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Original Source: FD (FAIR DISCLOSURE) WIRE
. Kiley Rawlins, Family Dollar, Divisional VP, IR . Jim Kelly, Family Dollar, President, COO, Interim CFO . Howard Levine, Family Dollar, Chairman, CEO . Stacy Turnof, Merrill Lynch, Analyst . Meredith Adler, Lehman Brothers, Analyst . Scott Malat, Goldman Sachs, Analyst
. Matt Bos for Charles Grom, JPMorgan, Analyst . Patrick McKeever, Avondale Partners, Analyst . Dan Wewer, Raymond James & Assoc., Analyst
. David Cumberland, Robert W. Baird & Co., Analyst . David Mann, Johnson Rice & Co., Analyst . Bakley Smith for Scott Mushkin, Banc of America Securities, Analyst . Bernard Sosnick, Oppenheimer & Co., Analyst
Co. announced 2Q07 EPS of $0.60. FY07 EPS guidance was narrowed to 1.63-1.69 and 3Q07 EPS guidance was $0.39-0.43.
A. Key Data From Call 1. 2Q07 EPS = $0.60. 2. 2Q07 gross margin = increased 60 BP. 3. 1H07 CapEx = approx. $51m. 4. Cash and short term investments at 2Q07-end = $416m. 5. FY07 EPS guidance = $1.63-1.69.
6. 3Q07 EPS guidance = $0.39-0.43.
S1. 2Q07 Financial Review (J.K.) 1. QoverQ Comparisons: 1. Reported 2Q07 results EPS of $0.60, an increase of about 71%. 2. 2Q07 has some elements that makes an apples-to-apples comparison with 2Q06 difficult. 1. 2Q06 results included a charge of $45m or about $0.18 a share related to an adverse jury verdict. 2. Excluding this charge, earnings were $0.53 per share. 3. In 2Q07, had the benefit of an extra week. 1. Estimate that the EPS benefit was approx. $0.05, which was offset by about $12m or $0.05 a share in unplanned expenses relating to stock option review. 4. Adjusting for $0.18 a share litigation charge in 2Q06 and both the impact of the option investigation and the extra week in 2Q07, EPS for 2Q07 increased about 13% to $0.60 per share from $0.53 in 2Q06.
2. 2Q07 Performance: 1. Characterize performance as solid.
1. Despite lower than expected sales, maintained good cost control.
2. If not for the unplanned expenses associated with the stock
option review, would have achieved operating margin expansion.
3. Pleased with continued improvement in inventory productivity, which Co. believes is positively impacting shrink and manager retention trends. 2. 2Q07 net sales increased 12.2%. 3. Comp store sales increased 0.4%. 4. Opened 83 stores, closed 16. 5. Despite a difficult holiday season, sales results in Dec. were in line with expectations. 1. Results in many key seasonal categories performed better than expected. 2. Merchandise presentations of holiday product including toys, trim-a-tree, and gifts all benefitted from lower inventory levels and higher store manager retention.
3. Had better assortment and better store level execution this
year and customers responded favorably. 4. Apparel sales were disappointing. 1. May have been negatively impacted by unusually warm
weather leading up to the holiday. 3. Schematic Changes: 1. Jan. and Feb. results were a bit softer than expected, largely
due to decision to accelerate the timing of schematic changes
in a few key consumable categories. 2. Each year, refresh basic assortment, allowing merchants to drop underperforming items and add new items. 1. Transition to the new schematic can be disruptive as the Co. makes these changes. 2. In-stock levels are affected as Co. sells through discontinued items prior to the reset and again after the reset as the Co. learns more about the rate of sale of new product and as customers become acclimated to the positioning. 3. Physical changes often create temporary disruption in stores as the Co. removes product from the shelves, reset, labels and re-stock merchandise. 3. Three of Co.'s largest consumable categories: household chemicals, paper, and food, were all reset during 2Q07. 1. Last year, much of the schematic work in these categories occurred in 3Q. 2. Accelerated the changes this year into months that generally have lower traffic patterns to minimize the impact of the transition, and to better position stores to focus on Easter and spring Treasure Hunt events. 4. 2Q07 Margin: 1. GM as a percent of sales increased approx. 60 BP and was better than expected. 1. Stronger sales of prepaid services, better purchase markups and lower inventory shrinkage offset approx. 50 BP in negative leverage from increased markdowns.
2. Freight was relatively neutral. 2. As the Co. seeks to drive better inventory productivity, it is using markdowns more aggressively to position fresh merchandise better. 3. This year, initiated end-of-season markdowns a few weeks earlier than last year, even though YoverY fashion inventory levels were lower.
1. This more aggressive approach to markdowns has resulted in better: 1. GM ROI. 2. Inventory turns. 3. Customer-facing presentation.
5. Other Financials: 1. SG&A expenses as a percent of sales increased approx. 90 BP. 1. Option review expenses drove most of this deleverage with flattish comp also a contributing factor. 2. Income tax rate for 2Q07 was 36.3% vs. 37% for 2Q06. 1. Decrease in the effective tax rate was primarily the result of the effect of changes in state income taxes and the retroactive reinstatement of certain federal jobs tax credits. 3. Cash and short-term investments aggregated approx. $416m at quarter-end. 1. Up approx. $85m or 26% over 2Q06-end. 4. Asset mgt. efforts continued to drive improvements. 5. Inventories at quarter-end were approx. 7% lower on a per-store basis than 2Q06-end. 6. CapEx: 1. The Co. has raised the bar for targeted returns on CapEx but continued to invest aggressively to fund: 1. New store growth. 2. Improve store performance, through initiatives such as the food strategy.
3. More effectively leverage technology. 2. Through 2Q07 CapEx was approx. $51m vs. $98m for 2H06. 1. 1H06 CapEx included investments to support the opening of Co.'s ninth distribution center in Rome, New York. 2. Now expect current year capital expenditures to be approx. $155-165m. 1. Reduction of approx. $35m from initial estimate. 2. Resulted from fewer new store openings and deferral of a planned new distribution center. 7. Store Openings: 1. Several years ago, made a strategic course correction that shifted greater emphasis on driving financial returns. 2. As a part of this shift, slowed new store growth. 1. Last year, opened 350 stores. 3. Initially, planned to gradually ramp up new store openings
this year, but now believe the Co. will open around 300
stores. 1. This …