Family Dollar Stores Earnings Call Insights: Fourth Quarter Sales Guidance and Inventory Initiatives

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

Fourth Quarter Sales Guidance

David Mann – Johnson Rice & Company: In terms of the guidance for the fourth quarter on the sales line, can you talk about – is that a – it seems like it’s lower than what you had talked about on the last call. Is that mainly on the consumables side, discretionary side and why do you think sales have slowed in June versus where they were in April and May?

Howard R. Levine – Chairman and CEO: Good Morning David, this is Howard. As I’ve said in my opening comments that when we look at the Nielsen data, one thing that’s pretty clear is that our customer is spending less than the overall marketplace. Fortunately, she is spending more with us, not as much as we’d like, but we are improving market share and growing that. The biggest factor for the additional weakness in my opinion in the consumer, as there is more challenge and we get anticipated. She is making choices. Things are very tough right now. While we’re not going to go into a lot of details about June specifically, what I can tell you is that comps in consumables were up about mid-single digits. As we talked about in the call in the prepared remarks, what we also saw was the beginning of what I will say some stabilization in our discretionary businesses. Well comps are still not positive. If you all recall, one of the things that was our major focus over the remainder of this year was to drive gross margin accretion. While it’s a little early to call a trend in that, I think the month of June did begin to see some strong stabilization there. We’re looking to continue that, and that’s just a result of some of the work that the team has done on managing expenses, controlling inventory, and improving the assortment where we have. So, we are starting to see some signs there. That’s a very nice trend for us despite some of the challenges that the consumer is facing today. Finally what I will tell you is and as a shareholder myself one of the things that I was most focused on getting us in a position to be able to operate profitably in a slower sales environment. I think you are seeing some signs of that in what we accomplished in the third quarter and how we talked about guidance for the fourth quarter. Expenses are under tight control, inventory is improving, gross margin is stabilizing and we are forecasting to grow our earnings in the fourth quarter and finish off the year and really continue some of that work into fiscal ’14.

Inventory Initiatives

Deborah Weinswig – Citigroup Global Markets: Can you update us on your inventory initiatives? I was very impressed with your increase in the inventory productivity.

Howard R. Levine – Chairman and CEO: Sure. One of the things that we have talked, I know it seems like longer been should have been but when you take a step back and look at what we’ve done over the last couple of years in terms of investment in inventory, it was pretty substantial. As we look back it was over a 1,000 SKUs that we’ve added in. We knew that once we added those SKUs that we would have some higher inventory levels than we typically would prefer and typically what we have shown historically. We also indicated that as these businesses matured that we would start to see some inventory productivity improvements and really what you’re seeing is a result of some of those efforts. The team has worked really hard on improving the assortment, culling out some of the SKUs that have not performed well, adding other SKUs that will replace those to continue to be more relevant to our customer. But at the end of the day, what we’re most pleased with is, we are more relevant to our customers. We have a better and improved assortment and look to continue to grow and manage that.

Deborah Weinswig – Citigroup Global Markets: Then in terms of a follow-up, you talked about improving your assortment in discretionary and then gross margin impact there. I don’t know if you could dive into a little bit more of the details there? I know you have made some changes in your team as well.

Howard R. Levine – Chairman and CEO: Sure, yes, Deborah. We announced this morning the departure of Paul White who was our Chief Merchant. At the same time, we announced the hiring of Jason Reiser from Sam’s Club as a Senior Vice President over the consumables area. We’re very pleased with the arrival of Jason and certainly wish Paul all the best in his future endeavors. But the team continues to come together, understanding what specifically is requested by our customer. I like the collaboration. I like the way we are working together and look to see that continue as we move into ’14.

Michael K. Bloom – President and COO: Deborah, it’s Mike. Specifically on discretionary, we’ve got a new team there as well. I’m very pleased with how that team is coming together and how they have dug deep into the business and identified the opportunities. Some of our stabilization are in areas like bedding, which we’ve been talking about. If you remember, I talked about, we discontinued comforters and we recently brought them back into all stores. Comforters are – if you remember, it’s the start of the purchase for the home and the bedroom. So whether it’s bedding or house wares, we’re seeing some really good stabilization in those businesses. The team has done a great job fixing the assortment. We’re working on allocation, distribution, the mix. So, really pleased with where we’re going and what the team has done there.

A Closer Look: Family Dollar Stores Earnings Cheat Sheet>>