Family Dollar Stores Earnings Call Insights: Analyzing the Competitive Landscape and This Product

Family Dollar Stores, Inc. (NYSE:FDO) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Competitive Landscape

Matthew Boss – JPMorgan: Can you speak to any changes on the competitive front over the past three months and anything incremental seen in December that we should consider looking forward?

Howard R. Levine – Chairman and CEO: As we look back over the last few months, particularly the holiday selling season, I would tell you that there were more wins out there from our competition and that’s the entire market, not calling out any one specific competitor. I will also add that while there were more of it the promotional pricing activity seem to be fairly rational during the time period, but definitely a very competitive environment and a lot more wins that were posted by the market this year.

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Matthew Boss – JPMorgan: Mike, since coming on board the stores have clearly seen substantial improvements. Can you speak to any branded wins over the last couple months and what should we look forward to in the stores in the back half of the year?

Michael K. Bloom – President and COO: Matt, as far as branded wins, if you think about all of the brands that we’ve added over the last six months to a year and looking at these sales growth that we have in our consumables area, we are seeing nice wins across the board. It’s not beverages versus health and beauty aids versus tobacco. We are seeing a real nice balance of growth within all of the brands. Clearly look, we’ve talked about this before, we continue to monitor, not everything we added is working and we will continue as the year progresses. It’s what we do as retailers continue to look for new items and weed out the ones who are not working. As far as what to look forward to in the stores for the balance of the year, I would tell you store simplification. I think we’ve talked about this in the past as well. Our goal we are laser-focused on simplifying activities for our stores. You know our stores, we work them hard last year and they rose to the challenge and did an exceptional job executing these initiatives and we are seeing the results. And now we need to simplify for them everything from planogram execution to delivery to processing customers at the check-out. So, we are pretty focused on making sure our stores are easier to run…

Tobacco

John Heinbockel – Guggenheim: Couple of things, one on tobacco and then sort of a longer term question. As you look at the experience so far is tobacco accretive to EBIT are you finding that, and then how impactful was tobacco on – maybe order of magnitude in the quarter on both comp and gross?

Michael K. Bloom – President and COO: John, it’s Mike, I’ll start. So, let me just – couple of things; first, as we mentioned it’s in 6,600 stores. I think we’ve got a few hundred stores more to go that we’re going to add tobacco this fiscal year. Ramping up, it’s performing well above our expectations. Our basket remains like we talked about before, 60% of the baskets include another item and in the basket that margin is consistent with the rest of the – with the store-wide margin. It’s clearly driving trips. We don’t believe that cigarettes – the fact that we’re selling cigarettes, people are trading off in other item. We don’t believe there is more smokers. We believe we are capturing that cigarette trip from another retailer that was selling tobacco. So, I think, look, at the end of the day, I’d like to believe that while we’re experiencing some margin pressure, we’re generating margin dollars.

Mary A. Winston – EVP and CFO: I will just add to your comment about the profitability and whether or not it’s accretive. We really don’t get into specific profitability by category, but I view tobacco as obviously a critical component of our overall portfolio of consumable products, and consumable sales are up nicely, tobacco was a big piece of that. As Mike referenced, we’re seeing nice attachment, we’re seeing an increase in trip, so it’s driving traffic as we would expect. So, I think it’s having a positive impact on the business as all of our consumables are…

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John Heinbockel – Guggenheim: Finally, the strategic question, because we seem to have this conservation not just with you but others a lot every quarter, about the discretionary business. If you assume that because of the condition, the consumer, the economy he’s in, that we’re going to be under pressure for quite some time. At what point do you start to think about making fundamental changes, space allocation, cost structure inside the store, and then what would those changes be to mitigate the impact of mix?

Howard R. Levine – Chairman and CEO: I think you’re right. I have been asked the question about discretionary sales for many, many years, and just for some of the people newer to the channel, there has been over the last 10 or 15 years a pretty major shift from discretionary to consumables as the marketplace has decided that our channel is a great place to buy consumables. We’ve got a lot of convenient locations, we got great pricing, and that’s resonated very nicely with it. I’ll also add that one of the things that have been consistent is that our customers also like the discretionary component of our assortment. They like the treasure hunt aspect of it, they like the fact that our stores are located within their neighborhoods, it’s easy to get in, easy to get out and pick up some of these items. Clearly, the economic environment is pressuring our discretionary categories, and as we’ve indicated, we’ve been more defensive in those businesses. I think while markdowns are up a little bit here in the second quarter as a result of some of the lack of sell-throughs in some of the seasonal categories, apparel was actually pretty decent in terms of sell-through. We do have some additional markdowns in other areas. So, we will continue to refine our strategy. I don’t think I would look for anything dramatic other than a tight control on receipts to make sure that we’ve got good sell-throughs on what we buy, try to mitigate markdowns and balance out the assortment a little more as time goes on. We are as much a consumable house as we have ever been, up to 70%, 75% of the mix, driving nice sales, up 19% as a result of our consumables assortment. So, if you ask me what I think happens over the next few years, I think we’ll see further growth in consumable categories, and hopefully, a mitigation of some of the loss and decreases that we are seeing in some of the discretionary categories. Candidly, I think we’ll need some help from the economy. We are not standing by, waiting for that though. We are taking some actions ourselves internally, which we’ll talk about when we are prepared to do so, but I think there’s still plenty of opportunity out there despite some of the significant headwinds that we are facing.

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