quarters of fiscal 2009 was approximately 1.3% higher than inventory per store at the end of the first three quarters of fiscal 2008. The increase in inventory per store was due to an increase in consumable merchandise, resulting from increased sales volume and anticipated expansion of our consumable assortment during the second half of fiscal 2009. Inventory levels in more discretionary categories decreased.
Capital expenditures for the first three quarters of fiscal 2009 were $103.2 million compared with $108.9 million for the first three quarters 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 three quarters of fiscal 2009, we opened 148 stores, closed 65 stores and expanded, relocated, or renovated 41 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 three quarters of fiscal 2009, we purchased 1.2 million shares of our common stock at a cost of $38.5 million. We purchased 3.7 million shares of our common stock during the first three quarters of fiscal 2008 at a cost of $97.7 million. As of May 30, 2009, we had outstanding authorizations to purchase a total of $94.6 million of our common stock.
Cash flows from operating activities
Cash provided by operating activities decreased $15.9 million during the first three quarters of fiscal 2009 as compared to the first three quarters 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 three quarters 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 $44.4 million in the first three quarters of fiscal 2008 compared to a decrease of $7.0 million during the first three quarters of fiscal 2009.
Cash flows from investing activities
During the first three quarters of fiscal 2009, we had a cash outflow from investing activities of $93.8 million compared to a cash outflow of $150.8 million in the first three quarters 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 three quarters of fiscal 2009 and only liquidated $8.7 million of investment securities. During the first three quarters of fiscal 2008, we had a net cash outflow of $42.5 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 three quarters of fiscal 2009, we had a cash outflow from financing activities of $92.0 million compared to a cash outflow of $191.3 million during the first three quarters of fiscal 2008. The change is due primarily to a decrease in purchases of our common stock. During the first three quarters of fiscal 2009 we purchased $38.5 million of our common stock compared to the purchase of $97.7 million of our common stock in the first three quarters of fiscal 2008. In addition, proceeds from the exercise of stock options increased $27.7 million in the first three quarters of fiscal 2009 as compared to the first three quarters 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 April 2009, the FASB issued FASB Staff Position ("FSP") No. 107-1 and Accounting Principles Board ("APB") Opinion No. 28-1, "Interim Disclosures about Fair Value of Financial Instruments" (FSP FAS 107-1 and APB 28-1"). This FSP amends SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, "Interim Financial Reporting," to require those disclosures in summarized financial information at interim reporting periods. The FSP is effective for interim reporting periods ending after June 15, 2009. We do not currently believe that FSP FAS 107-1 and APB 28-1 will have a material impact on our Consolidated Financial Statements.
In April 2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments" ("FSP FAS 115-2 and FAS 124-2"). This FSP amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The FSP is effective for interim and annual reporting periods ending after June 15, 2009. We do not currently believe that FSP FAS 115-2 and FAS 124-2 will have a material impact on our Consolidated Financial Statements.
In April 2009, the FASB issued FSP FAS No. 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" ("FSP FAS 157-4"). This FSP provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased and includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP does not change the definition of fair value under SFAS 157. The FSP is effective for interim and annual reporting periods ending after June 15, 2009. We do not currently believe that FSP FAS 157-4 will have a material impact on our Consolidated Financial Statements.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. We do not currently believe that SFAS 165 will have a material impact on our Consolidated Financial Statements.
Critical Accounting Policies
Our financial statements have been prepared in accordance with accounting . . .
|
|