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Family Dollar Stores (NYSE:FDO)

Q1 2014 Earnings Call

January 09, 2014 10:00 am ET

Executives

Kiley F. Rawlins - Vice President of Investor Relations & Communications

Howard R. Levine - Executive Chairman, Chief Executive Officer and Member of Equity Award Committee

Mary A. Winston - Chief Financial Officer, Chief Accounting Officer and Executive Vice President

Analysts

Bernard Sosnick - Gilford Securities Inc., Research Division

Matthew R. Boss - JP Morgan Chase & Co, Research Division

John Heinbockel - Guggenheim Securities, LLC, Research Division

Meredith Adler - Barclays Capital, Research Division

Matthew Siler - Deutsche Bank AG, Research Division

Peter J. Keith - Piper Jaffray Companies, Research Division

Mark R. Miller - William Blair & Company L.L.C., Research Division

Stephen W. Grambling - Goldman Sachs Group Inc., Research Division

Edward J. Kelly - Crédit Suisse AG, Research Division

Mark K. Montagna - Avondale Partners, LLC, Research Division

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

Scot Ciccarelli - RBC Capital Markets, LLC, Research Division

Operator

Good morning. My name is Jessica, and I will be your conference facilitator today. I would like to welcome everyone to the Family Dollar earnings conference call. [Operator Instructions]

I would now like to introduce Ms. Kiley Rawlins, Vice President of Investor Relations and Communications. Ms. Rawlins, you may begin your conference.

Kiley F. Rawlins

Thank you, Jessica. Good morning, everyone, and thank you for joining us today. Hopefully, you all have had a chance to review the press releases we issued this morning.

Before we begin, you should know that our comments today will include forward-looking statements regarding various operating initiatives, sales and profitability metrics and capital expenditure, as well as our expectations for future financial performance. While these statements address plans or events which we expect will or may occur in the future, a number of factors, as set forth in our SEC filings and press releases, could cause actual results to differ from our expectations. We refer you to and specifically incorporate the cautionary and risk statements contained in today's press release and in our SEC filings.

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today, January 9, 2014. We have no obligation to update or revise our forward-looking statements, except as required by law, and you should not expect us to do so.

On our call today, we will begin with opening comments from Howard Levine, Chairman and CEO. Then Mary Winston, CFO, will review our financial results for the first quarter of fiscal 2014 and our outlook for the remainder of the year. Following our prepared comments, you will have an opportunity to ask questions. Remember that the queue will not be available until after we have finished our prepared remarks.

Now I'd like to turn the call over to Howard Levine. Howard?

Howard R. Levine

Thanks, Kiley, and good morning, everyone. This morning, we reported our first quarter results, revised our outlook for the rest of 2014 and announced some organizational changes. We continue to make some -- we continue to face some challenges and today, I want to focus on steps we are taking to improve our performance.

Over the last several years, we have invested significantly to support the acceleration of new store openings, a chain-wide renovation program, the expansion of consumable categories and a number of margin-driving initiatives including our global sourcing and private brand efforts. While we are convinced that we are making the right long-term investments, we are not happy with our recent financial results.

We've undertaken a lot of change over the last few years. At the same time, our customers have continued to be challenged by strong economic headwinds and competition has increased. As our teams adapted to these changes, I believe we strayed from our core strategy of serving the value-conscious consumer. We have a great business model and ample growth opportunity, and we've made progress to improve our execution. We've expanded our market share, improved customer satisfaction and reduced store manager turnover, but I know we can do better.

As we move forward, my priorities are stabilizing the business, reenergizing our focus on providing customers with exciting values and reaccelerating traffic into our stores. It will take time to reverse the recent trends, especially given the challenging environment, but I have confidence in our team. And I believe that their experience, combined with my passion to inspire our team to get back to focusing on serving our value-conscious consumer, will get us back on track and position us to achieve our long-term financial goals.

Let's talk about how we're moving forward. For the last several quarters, we've discussed the economic challenges our customers are facing. Over the last 2 years, I think we've seen a growing bifurcation of households. Higher-income households, who have benefited from market gains, better employment opportunities or improvements in the housing markets, have become more comfortable and confident in their financial situation. But our core lower-income customers have faced high unemployment levels, higher payroll taxes and more recently, reductions in government assistance programs. All of these factors have resulted in incremental financial pressure and reduction in overall spend in the market.

At Family Dollar, we have provided customers with a compelling combination of value and convenience for more than 54 years, and we have weathered many difficult economic cycles. We have a long track record of success, but we have also experienced bumps along the way as we have worked to reposition the company for the next phase of growth. Throughout our history, 2 things have remained constant: our focus on providing customers with great value and convenience and our ability and willingness to adapt to near-term challenges, while also investing for our future. While it is very difficult to know how long the current macro and competitive pressures will continue, it is clear to us that the operating environment will remain difficult. Despite these challenges, I know that we can, and in fact must, do better.

As we look to reverse the recent trends, we are taking several steps to drive stronger revenue growth and better financial returns. Building on the assortment changes we have made, we will continue to refine and enhance our assortment. We intend to invest to strengthen our value proposition. We are working to reaccelerate traffic. We've made some management changes to drive better execution of these initiatives. And of course, we will continue to look aggressively for ways to reduce our infrastructure cost.

In the summer of 2012, we added about 1,000 new items in food and HBA, added tobacco and made significant fixture and layout changes in 7,400 stores, all in about 4 months. While these changes resulted in more trips and share of wallet, they also resulted in significant margin pressure, higher store manager turnover, increased shrink and lower inventory productivity. To allow our teams and customers to adjust to the changes, we made the decision to limit assortment and layout changes in fiscal 2013. As a result, we will make our first significant changes in consumable categories this quarter, about 18 months after the changes were made in 2012.

In hindsight, had we foreseen the deteriorating customer trends, we probably would have made a different decision. While the top line has been more pressured than we expected, we have seen some important benefits from our decision to pause. Gross margin has stabilized. Inventory growth has stabilized. We are beginning to see better trends in inventory shrinkage. Importantly, store manager retention is improving and our store teams are executing well. Building on the assortment changes we made, we will continue to refine our food assortment. We plan to expand categories where customer demand has been very strong and reduce space in categories where the customer response has not met our expectations.

We will also improve adjacencies and make it easier for our customers to shop. We expect that these changes will support further improvement in sales and inventory productivity in this critical category. In addition to food, our household area is a destination category for Family Dollar. Spending in the household category in the overall market has been relatively flat over the last year, and we have not been immune to this trend. But we have maintained our market share, and we see opportunities to reenergize this traffic-driving category. This month, we will make key changes to our assortment to provide our customers with greater value and convenience. We will expand space and introduce new formulations and sizes of both national and private brands to enhance our relevancy.

Over the last 2 years, we have expanded our assortment to drive traffic and increase our market share. While we have increased the relevancy of our assortment, I believe that we have an opportunity to strengthen our value proposition. Family Dollar has always stood for value with our customer. In this environment, I believe that value is even a more important trip driver for our customers. To improve our competitiveness and drive further market share gains, this year we plan to invest significantly to provide our customers with greater everyday value and further enhance our strong price image. How we communicate and reinforce our great values and assortment changes with customers is as important to our success as the actual investments we make.

Over the last few years, we have increasingly used circulars to drive traffic and shape our price image. Going forward, our priorities are to return to our EDLP strategy, while optimizing our marketing tools, including our circulars, radio and digital to drive traffic. We're not eliminating our use of circulars, but we plan to reduce the frequency and utilize them when our customers are most responsive. Our goal was to create more excitement in our stores about the values we offer every day, while also improving the returns of our marketing investments.

In addition to taking steps to increase our customer traffic, we are also working to reduce cost and improve our profitability. We will continue to manage and prioritize our expenses to adjust to the current environment, while also investing in our longer-term capabilities to build a platform for future growth. We have made significant progress in reducing our cost of goods through our investments in global sourcing and private brands, and our efforts in these areas will continue. Being a low-cost retailer is deeply rooted at Family Dollar. As such, our teams continuously look for ways to reduce cost and improve profitability. For example, through our procurement process, we recently consolidated our store maintenance services to 1 vendor, resulting in significant expense savings this year. As the top line is likely to remain challenged, we will continue to look aggressively for additional opportunity to reduce our core operating cost.

We will also continue to selectively invest to support our future growth. Our new pallet delivery program is an important investment to help us improve the long-term efficiency of our supply chain, simplify store processes and increase workforce retention. Through this new method, goods are now sorted by product group at the distribution center and delivered to stores on pallets. This process makes it easier for our support teams to unload trucks, enables us to replenish goods to the sales floor more quickly. We have converted our North Carolina distribution center to the new process, and we are pleased with the early results. We are seeing improved delivery service rates, reduction in merchandise damages and higher customer satisfaction stores, and our store teams love it. We plan to convert 3 additional distribution centers this year.

To improve the shopping experience in our stores and strengthen our competitive positioning, we continue to invest in our store renovation program. This multiyear investment is critical to improving our competitiveness. Our teams continue to build on past learnings to tweak the layout and assortment to optimize performance in these stores, and renovated stores continued to outperform the chain. We remain on track to complete the chain by around 2016.

Lastly, we are committed to our new store program. With strong returns on investment and ample market opportunity, opening new stores continues to be an investment priority. This year, we plan to open 525 new stores. New store returns remained strong and initial sales productivity has remained consistent, between 85% to 90% of an average store. We believe we can double the size of our chain and we remain committed to 5% to 7% annual square footage growth as long as these metrics continue to meet our targets.

Before Mary discusses our financial results, let me address the management changes we announced this morning. First, I'm pleased to announce that we have promoted Jason Reiser to Chief Merchandising Officer. Jason joined us from Walmart last summer to lead our HBA and household teams. In October of 2013, we promoted him to the role of Lead Merchandising Officer. While he is relatively new to our channel, Jason knows our core customer and how important value is to her. His knowledge of the value-conscious customer, combined with his leadership style and merchandise experience, make him an excellent choice for this important role.

In addition, we announced that Mike Bloom has left the company. While we've made some progress during Mike's tenure, we weren't happy with our financial results. Ultimately, Mike and I were not aligned on our merchandising strategy and we decided to make a change. I appreciate Mike's contributions while with Family Dollar and wish him the best in the future. We plan to initiate an executive search for Mike's replacement. But in the meantime, our merchandising, supply chain and store operations teams will report directly to me. We aspire to be a best-in-class operator, and we are committed to hiring a great talent to help us achieve this goal. As I think about the candidate for this important role, I want to make sure that we find a knowledgeable, experienced retail executive who fits our team's culture and who could, over time, become CEO.

Now, I'll turn the call over to Mary, who will discuss our financial results in more detail and discuss our outlook for fiscal 2014. Mary?

Mary A. Winston

Thank you, Howard, and good morning, everyone. This morning, I will review our first quarter results and then discuss December sales and our revised outlook for the remainder of the year. This morning, we reported sales and earnings that were in line with our previously provided guidance. Total sales increased 3.2%. Comparable store sales decreased to 2.8%, and earnings per diluted share were $0.68. As expected, our first quarter sales were pressured as we anniversaried our strong consumables growth from last year. In addition, we believe our sales were impacted by increasing economic headwinds for our core customers and a very promotional operating environment.

Total sales increased by $2.5 billion for the first quarter of fiscal 2014, as compared to $2.4 billion in the first quarter of fiscal 2013. Please note that the first quarter fiscal reporting period is different from the comp reporting period because of the extra week in fiscal 2013. Comp store sales for the 13-week period ended November 30, 2013, as compared to the 13-week period ended December 1, 2012, decreased 2.8%. The decrease in comp sales was primarily due to fewer customer transactions. As a reminder, the comp store sales period this year included 6 fewer selling days during the holiday season as compared to last year. We believe this shift negatively impacted our comp store sales in the first quarter this year.

For the quarter, gross margin expanded 14 basis points, as compared with the first quarter of fiscal 2013. The improvement was the result of higher initial merchandise markups and lower freight cost. As expected, our merchandise margins continue to benefit from our global sourcing and private brand programs. In addition, we saw less pressure from mix as we began to anniversary last year's consumable assortment additions. Offsetting these improvements, shrink and markdowns increased as a percentage of sales. I will note that shrink was less of a headwind this quarter as our inventory levels and store manager turnover metrics continued to stabilize. Markdowns increased primarily as a result of our efforts to drive holiday merchandise sales during a very competitive season.

SG&A expenses increased 5.2% compared to the first quarter last year and as a percentage of sales, increased 57 basis points to 29.5%. The SG&A leverage in the quarter was mainly the result of slower sales growth. As a percentage of net sales, store occupancy and store labor cost increased as compared to last year. Partially offsetting these factors were reductions in advertising, insurance and incentive compensation expense. Advertising expense as a percent of sales decreased 50 basis points as compared to last year. Last year, we distributed 11 circulars in the quarter. To improve profitability and the effectiveness of our marketing spend, we eliminated a few of these ads. At the same time, we have continued to strengthen our supplier partnerships and have worked more closely with them to support our marketing efforts. As we continue -- as we think about the rest of the year, our advertising cadence is expected to be more in line with last year.

Reflecting our pay-for-performance philosophy, incentive compensation cost decreased as a percentage of sales. This is due to our relative performance against our plans. The effective income tax rate in the first quarter of fiscal 2014 was 35.4% as compared to 36.4% in the first quarter of fiscal 2013. The decrease in the effective tax rate was primarily due to foreign tax benefits associated with our global sourcing efforts and an increase in federal job credit -- tax credits partially offset by an increase in uncertain tax positions.

Net income for the quarter increased 2.8% to $78 million, compared to $80.3 million in the first quarter of fiscal 2013, and earnings per diluted share were $0.68 compared to $0.69 last year.

Merchandise inventories at the end of the quarter increased 3.4% to $1.65 billion compared with $1.59 billion last year. In the first quarter, we continue to anniversary many of our consumable assortment additions and as a result, average inventory per store was down about 2.7% versus last year. Despite the softness in seasonal sales, discretionary inventories were well controlled at the end of the quarter.

Capital expenditures in the quarter were $112.5 million, as compared to $196.4 million in the first quarter of fiscal 2013. The decrease in capital expenditures was primarily a result of lower new store investment, reflecting our decision to diversify our new store financing vehicles. This quarter, we opened more stores under a build-to-suit financing structure and opened fewer fee development stores as compared to last year. This diversification of financing results in less capital on our balance sheet and yet still enables us to achieve competitive lease rates.

During the quarter, we opened 126 new stores and closed 1 store, compared to 125 openings and 1 closure in the first quarter last year. In addition, we expanded, relocated or renovated 179 stores in the quarter.

Reflecting our commitment to returning excess capital to shareholders, in the first quarter of fiscal 2014, we paid $29.9 million in dividends and repurchased $125 million of our common stock. At the end of the quarter, we had $245.8 million remaining under our current authorization.

Now let's turn to our expectations for the second quarter of 2014 and the remainder of the year. As we announced in this morning's press release, comp store sales in December decreased about 3%. Our customer remained pressured by the tough economic climate and faced -- and continued to face increasing uncertainty related to government assistance programs. In addition, the promotional environment was more intense than we anticipated. Reflecting our December results, we now expect comp store sales in the second quarter will decline in the low-single-digit range.

In addition, in response to the competitive environment and challenging sales trends, we leveraged significant in-store promotions to drive in-season holiday sales and manage our discretionary inventories. We are pleased with our inventory position at the end of December. And while the increased promotional activity will likely result in higher markdowns at the end of the quarter than we originally planned, we continue to expect modest gross margin expansion in the second quarter.

Based on these assumptions and excluding the effect of the extra week last year, we expect the second quarter sales will increase in the low-single-digit range and that earnings per diluted share will be between $0.85 and $0.95. As a reminder, the extra week last year contributed approximately $189 million in sales and $0.07 of earnings per diluted share.

As Howard indicated, we believe that we're making the right investments to stabilize the business. It will take time to reverse the recent earnings trends, especially given the challenging environment, but we expect that the trend will improve modestly in the second half of the year. We now expect that net sales for the full year, excluding the impact of the extra week, will increase in the low to mid-single-digit range and total comp store sales will decline in the low-single-digit range. We expect that gross margin will be flat, and we expect SG&A deleverage for the year, given our current expectation for comp store sales. As a result, we now expect earnings per diluted share for the full year to be between $3.25 and $3.55.

Now, I'd like to turn the call back over to Howard for some final remarks. Howard?

Howard R. Levine

Sure. Before we take your questions, I'd like to leave you with a few closing thoughts. We have made progress in many areas, and I appreciate the hard work and commitment of all of our 60,000 team members. But we are not satisfied with the results. We are taking steps to reverse the trends. In my many years with Family Dollar, I've been through difficult times before. Family Dollar has a long track record of success. We have experienced challenges and we have always worked effectively to reposition the company for the next phase of growth. The key to our success has been our commitment to managing both the near-term execution of our initiatives, while also investing to position our future growth.

We have a great business model that has stood the test of time. And at a time when our core customers are under more financial pressure than ever, I know that we can do a better job of offering her exciting values and a convenient shopping experience. This is our history. This is our future. I am confident that as we work to serve our customers better while also focusing on improving profitability and managing risk, we will successfully navigate through this period and accelerate returns as we move into 2015 and beyond.

And now, operator, we would be happy to take any questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Bernard Sosnick with Gilford Securities.

Bernard Sosnick - Gilford Securities Inc., Research Division

Howard, I've been following Family Dollar long enough to know that you've been through cycles before, and I'll express my confidence for you in the future. But in the meanwhile, you raised a couple of important points, one of which is an increase in promotional activity. And I wonder if you can go into a little amplification of that, along with the possible already discernible effects of the reduction in SNAP allowances.

Howard R. Levine

Sure, Bernie. Thanks for the question. Were you referring to our plans regarding promotional activity? Or were you talking about what we...

Bernard Sosnick - Gilford Securities Inc., Research Division

Yes, yes.

Howard R. Levine

Okay, sure. As my time in the company, over the years, one of the things that is critically to our unique customer who is absolutely living paycheck-to-paycheck, standing for an everyday low price proposition is critically important. As you manage through that sort of situation, it's very difficult to have an EDLP strategy and promote every week. The numbers just don't make any sense. What we're going through, when you began to see some of that in the first quarter, is a beginning of the reduction of circulars, while also investing in price to further drive that EDLP strategy. So it is going to take some time for us to work through that as the year progresses. But over the years, one thing I know for sure is that we have to stand for low prices every day, and we have to offer her competitiveness on those consumables that she's buying every day. We're a pickup kind of business today, where she's coming in and filling her needs in the week to get through some of the challenges in the week. And I think it's important when she walks in our store that she knows we stand for value. At the same time, as I've talked about, we're not abandoning our circular program. So we're going to still be advertising 1 to 2 times a month, making sure that those are as effective as ever, communicating some of our values not only in consumables, but in some of the discretionary categories and have a little more balanced approach as we work through the year and into 2015. Regarding your comment on the SNAP, clearly, a reduction in SNAP benefits is not a positive. SNAP benefits have increased substantially over the last several years. And with that reduction, it certainly will have an impact on our challenged consumer. At the same time, we do think that the improvements we're making in our new set over the next quarter will be extremely helpful in helping her make it through that. But no question, that's a headwind that we'll be dealing with.

Operator

We'll go next to Matthew Boss with JPMorgan.

Matthew R. Boss - JP Morgan Chase & Co, Research Division

So I just wanted to -- could you walk through your mindset with your capital allocation strategy? There's obviously some changes this morning. Primarily, the motivation behind the buyback and any consideration that you guys have given to potentially slowing the square footage growth?

Howard R. Levine

Sure. I'll start and let Mary pick up. But Matt, our capital allocation strategy is really the same. As we've always talked about, we first want to invest into our business; secondly, support our strong dividend; and thirdly, buy back stock with any excess capital that we have. So that remains consistent and there's always adjustments as we work through year to year. What's also very important to us is maintaining of the investment grade. That certainly impacts some of the decisions we made, but we think it's an important thing that we want to continue to maintain. And finally, and Mary can get into this, is some of the capital reallocation as far new store financing because that was the most significant change in the quarter and will impact the year as well. So Mary, you want to talk -- touch on that?

Mary A. Winston

Yes, absolutely. Matt, this is Mary. To leverage off of what Howard already said, our philosophy around capital allocation really has not changed. What we have done, though, is continue to look at how we can refine our strategies for financing our real estate growth. And we talked about this even last quarter when we gave initial capital guidance that was lower than the CapEx level we spent last year. We talked about the fact that we were diversifying, I guess, is the right way to say it, diversifying the number of vehicles that we use to finance our store growth, and going back to relying a little bit more on build-to-suit programs, where we don't tie up our capital on our balance sheet. As we went through the first quarter, we saw additional opportunities to do that and still do it at competitive lease rates. So as we look out for the remainder of the year, we're going to open the same number of stores as planned, the 100 -- I mean, 525 new stores, but we're going to open fewer of them under the fee development program, which ties up capital on our balance sheet, thereby freeing up some capital. Again, our priorities continue to be the same, though, we're going to be making some investments in the business as well in the back half, as we look to improve our value proposition with customers. And then we've announced in our press release that our -- we think our total share buyback for the year will be $250 million. So that is on our radar screen as well. And we'll be continuing our dividend program, of course.

Matthew R. Boss - JP Morgan Chase & Co, Research Division

Great. Last question. On your gross margin guidance, flat now for the year, what does that embed from a discretionary standpoint? Does it embed trends as they are today, or any improvement?

Mary A. Winston

I would say for discretionary, it is about flattish to where we are now, but our discretionary trends have improved versus what we were looking at 1 year ago. But we're not expecting significant acceleration in that business given some of the challenges that our customer continues to face. What's happening in our gross margin trends though is a recognition that the environment is much more promotional and that we will stand for value. So we are looking at investments we may want to make in pricing, and that, of course, will put some pressure on our gross margin.

Operator

We'll go next to John Heinbockel with Guggenheim Securities.

John Heinbockel - Guggenheim Securities, LLC, Research Division

So, Howard, a couple of topics. Discretionary is still a challenge, what's the thought process? I know you talked about value. But putting that -- is that the primary focus here in discretionary? Or do you think you need to change product content presentation, space allocation? What's the thought there?

Howard R. Levine

Sure, John. It's probably a combination of all those things that you mentioned depending on the specific categories. So, first, while it's kind of difficult to see in some of the second quarter results, we are getting some traction in some discretionary categories. Our Trim A Tree business through December had a low-single-digit comp, albeit was heavily promoted, but we were able to get through that and saw some nice sales there. Our ladies business during the month of December has been very strong. We've seen some traction in some other key discretionary categories. But there's absolutely been some weakness there, and we have planned those down very conservatively as a result of some of the challenges out there. Our overall game plan there has continued to be cautious given the customer, but I strongly believe that there is value opportunities on that side of the business as well that she will make purchases when there is great value out there. And I think one of the things that I plan on doing is working very closely with our merchandising teams to see how we can further enhance the value proposition there, clearly understand that it will be difficult. And as we work through the year and into 2015, we will also be considering space reductions to get better return on that investment. We have a new concept renewal layout that we'll begin rolling out that does further utilize space better to try to get our sales per square foot up better. So there's a number of things we're working on and still believe there's opportunities there, albeit it will be a little challenging.

John Heinbockel - Guggenheim Securities, LLC, Research Division

And then just with regard to expansion -- and I understand the new stores are working well. But with EBIT margin down 250 -- and including this year, down 250 over the last 3 years. Is there not a good argument for stepping back new store openings in '15 and '16 for a bit, focus on existing stores and comps and get the margins back to kind of where they were a couple years ago? Or is that not a good argument given how the new stores are performing?

Howard R. Levine

No, I think it's a very fair question, John, and it's something that we continue to spend a lot of time looking at and focusing on. And if we were to see our new returns slip, we would certainly consider a reduction there. To explain why we are so bullish on new stores is because our new stores are performing well. Clearly, there's a lot of opportunity to continue to grow this chain and expand our market opportunity there. But we were going to continue to evaluate that and try to make the best decision possible regarding the long-term proposition and the long-term growth of the company.

Kiley F. Rawlins

[Operator Instructions]

Operator

We'll go next to Meredith Adler with Barclays.

Meredith Adler - Barclays Capital, Research Division

I guess I want to talk a little bit about whether -- I want to understand the EDLP decision. Or maybe the other way to say this, it must have been a reason why you had moved to be more promotional. And in that is how do you communicate to customers that you're moving back more towards EDLP?

Howard R. Levine

Great question, Meredith, and what I'm referencing to is my history with the company here. And as we've, over the years, going back to the early '80s, have had various promotional strategies and pricing strategies, what I have seen as most important and relevant to our customer is maintaining great everyday low prices. And what I'm saying is we have gotten away from that. We're in a limited SKU assortment business and a business that has a very unique customer that relies on us for low prices every day. We got very promotional, as we were trying to drive traffic and some of our prices has increased. And what happens is you get caught up in a habit of continuing to run circulars. As an example, we ran 11 events in a 13-week quarter in the first quarter of our year. And I can tell you that our model is not built to maintain that level of promotional activity. As you know, we have small stores. We have limited labor model. There's a lot of logistical challenges getting ads set and removing them. And it was just very difficult to execute and get the returns on those circulars with that kind of frequency. So there will be a better balance between our circular program in that EDLP strategy. It doesn't mean we're not going to advertise. It doesn't mean that at all. But our objective is to make sure that we, first, we get our prices right; secondly, then communicate and highlight that to our customers, not only externally, but with our in-store signage program. And what I have seen happen over the years is it takes some time to get that through, but -- through the customer base, but it has consistently come through and really is more balanced and something that we think we can execute better, given the unique challenges of our model.

Operator

We'll go next to Paul Trussell with Deutsche Bank.

Matthew Siler - Deutsche Bank AG, Research Division

It's actually Matt for Paul. I was just curious if you could talk a little bit about your remodel program. I mean, obviously, you've said you're committed to new stores. You're happy with the new stores and what you're getting out of them in terms of returns. But can you talk about what you've seen from returns over remodels over the last 3 years? I mean, it seems as if you're saying you're going to announce another concept renewal format. And what have you seen, from a return standpoint, on each of these formats recently?

Howard R. Levine

Yes -- no, I think the performance in our renovated stores have remained consistent, Matt. I think the way that -- the comment that I made about a new layout is just our continuing effort to take learnings from the other layouts and adjust those as we go forward. But what -- the way I think about our renovation program is a couple things. Just first, it's a much better shopping experience for our customer. The layout and the presentation of the goods is much stronger. And it's critically important not -- to us to continue to invest in the existing chains and maintain our competitiveness. And absent a renovation program, I think our returns would be substantially below the levels that they are, so we intend to maintain that. We're over halfway through the program, and I continue to be pleased with the overall results there.

Operator

We'll go next to Peter Keith with Piper Jaffray.

Peter J. Keith - Piper Jaffray Companies, Research Division

Just wanted to focus back on the shift to EDLP. Just to be clear, it sounds like you're going to start making some of those pricing adjustments in the second half, I want to confirm that. And how long should we think about this shift to EDLP taking, just from resetting pricing overall? Should -- was it going to extend into next year?

Howard R. Levine

Sure, Peter. We've actually started some in the current quarter, and we'll continue that through the year. And as we talked about, a lot of those investments are embedded in our guidance. I wish I could tell you the exact time and date that it will take. That's part of our cautious outlook for the back half, and that is going to take time for customers to understand that and for us to roll out the program. But we think over the next 6 to 12 months that we should start to see some traction there. And in fact, we hope to see some improving trends in the back half of our year, albeit a little lighter than what we had originally thought. We still think that there's opportunity as we work through the year. But it will take some time, and we certainly ask for some patience there as our customers get acclimated to some of the things that we're doing.

Operator

We'll go next to Mark Miller with William Blair.

Mark R. Miller - William Blair & Company L.L.C., Research Division

Howard, I think this is the first time in the last 6 years that comps in consumable categories have declined. And I want to understand further what's going on across these -- the consumables. Because I know you had a tough comparison, but it should be the same assortment year-on-year. So, I mean, where are you seeing the weakness? And then also, in particular, I'd like to know how things are trending in tobacco.

Howard R. Levine

Sure, Mark. Nice to hear from you. As we look at what we went through, absolutely we're up against some big comparisons, but I also feel like we should have done a little bit better. So the traffic slowdown is what we really saw over the last months, particularly November and December. And we think that that's a combination of a few things. As we've talked about the fact that we did not refresh our schematics in these key areas, particularly food and household for -- and HBA for over 18 months, that those assortments, with all the new things that we added, had particularly greater number of changes that need to be made. We're excited that those are going to be rolled out and look to see some of the benefits there. Additionally, when I do think about the traffic impact, I think it had a lot to do with how we stood for value during this time period. And to some earlier questions, it certainly wasn't because we didn't have enough circulars, in the first quarter particularly where we had 11 events, though I think it's a combination of refreshing these schematics, re-instilling what we want to in terms of our value proposition and EDLP. And as we see those things come in, we look to see some sales that re-accelerate. Candidly, we all know that the customer is under pressure, so we're working against that kind of headwind. But even with that, we think that we can do better.

Mark R. Miller - William Blair & Company L.L.C., Research Division

My question was on category detail. Would you be willing to share anything about where you saw the weakness?

Howard R. Levine

In terms of our consumables, I think a lot of the weakness was in the categories that we haven't refreshed. And as I mentioned in my prepared remarks, household has been under some pressure in the market and we certainly have not been immune to that. We're excited about the planogram changes and the adjustments to that assortment that are beginning the end of this month to help kind of reenergize that business. It's a critically important category to us and one that we think we are a destination for. So with the item changes that we've made there and the adjustments to the space presentation, we're hoping to see that re-accelerate a little bit further.

Operator

We'll go next to Stephen Grambling with Goldman Sachs.

Stephen W. Grambling - Goldman Sachs Group Inc., Research Division

Within the EDLP strategy, how do you think about the importance of national versus private brands? And then I have a very quick follow-up, if I can.

Howard R. Levine

Sure. It's all right with me, Steve. I don't know if Kiley will let you. Steve, one of the bright spots in our strategy has been our private brand program. We have made tremendous strides in the packaging, in the quality offering there. And in fact, it's continued to see very nice increases there. We executed 500 new SKUs in the fourth quarter last year. We probably only have about another couple of hundred this year that we're going to be rolling out. And what we have been working there -- working on there, is making sure that we have a -- an easy comparison for the consumer when she walks into our store. So we're going to stand for great prizes every day on our national brands. And we want to also offer that great value on a private brand, so she can come in and see what her actual savings is and understand that very clearly at the shelf. Both are extremely important businesses for us. National brands represents a huge portion of our sales today, but the private brand consumable end of our business has continued to grow very nicely as well. So we continue to evolve there, and continue to feel that there's opportunity to better communicate some of those savings. I can tell you personally, some of our private brand items, particularly, I'm a big cashew guy. I think our cashews, in fact, we ate a bunch of them last night, are outstanding. The quality there is better than some of the national brand offering, in my opinion. The same thing in some of our paper towels, the quality of our paper towels is as good as some of the national brands out there. So I'm excited about what that offering has been and think that the consumer continues to grow in her acceptance of some of those items as well.

Stephen W. Grambling - Goldman Sachs Group Inc., Research Division

And then the follow-up is just to Matt's question from earlier. It's maybe for Mary. You previously guided for $100 million in buyback estimates. I mean it looks like the results came in a little bit weaker than expected and then you bought back more than you had prior -- previously guided to. So it seems like there was a bit of a change in the thought process. So is there some methodology that you're using to help us think about this going forward?

Mary A. Winston

Yes, -- no, there really was not a change in the methodology or our thought process around buybacks and their role in our capital allocation strategy. I think what you're seeing really is timing. We really did begin our buyback program right after our call last time. And as we talked about with the quarter, as we progressed through the quarter and we were buying through the quarter, the quarter was on track. And where we started to see pressure was towards the end of November as we got into the holiday selling season. So I would say, we stayed on track with what we were thinking about originally in terms of buybacks. And the quarter just came under a little bit more pressure than we had initially expected in the last couple of weeks.

Operator

We'll go next to Edward Kelly with Credit Suisse.

Edward J. Kelly - Crédit Suisse AG, Research Division

Howard, my question is a little bit bigger picture. There's been a significant amount of management change over the years, and obviously, Mike's a big change today. And my question for you really is why do you think it's been so hard to find the right people and execute? I think obviously, everybody thinks that this model should be more profitable and performing at a higher level. But is the fix just in sort of the execution and the people? Or is there something more structural? Or are you just juggling too many things? I think that's why people are asking you today about slowing store growth. It's not necessarily about what's new store returns, but what else is going on. So if you could just maybe provide a little bit of color on that, I think that would really be helpful. Because I think people get concerned, right, is there something structural?

Howard R. Levine

Sure, Ed. No, and I appreciate the question. First, let me talk about it from a shareholder's perspective in that being a major shareholder myself and looking to improve the performance of the company, when you believe you have a great business model, it is about the people and it is about the execution of our game plan. So when you look back prior to the last 2 years, the prior President, some of you may remember, he wasn't related to you, but have the same last name, Jim, we were together for 15 years. We had a pretty stable management team. We had very few changes, and we had pretty good execution. With the announcement of the retirement of Jim, it did cause us to go out and look. And Mary was recruited and Mike was recruited. And typically, what happens is when you bring in new folks, they want to bring in new folks, and it becomes a very slippery slope at times and something that I'm not at all accustomed to and something that I'm not pleased at all with. I think that one of the things I've actually been proud of is the fact that we do have a stable team and that we are able to help people be successful and grow careers and promote from within. So all that being said, I can't change what's happened in the last 2 years. I will tell you, as I sit and look at our team today, I think we have a great team. The effort with Mike was not pleasant. It isn't something that I was wanting to do and something that I felt we needed to do to get a more stable team in place. Try to let people breathe and focus on those things that are important. Because I'm with you, I absolutely agree our returns can improve and should improve. And I think over the next few quarters, several quarters, that we will start to see as this team stabilizes and move forward that we'll begin to see better results.

Edward J. Kelly - Crédit Suisse AG, Research Division

Just one quick follow-up. So as you look replace Mike, it's about finding execution of the current strategy. We shouldn't expect more changes down the road?

Howard R. Levine

Another fair question. If you heard the main theme today of the call is getting back to our roots, getting back to what has worked at Family Dollar over the many years that I've been here. And that is standing for an EDLP pricing, offering great value to our customers. We've got some work to do there, we're started. We've got to make some improvements to our assortment. Those things are lined up and ready to go. So no, I'm not looking for somebody to come in and change what our strategy is. I think if anything, one of the benefits that we've seen over the last 2 years is how important it is to maintain and have a consistent merchandising strategy. It's not only confusing to the customer, it's confusing to our teams internally. So we are absolutely looking to stabilize, focus on that important metric of growing our comp store sales and our earnings. And frankly, I'm reenergized over this. I'm excited to get back and work with our teams here and try to get us positioned properly. And as I talked about from a recruiting standpoint, it is going to be critically important to us that we find the right person. I'm looking for somebody that has CEO qualities. Doesn't mean I'm leaving or going anywhere, as long as the board wants me to be here. But I think it's critically important that we find somebody that works with our culture, understands our unique customer. And with those kind of things, I feel pretty confident that they'll come in and hit the ground running. It's going to take some time. And to me, the timing is not as important as getting the right person in place. So you make very good points, and it's all things that we have thought about. And as I say, I'm really looking forward to getting in and working with our teams and reenergizing the business.

Kiley F. Rawlins

[Operator Instructions]

Operator

We'll go to Mark Montagna with Avondale Partners.

Mark K. Montagna - Avondale Partners, LLC, Research Division

Howard, clearly you're not at -- the company's not executing to a level that you find acceptable. Would you -- do you feel that the greater deficiency is more on the merchandise end, or the operations end?

Howard R. Levine

Mark, as I think about things, if you don't have a clear understanding of what your merchandising strategy is, I think it impacts your stores. And so I think once we get squared away on what that's -- fully executing on our overall merchandising strategy, that it will help our store teams. But I will tell you that -- and we track this and measure this every quarter, we are seeing improving trends in our store conditions. I know we still have plenty of opportunity there, but they continue to improve. And I think despite the activity and the change, the fact that our store manager turnover is settling down is a great metric for improving our store execution and importantly, our shrink. We talked about not being quite as much of a headwind there. But frankly, we think that's an important metric that judges the execution of our stores, as well as many others. So good point and I appreciate your question.

Operator

We'll go next to David Mann with Johnson Rice.

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

Howard, my question is about the efforts you've made over the last few years to get a trade-down customer. It would seem that the changes in merchandising and the remodels have not been as successful as you've wanted, given the results. Can you just talk about the efforts, any changes you're going to make and what you think is going on with the trade down?

Howard R. Levine

Sure, and first, David, we are pleased with our renovation program. I think those stores are absolutely outperforming those stores that have not been renovated. And frankly, on that same note, we're happy with the improvements that we've made in our assortment. Now what we've got to do back and tweak it and make the changes and also instill this EDLP philosophy throughout the company. But we're pleased with the renovation program. I think it's critically important to the success of our company and our future competitiveness. So I don't know if that answers your question?

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

I guess, just a quick follow-up. Is there any data that you have that you are obtaining or getting a trade-down -- more trade-down customers into the store?

Howard R. Levine

Yes. Again, when I look at our customers. I would categorize a large group of core customers, which would be low income. And then we have some other more middle-income shoppers, which are more light shoppers for us. And I think everything that we're talking about doing, particularly in terms of our pricing and our overall strategy, has impacted both that trade-in customer and our core customer. And I think the efforts that we're taking there to drive that price image strongly and communicate those values to the customers will help us on both customer segments there.

Operator

And our last question comes from Scot Ciccarelli with RBC Capital Markets.

Scot Ciccarelli - RBC Capital Markets, LLC, Research Division

Obviously, sales trends have deteriorated. We're making management changes. We're naming a new Chief Merch Officer, et cetera. Can you help us better understand how much of maybe the shortfall for the second quarter and balance of the year you had kind of put on yourselves? And then how much is just kind of the continual grinds that we've seen on -- within the environment and with your consumer?

Howard R. Levine

Sure, Scot. I think it's a good question and one that I have given a lot of thought to. And unfortunately, I can't give you a percentage breakdown. It's just very difficult to do. But I will tell you the way we're thinking about it is the playing field is going to be difficult. The macro environment, as we talked about, is going to be challenging and we can't do anything about that. So our efforts and our focus is going to be on what we can control and what we can change. And I think that, that's the only path to continuing to improve the business. So that's really where the focus will be. And hopefully, things will improve in the macro. On the positive side, we are now starting to anniversary the payroll tax increase. I think gasoline prices look like they've stabilized, maybe will start to drop a little bit. So there are some positives out there from the macro, but clearly, the -- it will be a challenge. And our effort is to try to compete and have a competitive offering despite those kind of challenges.

Scot Ciccarelli - RBC Capital Markets, LLC, Research Division

Did you think the environment actually got worse during the quarter?

Howard R. Levine

Are you talking about the first quarter?

Scot Ciccarelli - RBC Capital Markets, LLC, Research Division

Well, I guess kind of what you saw through December and thus far it's early in January. But you guys have taken a pretty big hatchet to the balance of the year. And so what I'm trying to figure out is has there really been a change, or is it just a still difficult environment? And maybe some of the shortfall that we're seeing is really more company specific, or is it more environment? And again, I know it's not a science, Howard, but I'm just kind of wondering the way you guys are thinking about that.

Howard R. Levine

It was both. And Scot, I think the way we looked at it was September and October were okay. What we saw was a deteriorating trend particularly the last couple of weeks in November, when discretionary sales became more important, as well as through the month of December when traffic started to decelerate. So that gave us some pause in the way we thought about the back half and the fact that traffic had slowed and it will also be -- so that's really what drove the kind of softer back half than what we had previously thought. Additionally, as we've talked on the call, the price investments are just now starting. And I, as I've said, I think that's going to take a few months to get fully ingrained into our customer's shopping patterns. So we were probably just being a little more cautious given the environment and given the investments in some of the trends that we saw in November and December.

Operator

I will now turn the call back over to Ms. Rawlins for her final comment.

Kiley F. Rawlins

Thank you, Jessica. And thank you, everyone, for joining us today. We had a lot of folks on the call and we had a lot of folks in the queue, and I'm sorry we didn't get to everyone. As usual, Kevin and I will be available for questions after the call, and have a good day.

Operator

This does conclude today's conference. Thank you for your participation.

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