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Here’s the entire text of the prepared remarks from Family Dollar’s (ticker: FDO) fiscal Q1 2006 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Executives:

Kiley Rawlins, Divisional Vice President, Investor Relations and Communications

James Kelly, Vice Chairman, Chief Administrative Officer and Chief Financial Officer

Howard Levine, Chairman, Chief Executive Officer

Analyst

Meredith Adler, Lehman Brothers

Stacy Turnof, Merrill Lynch

Mark Miller, William Blair

Patrick Mckeever, Suntrust Robinson Humphrey

Shermin Tan (ph), Citigroup

Jack Bayless, Nedwood Research

Christine Augustine, Bear Stearns

David Cumberland, Robert Baird

Michael Baker, Deutsche Bank

Chris Weissman, Empirical Capital

Operator

Good morning ladies and gentlemen and welcome to the Family Dollar First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After prepared statement by the company, we will open the call for questions from the participants. This call is being recorded for MCI and CCBN. If you have any objections, please disconnect at this time. And I will turn the call over to Ms. Kiley Rawlins, Divisional Vice President, Investor Relations and Communications. Ms. Rawlins, you may begin.

Kiley Rawlins, Divisional Vice President, Investor Relations and Communications

Thank you Carrie and good morning everyone. Thank you for joining us today. We appreciate your continued interest in Family Dollar Stores. With me this morning are Howard Levine, Chairman and CEO and Jim Kelly, Vice Chairman and Chief Financial and Administrative Officer.

Before we begin, you should know that our comments today will include forward-looking statements which may or may pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act. These statements address company plans and activities or events which we expect will or may occur in future. However, a number of factors as set forth in our SEC filings and press releases could cause actual results to differ from our plans. We refer you to and specifically incorporate into our comments today, the cautionary statements contained in today’s press release and in our other SEC filings. You are cautioned not to place undue reliance on these forward-looking statements which speak only as of today at this call. The company does not undertake to publicly update or revive its forward-looking statements.

I hope that you had an opportunity to review our earnings release this morning. We’ll begin this discussion with some comments on the quarter’s financial results from Jim and then Howard will share some of his thoughts with you. Jim?

James Kelly, Vice Chairman, Chief Administrative Officer and Chief Financial Officer

Thank you, Kiley. Good morning and happy holidays. It’s always good to get the first quarter of a New Year behind me, particularly when it’s a good start. This past quarter, we had a number of areas where exceeded our plans and a few unexpected expenses. We also had a number of items that impact comparability with last year’s first quarter, to include the expensing of options, and the impacts of our stock buyback program. As we walk through our financial results this morning, I’ll point these out.

The cornerstone of our retailers’ performance is sales. So, let’s start there. As many of you will recall, over a year ago, we discussed that in this difficult economic environment, we needed the sales drivers in order improve comp store performance. That is why last year; we initiated investments in our treasure hunt, urban and cooler programs. During the first quarter, our comparable stores grew sales at a solid 3% driven by these initiatives. As planned, we opened 73 new stores in the first quarter. New stores sales performance remains relatively high by industry standards at around 85% of the sales of an average store. We would like new store sales with our current mix of our urban and rule stores to be closer to the 90% performance level. And believe that with some of the improvements we’re making in the urban markets and in our new store opening program, we will move in this direction.

The expansion of our gross margin by nearly 30 basis points exceeded our plan. We had expected gross margin to be flat to down slightly and still believe that with the impact of the rollout of coolers that this maybe an appropriate annual view. As expected, better shrink results helped the gross margin, but we also received a lift from improved initial markups. Strong sales in many of our treasure hunt categories such as toys and fashion accessories contributed to this better-than-planned performance.

Offsetting some of this gross margin expansion, were slightly higher markdowns and higher freight cost. As you know, we borrowed 250 million this quarter, on a long-term fixed rate basis in support of our stock buyback program. I will update you on this in a moment, but want to highlight now that for the first time, we’ve separated interest income and interest expense from operating expenses. My comments this morning are based on this new classification.

Operating expenses de-leveraged approximately 90 basis points, driven by 4 major expense categories, compensation, insurance, occupancy and urban market related expenses. Occupancy cost increased approximately 40 basis points, driven primarily by higher utility costs and higher depreciation charges. Insurance cost increased approximately 30 basis points, primarily as a result of a limited number of large claims in the healthcare and workers compensation areas as well as some hurricane-related costs.

Given the nature of these items, I do not believe that they are indicative of a negative trend. Compensation cost increased primarily as a result of the adoption of a new accounting standard requiring the expensing of share-based compensation cost. As discussed during our last conference call, in anticipation of this accounting change, we examined our compensation programs to improve alignment of pay with performance and to better link programs to precede associate value. This was, work resulted in a substantial reduction in the number of associates participating in share-based programs, as nearly 2/3rd of those participating in the stock option program last year are now participating in other cash-based programs of similar value. The impact of stock option expensing and the new substitute programs was approximately 20 basis points in the first quarter of this year. As a reminder, we also have yet to anniversary some of the incremental cost associated with the urban initiative.

During the first quarter of this year, we had around 1,300 urban initiative stores versus around 300 during the first quarter last year. While this result in some de-leveraging, importantly around 80% of our urban initiative stores earned more than they earned during first quarter of last year. And nearly 2/3rd of these stores reported an operating margin that was at or above their operating margin for the first quarter last year.

Now let’s turn to the impact of the stock buyback program. As a reminder, this past August, our Board approved the buyback of 300 million of company’s stock. Pursuant in the buyback program, on September 27, the company obtained 215 million through a private placement of unsecured senior notes. On October 04, we executed an overnight share repurchase transaction with the bank, with the acquisition of 10 million shares or approximately 6% of our outstanding stock. These transactions are more fully described in our recently filed Form 10-K. In addition to this $300 million program, we also have authority to repurchase up to an additional 3.9 million shares under earlier Board approved programs.

From the first quarter results perspective, the impact of this program was to increase net interest expense by around $2 million. However, on an earnings per share basis, the program was accretive by roughly 1/3rd of penny per share sold around in basis; it had no impact this quarter. As this buyback program moves forward, we continue to expect an annual benefit in the $0.04 to $0.05 per share range.

Now let’s turn to the balance sheet, our liquidity remains strong for the 145 million of cash and short-term investments at quarter end. Inventories on a per store basis were flat, and seasonal merchandize has been well-controlled. For example, we continue to operate with about 6% less, year-over-year softline inventory as we cautiously manage marked down exposure in this area.

As we turn towards the second quarter and the rest of the year, we are reconfirming the annual guidance given during our last conference call, i.e., we believe that earnings per share for fiscal 2006 will be in the $1.30 to $1.39 range. Holiday sales which include a much higher mix of discretionary merchandize will significantly impact second quarter results. So sales during the next 4 days are both important and hard to predict. We currently expect second quarter earnings to be in the $0.45 to $0.50 per share range. This assumes comp sales for December, will be in a 2% to 3% range and as January and February comparable sales will be the 2% to 4% range. And now, Howard will give update you on some of our key operating initiatives. Howard?

Howard Levine, Chairman, Chief Executive Officer

Thank you, Jim. Good morning and happy holidays. Jim has given you a financial overview of the quarter’s performance. I’m particularly pleased that comp stores sales have steadily improved since August, especially during this challenging environment. This improvement was driven by key initiatives, which we began to invest in last year to drive comp store sales. The urban initiative, the cooler rollout and the treasure hunt merchandise program. Continued sales increases generated from these programs are the foundation for our comp growth expectation for the rest of the year. Last year, we began to invest in these initiatives. This year, we are accelerating our plans in those areas that are performing and in those areas where we have opportunities to improve we have slowed things down and are focusing on enhancing related processes.

I’d like to spend my time this morning discussing the initiatives that have led to improvement in comp stores sales performance. Let me first begin with an update of our urban initiative. As I mentioned on our last earnings conference call, the urban initiative is a significant strategic investment and represents a tremendous opportunity for growth and improved returns. Last year, we aggressively rolled out the program to approximately 1,200 stores. While the program generated enough sales to justify our investments, our aggressive rollout did not generate the expected results. With 20-20 high end side, considering the economic environment and the cultural changes we undertook, I think we would have moved more slowly with the rollout which would have enabled us to adapt better to more challenging markets.

While stores in the urban initiative experienced solid comp store growth and continued to be profitable last year, we did not see of our financial objectives. This year, we are continuing to support our investments in the current urban initiative markets and are focusing our efforts on driving sales increases and improving our cost structure to enhance financial returns.

I’m pleased to announce that we are making progress. In most markets, we are leveraging the significant investments we made last year and as Jim indicated in the first quarter, approximately 80% of urban initiative markets saw an improvement and profitability compared with last year and more importantly 2/3rd of these markets are achieving higher profit margins.

This quarter, comp stores in the urban initiative consistently generated mid-single digit sales increases and shrink trends are encouraging. Additionally, while it’s still early, most markets have also experienced improving trends and manage a turnover. These results have achieved, were have been achieved despite the fact that more than half of the stores have had the initiative in place for less than six months.

We are moving from a reactive management style to a proactive approach. That anticipates me and prepares appropriately. This strategy is working in most markets but we have a few where haven’t been a successful, as we’d like. The combination of leadership changes and aggressive new store growth are common things in these markets. And we are making appropriate changes where necessary, we have clearly defined plans to address these issues and to strengthen and stabilize the leadership and infrastructure in these markets. While, this taking longer than expected, we are confident that we will improve the profitability of these stores. The implementation of a new more fluid organization structure and proactive management approach is only the first phase of this multi-year initiative. We are also developing pricing strategies; merchandise slow processes and customize assortments for urban markets. As we implement these changes over the next 3 to 5 years, we expect to drive even better returns.

Our cooler program, which primarily impact non-urban stores, is preceding this plan. We install coolers in about 400 stores this quarter, bringing the current number of stores with coolers to about 1,400. We continue to experience strong customer acceptance of our perishable food program as comp store sales with coolers generated mid-single digit sales increases in the first quarter, we plan to install coolers in 2,100 more stores this year, so that by the end of the year we expect to have coolers in a total of about 3,500 stores or more than half of our chain.

This holiday season is the second year of our treasure hunt merchandising initiative. Last year our treasure hunt initiative was more opportunistic. This year we are taking a more process-oriented approach. The treasure hunt initiative consists of three key components, 1) identifying and selecting exciting values of our customers, 2) informing our customers of these compelling values through our circulars and in-store handouts, and 3) effectively presenting the items to attract the customer’s attention. If you had seen our circulars, or have had an opportunity to visit our stores this fall, you have seen the results of better coordination between our merchants, marketing groups and store operators. Our merchants brought in some great values in toys and electronics. Our November, circular did a better job of highlighting these exciting values this year as reflected in our improved gross margins. And our store teams did a great in creating exciting merchandising display around both and Halloween and Christmas holidays. And their efforts resulted in higher sales of seasonal merchandise in the first quarter.

The holiday season, this holiday season, the environment remains challenging for our customers. They continue to see real wage declines and high unemployment rates. Gasoline prices continue to be volatile and remain higher than in 2004. Recent research from AC Nielson suggest that low income customers have reduced their total shopping frequency, combining trips in areas, in response to rising gasoline prices. Our declining customer traffic trend and increasing transaction size of the last several months are consistent with this research.

Our November results were strong supported by good sales increases and consumables, cooler stores and stores in the urban initiative. We believe that the additional traffic generated by the cooler program and the urban initiative program had positioned us nicely for this holiday season. Well off, while our sales are not as seasonal as some retailers, December is difficult to predict because of the increase level of discretionary spending. The economic environment remains challenging and we have seen the promotional environment escalate.

Christmas is this Sunday and the biggest day of the season, are still ahead of us. Consequently, the full month’s results will be significantly impacted by the next few days. If current trends continue, we expect comp store sales to increase 2% to 3% in December.

In summary, this year we are accelerating initiatives that have performed well and are slowing down in refining those initiatives that did not meet our expectations in fiscal ’05. While it is early in the new fiscal year, I’m please with our progress in the urban initiative and I believe that we are making the improvements in our new store opening process that will enable us to improve new store productivity and accelerate growth in the future. As expected, our cooler program and treasure hunt initiatives are on track. Now operator we’d be please to take questions.

Question-and-Answer Session

Related:

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Source: Full Transcript of Family Dollar’s F1Q06 (Qtr Ending Nov 26, 2005) Conference Call - Prepared Remarks (FDO)
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