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.
Good morning and thank you for joining us today. We appreciate your continued interest in Family Dollar Store.
Before we begin you should know that our comments today will include forward-looking statements which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act.
These statements address plans and activities or events which we expect will or may occur in the 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 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, October 3, 2008. We have no obligation to publicly update or revise our forward-looking statements except as required by law and you should not expect us to do so.
With me on the call today are Howard Levine, Chairman and CEO; R. James Kelly, President and COO; and Kenneth Smith, Chief Financial Officer. We’ll begin our discussion this morning with a review of our fourth quarter and fiscal 2008 results. Then we’ll take a few minutes to discuss our plans our outlook for fiscal 2009.
Now I would like to turn the call over to Howard Levine, for a few introductory comments.
Thank you Kiley and good morning to everyone. Before Kenneth discusses our financial results in more detail, I’d like to share with you some thoughts about our performance this year.
Clearly fiscal 2008 was more challenging then any of us predicted. Our customers, who often manage with less then $30,000 a year, began feeling the pressures of the economic slowdown well before other higher income customers.
Consequently we began seeing shifts in our business much earlier then many other retailers. Although our performance in the first half of fiscal 2008 was not as strong as we had planned, I am pleased with how well our team adapted to the volatile environment.
We adjusted our merchandise assortments quickly making investments in the consumable categories that our customers need the most. The result was an improvement on our comp store sales trend from a 1% decline in the first quarter to a 5.6% increase in the fourth quarter.
We recognized early that as our customers have less money to spend discretionary categories would face more risk. Therefore even as we made investments in key traffic-driving categories we reduced our exposure to more discretionary categories like apparel and home.
The result was fewer markdowns in the second half of fiscal 2008 and double-digit reductions in discretionary inventories at year end. Faced with a more challenging environment our team aggressively worked to reduce costs, moving from a plan to leverage expenses at about a 3% comp to actually leveraging expenses well below this level in the fourth quarter.
We also continued to strengthen our associate retention throughout the company. In addition to improving our store managed retention for the third consecutive year, we also increased our retention of assistant store managers. Our investments to make Family Dollar a more compelling place to work are clearly delivering results.
Finally lower inventory levels and stronger associate retention helped us control inventory shrinkage during the first three quarters keeping it roughly flat to the percentage of sales with fiscal 2007 despite a deteriorating environment and I’m pleased to report that we actually reduced shrink as a percentage of sales in the fourth quarter.
In other words, we focused on those things that we control; we lowered inventory risk, focused on meeting our customers’ everyday needs, and lowered our cost structure. But even as we adapted to the near-term economic challenges, we continued to focus on the long-term opportunity of our business, investing aggressively in key strategic initiatives including Store of the Future, Project Accelerate, and Concept Renewal.
I’m extremely pleased with our teams’ ability to reposition the business in an adverse environment. I want to recognize the hard work and efforts of our cohesive management team, and all of our 45,000 associates in delivering such strong performance in the face of so much uncertainty.
Now I’d like to introduce Kenneth Smith, our CFO, who will discuss our financial performance in more detail.
Thanks Howard, this morning we reported fourth quarter earnings of $0.38 per diluted share compared with $0.26 per diluted share in the fourth quarter of fiscal 2007. Robust top line growth together with strong expense control resulted in a 34% increase in operating profit.
This performance combined with the lower tax rate resulted in a 41% increase in net income in the fourth quarter. For the full year, we earned $1.66 per diluted share compared with $1.62 per diluted share in fiscal 2007.
Net income for fiscal 2008 was $233.1 million compared with $242.9 million in fiscal 2007. I would remind you that fiscal 2008 included one less week of sales as compared with fiscal 2007.
As expected our sales trend in the fourth quarter was stronger then the first three quarters of fiscal 2008. Net revenues increased 8.2% in the fourth quarter of fiscal 2008 while comp store sales increased 5.6%.
Building on the trend established in the third quarter consumables continued to be the primary driver of sales, increasing approximately 10% on a comp basis. Notably the sales performance of more discretionary categories improved from trends we experienced in the third quarter.
The seasonal and electronics category improved nicely from the third quarter trend comping in the mid single-digits, while the apparel and home categories were less negative. Although we cannot quantify the specific impact of each, we believe that the government stimulus checks, more seasonable weather patterns, and a more aggressive advertising strategy all contributed to the improved results in our discretionary categories this quarter.
Building on the momentum we saw in the third quarter customer transaction trends continued to improve. Both customer traffic as defined by register transactions and the average customer purchase increased in the fourth quarter.
Our strong fourth quarter sales performance resulted in an overall increase of 1.2% in comp store sales for the full year. Fiscal 2008 net sales were $6.98 billion or 2.2% above sales of $6.83 billion in fiscal 2007.
For the full year the increase in comp store sales was driven by a slightly higher average customer purchase. The number of transactions was approximately flat. For the fourth quarter gross profit as a percentage of sales was slightly better then expected, declining only about 15 basis points.
Lower markdowns and lower shrink offset much of the impact of a higher mix of consumable sales and higher transportation expense.
Despite increasing inflationary pressures, from higher commodity and raw material costs, we are managing our purchase markups reasonably well. For the full year gross profit as a percentage of sales declined approximately 40 basis points. This decline was primarily a result of stronger sales of low margin consumables, which as a percentage of sales, increased approximately 225 basis points in fiscal 2008 as compared with fiscal 2007.
We continued to aggressively limit our inventory risk in more discretionary categories. At the end of fiscal 2008 average inventory per store was approximately 6% lower then average inventory per store at the end of fiscal 2007.
This reduction was the result of double-digit inventory declines in each of our three discretionary categories. As Howard mentioned earlier, we had great expense control this quarter. Clearly the profits improvements from our investments in facility management, and centralized procurement have enabled us to lower our infrastructure costs.
These improvements combined with generate belt-tightening efforts resulted in an increase of only 4.4% in SG&A expense this quarter. As a percentage of sales SG&A expense declined approximately 100 basis points. The expense leverage provided by the 5.6% comp increase more then offset the investments we made in the increased promotional programs.
For the year SG&A expense as a percentage of sales increased approximately 10 basis points. As a result of our 1% increase in comp store sales for the year, many of our expenses were deleveraged. As we have discussed on previous conference calls, lower insurance costs and lower professional fees have provided some relief from the effect of the low comp store sales increase and higher occupancy costs.
Our tax rate in the fourth quarter was lower then the fourth quarter of fiscal 2007 adding about $0.01 to our earnings per share results. The lower tax rate was primarily a result of adjustments in certain income tax reserves.
Despite the difficult environment our business continues to generate strong cash flows. In fiscal 2008 we generated approximately $516 million in operating cash flow; more then adequate to fund approximately $168 million in capital expenditures and approximately $67 million in dividend payments.
We believe that future operating cash flows and existing facilities will continue to provide sufficient liquidity for our ongoing operations and growth initiatives.
Now Howard will highlight some of our plans for 2009.
As we begin fiscal 2009 many of the challenges we faced in 2008 remain. The average price of gasoline is approximately 35% higher then a year ago. Unemployment rates for low income consumers has increased more then 175 basis points over last year and consumer confidence has fallen dramatically.
Wage growth has slowed while inflation has increased rapidly. In addition with the recent upheaval in the financial markets we face more uncertainty today then many of us can remember. Clearly the environment is difficult.
But we have little control over these external forces; instead we remain focused on what we can control. Our priorities remain, increasing our relevancy to the customer, mitigating risks and managing our costs.
Today customers need the value and convenience we offer more then ever as evidenced by the increase in our share of our core customers’ wallet. In addition we are seeing some benefit from the trade down from a slightly higher income customer.
This gain in market share was a result of several investments we made in fiscal 2008. Reinforcing our value proposition we expanded our assortment of key consumables, providing our customers with more of what they need at compelling price points.
And recognizing that our customers have limited ability to spend on discretionary items, we adjusted our assortment to focus on providing even more value in these categories. In challenging environments our customers are especially sensitive to promotions as they manage with less spending capacity.
Consequently we also increased our marketing efforts to emphasize the value we offer on both consumables and discretionary items. We enhanced the convenience of our checkout process and in additional 1,650 stores, with the installation of our Store of the Future platform.
As of the end of the fiscal year approximately 2,400 stores had the capability to accept both EBT and credit cards.
Finally we began testing renovation strategies, refreshing stores in several markets with our new concept renewal format. In fiscal 2009 we plan to build on the progress we made in 2008. We intend to continue our focus on traffic-driving consumables, providing customers with more of what they need in this challenging environment.
As part of these efforts we expect to leverage our sourcing capabilities to expand our private label offering. And to reinforce the values we offer, we intend to increase our marketing and promotional events.
We also plan to continue the rollout of our Store of the Future initiative, upgrading the technology platform in approximately 1.300 more stores this year.
Importantly, we expect that roughly half of the chain will be able to accept credit cards this holiday season. Finally as part of our efforts to improve customer shopping experience this year, we plan to renovate approximately 200 additional stores to our concept renewal format.
Even as we aggressively pursue greater market share we also intend to mitigate risk in this uncertain environment. In fiscal 2008 our merchandising teams did a great job adapting quickly to the deteriorating conditions, utilizing the tools and processes implemented through our project accelerate initiative we had greater visibility to sales trends enabling us to react more quickly and to make better decisions.
As a result in fiscal 2008 we continued to improve inventory turns and gross margin return on investment despite soft sales in our discretionary categories.
In fiscal 2009 we will continue the implementation of project accelerate. Building on previous work in category management, merchandise financial planning, and price optimization we plan to begin the implementation of new assortment planning processes and space management tools.
Our goal is to increase the effectiveness of our assortments and merchandise presentation by reflecting the unique customer and space characteristics of the given store. This in turn should result in greater sales and inventory productivity with less markdown risk.
And finally in fiscal 2009 we intend to maintain our focus on containing costs. From a gross margin perspective we are seeing unprecedented pricing pressure from rising commodity and raw material costs. Through our price optimization work and the expansion of our private label offering and our global sourcing efforts, we hope to continue to mitigate much of this pressure in fiscal 2009.
Improvements in store managed retention and lower inventory levels are having an impact, but reducing shrink remains a significant opportunity. Our investments in people, processes and tools are providing greater security for our associates and better [inaudible] reporting for our management teams.
We expect that these investments will continue to have a positive effect on shrink in fiscal 2009.
From an operating expense perspective the investments we have made at facility management and centralized procurement have enabled us to lower our cost of doing business in a sustainable way. In addition the improvements we have made in associate retention have also impacted our expense structure.
As we have seen this year, retaining experienced store managers can result in lower Workers’ Compensation and general liability cost as well as lowering training and development expenses.
And perhaps more importantly experienced store teams maintain well-stocked inviting stores for customers.
While we expect to face pressure from rising energy and labor costs this year with continued investments and benefits from our facility management and centralized procurement, combined with stronger associate retention and a continued focus on expense control, we believe we are positioned to manage these ongoing pressures affectively.
Today we introduced earnings guidance of $1.58 to $1.78 per share for fiscal 2009. Before we discuss the specifics underlying our earnings guidance, I want to stress that at no other time in our history have we faced such economic uncertainty.
I would remind you that the impact of even small shifts in the environment can have an immediate and severe impact on our core customer. We have made certain assumptions about how our business will trend over the next year and we will share these assumptions with you.
But let me be clear continued economic volatility could produce actual results that are different from this forecast.
And now Kenneth will discuss our guidance assumptions in more detail.
Thank you Howard, as discussed in our press release we expect net sales to increase 3% to 5% in fiscal 2009. This revenue target assumes approximately 125 net new stores and the comp store sales increase of between 1% and 3%.
We expect that strong sales of consumable merchandise, weakness in more discretionary categories and volatile diesel costs will pressure gross margin again in fiscal 2009. But we anticipate that benefits from lower markdowns, global sourcing and better shrink could offset much of this pressure.
Despite the impact of rising utility and labor costs we are targeting operating expense leverage at around a 2% increase in comp store sales. Reflecting these expectations the company expects earnings per share to be between $1.58 and $1.78 in fiscal 2009.
As we consider the cadence of quarterly earnings this year I would note that the fourth quarter will likely be our most challenging quarter as we anniversary strong comp sales performance.
In the first quarter we expect net sales to increase 4% to 6% and the comp store sales to increase 2% to 4%. So far this quarter we’re seeing sales trends similar to what we saw in August. I would note that the movement of Thanksgiving to the last week of the November period will most likely create some difficult sales comparisons toward the end of the first quarter.
We expect that strong sales of consumables combined with tight expense control will result in earnings per share for the first quarter of fiscal 2009 of between $0.38 and $0.42 compared with $0.37 in the first quarter of fiscal 2008.
Now I’ll turn the call over to Howard for some final remarks.
Thanks Kenneth, clearly the current environment requires a careful rationalization of resources and priorities. We believe that the greatest opportunity to drive stronger shareholder returns lies with the focus on improving the returns of existing assets.
I am confident that as we work aggressively to increase our relevancy to the customer, maintain our strong expense management discipline and affectively mitigate risk we will position Family Dollar to be more competitive in this volatile environment.
As I look forward I believe our greatest near-term challenge is the economic uncertainty we face today. But I also believe that our strategy of providing value and convenience positions us well within this environment and I am confident in our teams’ ability to adapt to whatever the future holds.
And now we would be happy to take your questions.
(Operator Instructions) Your first question comes from the line of Mark Miller - William Blair & Company
Mark Miller - William Blair & Company
Can you discuss Family Dollar’s marketing strategy in an environment where we can expect that promotions probably only going to increase and particularly as we head into the holidays, and intensive ad circulars could be forthcoming on Black Friday, in the past that’s sometimes been difficult for Family Dollar to compete in this environment, but can you talk about what’s worked in the past and what incremental you might be able to do this year?
No question the promotional environment has intensified over the last 18 months to two years, and we certainly expect that to continue into the holiday season this year. The way we thought about our advertising and promotional plans as we looked at what was going on in the world with the consolidation of [Trip] we felt that it would be necessary to do something to drive traffic to our stores for a couple of reasons.
Number one to reinforce the value proposition that we offer along with the convenience and some of the other seasonal categories that we offer. We’re going to continue that type of approach into this next fiscal year with primary focus on driving traffic and trying to impact what we’re seeing with the [Trip] consolidation. As we look at the traffic through the year that we just completed, the first half showed a slight decline. We did see some stabilization in the third quarter and in the fourth quarter we actually saw an increase in traffic.
So from a success standpoint we’re pretty pleased with what we’ve done but we’ll continue to tweak and learn and test new ideas to be more affective and efficient in the way we spend those dollars.
Mark Miller - William Blair & Company
Regarding share repurchase, you didn’t buy any stock back in the quarter despite having very good free cash flow in the period, can you talk about how the status of the auction rate securities might have impacted the way you proceed and then how should we think about uses of free cash flow in the year ahead also as it relates to dividend, debt to pay down, other opportunities in this environment?
To speak to the auction rate securities specifically they remain illiquid, there is some activity you might have read about with various settlements that various of the issuers are settling with individuals but to date nothing real definitive from a corporate perspective.
So as we think of that, we evaluate, continue to evaluate the opportunities to buyback shares on an ongoing basis and evaluate that certainly on a quarterly basis at a minimum and the auction rate securities are a factor in that decision but certainly not the sole factor.
I think we’ll remain, as we look forward, we’ll remain somewhat cautious in the near-term but continue to evaluate as we move throughout the year. As far as using our cash, we do have a very consistent dividend program so we’ll continue to fund that.
Our first priority is to use our cash to reinvest back into the business and then thirdly we think of stock buybacks. So we’ll continue that approach very similar to this past year and continue to evaluate that.
Your next question comes from the line of Deborah Weinswig - Citigroup
Deborah Weinswig – Citigroup
In terms of, you mentioned improved store retention can you maybe give some specifics in terms of what the company has done in order to improve that metric?
R. James Kelly
We began six, seven years ago with this compelling place to work part of our mission statement and really honed in on the reality that the heart of any retailer is the store team. So we worked on making that team more successful. To do that we have improved how we select associates for various positions. We’ve improved the training very significantly and we’ve made the store more [operatable] by doing such things as lowering inventory levels.
So the combination of selecting the right people, training them better and putting them in position to win, has created store teams that are making more progress and generating a more compelling place to shop. They are enjoying the experience better and they’re staying with us significantly longer. So we would expect to continue to invest in the associate stabilization programs and to continue to reap the benefits to include better operating standards in the stores and lower shrink and better customer experience.
Deborah Weinswig – Citigroup
In terms of the merchandise side, how great is the private label opportunity and then also in this environment when obviously a lot of retailers are finding it difficult to operate, what’s the availability of product from a treasure hunt perspective?
As it relates to private label, let me start off by saying we think that’s a significant opportunity for us at Family Dollar and we do intend to increase our private label offering in fiscal 2009. We’ve had a program in place; we’ve done a lot in terms of improving the quality of our private label offering, the packaging of our private label offering and getting better at defining what the private label strategy is overall within the company.
But as other retailers have commented when things do become more difficult you do see increases in private label. We think it fits in nicely to what we’re doing in terms of the global sourcing efforts that we’re making there and working in conjunction with the merchants. I think that you will see increase in private label penetration at the company.
In terms of availability of merchandise we don’t have any problem with availability of merchandise when you’re talking about discretionary goods. Our effort is try to actually reduce and manage risk in some of these discretionary categories and be in a position to take advantage of any opportunities that may exist that fit in nicely to what we’re doing today.
And with our strong financial position I think we do get a lot of those calls and we’re going to have to screen and determine which ones make the most sense for us but there has not been any shortage of discretionary merchandise at this point.
Your next question comes from the line of Meredith Adler – Barclay’s Capital
Meredith Adler – Barclay’s Capital
I was wondering if you could talk about your specific promotional plans for this year for this holiday and is it at all different? Is it going to be very different from last year?
The short answer is no, we’re not really going to comment on what our future plans are. I think I talked about what we did in fiscal 2008; the primary objective of our advertising is to try to drive traffic. We had success with that. We’re continuing to learn and make tweaks which I expect we will continue to, which we have done as we get into the holiday period.
We think we’ll be well positioned for the holiday period not only with our promotional and marketing plans but along with the investments we made in consumables, the effort that we’ve put in trying to offer better value to our customer as well as mitigate risk within some of those discretionary categories. I think we’re going to be well positioned for this holiday.
The doom and gloom has already started with how tough it’s going to be and as I said, I think those retailers that offer both value and convenience will have a great opportunity to gain share and we hope to be one of those.
Meredith Adler – Barclay’s Capital
Could you talk a bit about; you talk about trading down, what are the ways that you see that most? Is there differences in products that are being purchased or how you get at that information?
There’s research that suggests that we are currently getting some trading down today. When this economic slowdown began low income consumers and we’ve seen this over the history are impacted first and the hardest. What we’re seeing now is the more middle-ish income customer is being impacted.
I think there’s a number of things that we’ve done to improve our business and our offering. First I think about the efforts that we’ve made to improve the shopping conditions in our stores. I believe from five years ago we’ve substantially improved the shopping conditions in our stores which appeals to both our core customer as well as a better income customer.
I think we’ve also done some things to improve the quality of our merchandise in our store and I think we’re beginning to see benefits of that. I’ve also talked about the way we’ve added brands to our stores, something that brings more and more creditability to Family Dollar.
I’m also very excited about these concept renewal stores. I think the presentation of merchandise and the improvements we’ve made in adjacencies and promotional marketing and signage within these stores makes us very competitive with some of the stores that we would compete for in this trade down.
And finally I think that we are an alternative to higher priced retailers today. I think people are more proud then ever to get value for their merchandise. I know when I talk to people around here they love saving money shopping at Family Dollar. And finally now we accept credit cards and will be accepting credit cards in half of the chain for this holiday compared to about 200 test stores last year.
And I think the research as I said, has shown that we are gaining some trade down. We’ll continue to monitor that but think that is an opportunity for us in this challenging environment.
Your next question comes from the line of Bernie Sosnick – Gilford Securities
Bernie Sosnick – Gilford Securities
With regard to private label, where will the introductions be most greatly concentrated, in the discretionary areas or in consumables?
I think when we talk about increased penetration we’re more talking about some of the consumable categories. Most of our discretionary categories already are private label type merchandise. We did add Bugle Boy which is a recognized brand but when we think about our overall offering, I think there’s more opportunity in the consumable areas at this point.
Bernie Sosnick – Gilford Securities
With regard to treasure hunt, you’ve always been successful in managing that although there was some difficulty when consumers, when their budgets were stretched a year ago. How are you planning your treasure hunt focus and will that be a feature of your promotional advertising?
You’re right; the treasure hunt offering has always been very important to Family Dollar and over the long-term will continue to be very important. One of the things that I feel better about going into this holiday season though is the way we’ve managed risk in some of those categories. It doesn’t mean we’re getting out of those categories; we’re just being a little more cautious, looking for better sell-throughs and also a focus on compelling price points to make sure that we show the great value that we offer in some of those categories.
I’ll mention just on the apparel side the Bugle Boy introduction over a year ago has been very good for us. I think that’s something that has added to some of our apparel offering and brought a better level of quality at compelling price points and as that gets more well known, I’m excited about what that brings.
And in the home area I would say the same thing. There’s a number of things that we’re going there to provide better value for our customer and we will continue to see how we can improve in those areas but when I think about managing risk and markdown risk particularly, we did take a more cautious view this holiday season and think that it makes a lot of sense considering the headwinds that we’re facing right now.
Your next question comes from the line of Mitch Kaiser – Piper Jaffray
Mitch Kaiser – Piper Jaffray
In the past you’ve said that minimum wage increases have helped your business and I know a number of those came through at the state level, could you just give us some qualitative information on what you saw state-by-state basis and if you can estimate what that may have done for the fourth quarter?
There were a number of factors that I talked about that influenced fourth quarter comps. I didn’t mention the minimum wage increase but certainly I think that was a benefit, difficult to measure, but it goes into the category that I say is more money in our customers’ pocket which I think as we’ve talked about translates into more sales for us.
That last minimum wage increase occurred mid July so I think commenting on specific states we’re unable to do but again believe that overall when customers get more money, it’s a benefit to us.
Mitch Kaiser – Piper Jaffray
On the guidance if I go back the last couple of years the band on the comp guidance has been about a couple hundred basis points similar to this year and it’s been a range on EPS of about $0.10 to $0.12. This year you’ve got a much wider range so could you just help us define what are the puts and takes on the high end versus the low end even though the comp guidance is fairly consistent with what you’ve done in the past?
Giving guidance in this kind of environment shouldn’t be the toughest job that we have to do at Family Dollar but sometimes it feels like it is. We wanted to give broad guidance and you heard in my prepared remarks how concerned we are about the economic uncertainty out there.
Our promise is to continue to provide clarity and update you as we report those numbers and we will do that, but we wanted to broaden it out a little bit more simply because of the uncertainties in making these kinds of predictions today.
Your next question comes from the line of Michael Baker - Deutsche Bank
Michael Baker - Deutsche Bank
Your payables ratio was down as a percent of inventory, I’m wondering if that’s because you’re buying less inventory as you’re controlling that better or has there been any change in terms from vendors perhaps related to that. I think your line of credit I believe is [docked] by Wachovia. Does that change at all or any impact there because of what’s going on with Wachovia? On free cash flow this year, $348 million but I think $125 million of that was from tax issues? Should we expect that to not repeat next year and then therefore would free cash flow be closer to something in the $230, $250 range?
On the tax issue, our tax, I believe your question was on the tax rate?
Michael Baker - Deutsche Bank
It was more on your free cash flow this year on the operating cash flow, there were a couple of benefits earlier in the year, taxes payable, those types of things that ended up being a benefit of about in total $125 million to your free cash flow this year?
The direct answer to that relates to the cap. We’d [installed the cap of the] insurance company at the beginning of the year and so that created a receivable in the, an income tax receivable towards the beginning of this year. So that’s generating the, normally you wouldn’t have at the end of, for instance this fiscal year, a receivable of the size we had at the end of last year. So that creates the difference in the cash flow statement.
As far as the AP leverage, the balance sheet does indicate a change in AP leverage as it relates to inventory, what that is is primarily driven by timing issues that we have more towards the end of the year. If you look at a two, three year run rate, its very consistent, that leverage number but this past year we had, compared to the prior year there’s some timing differences related to payments that create a little fluctuation.
We also evaluate and we’re constantly evaluating that AP leverage number and continue to work on it and see it as an opportunity as we go forward but there’s no systemic answer there as far as dramatic changes in terms at this time.
From a credit perspective Wachovia is our lead but we have a broad syndicate that includes a group of banks so that credit is broader then one single institution so that the issues that may be directly related to Wachovia aren’t impactful to our position with our credit lines as a whole.
Your next question comes from the line of Jeff Weinberg – Unspecified Company
Jeff Weinberg – Unspecified Company
I think in the prepared remarks when you gave the guidance if I understood correctly you’d mentioned that the September and beginning of October time period was trending similar to August. I wasn’t clear, was that the 5.6% comp that you had for the August quarter or were you referring to the month of August?
We were talking about the month of August which we reported a 3.6% comp for the month of August.
Jeff Weinberg – Unspecified Company
So, so far it’s running more similar to that?
Your next question comes from the line of [Jack Baylos] - Midwood Research
[Jack Baylos] - Midwood Research
Regarding concept renewal remodels and new stores, I was wondering what the results are after a store has been remodeled to the concept renewal format and in terms of new stores what is their first year volume doing relative to the chain?
R. James Kelly
First let’s start with the concept renewal stores; we are going through various alternatives for renovation. So far depending on the nature of the renovation we’ve gotten very favorable results in the aggregate and that’s encouraging us to move forward.
We will renovate and additional couple hundred stores this next year. Those renovations will be designed not only to convert the stores to concept renewal stores but also to give us more evidence in terms of which renovation technique drives the highest ROI.
But you can expect directionally to see that we will be doing more and more renovations over time.
[Jack Baylos] - Midwood Research
Do you get like a five or better percent sales gain after it’s done?
R. James Kelly
We’re getting healthy returns on those right now but I don’t want to refine that any more then that. In terms of our new stores, we’re very pleased with where that process has gone. As you recall several years ago, [Derlissa Fleur and Keith Gale and Tom Nash] and others in our real estate group began an end-to-end review and reengineering of those processes. With the long lead times in real estate with many of the projects taking 12 to 18 months, its taken a while but we have seen some real nice returns from that work.
I have never been as confident in the new stores that we are currently opening as I am today and I’m extremely confident in our teams’ ability to open up new stores and perhaps increasing numbers as they are called upon and when they’re called upon to do so.
Your next question comes from the line of William Keller – FTN Midwest Securities
William Keller – FTN Midwest Securities
We haven’t heard recently anything about the urban initiative, I’m wondering if that is still part of your go forward plans and then looking at your fiscal 2009 growth in net openings, it seems like there’s more store closings then usual. I’m wondering if you could comment on that as well.
R. James Kelly
Starting with the latter part, our closing schedule has roughly been in that 70, 80 range over the last several years and we would expect to continue basically business as usual from that perspective.
As relates to the urban initiative, it is still a very, very important part of our strategy. It’s founded on a reality that 60% plus of consumers live in the urban markets and on a reality that where we execute well we can drive much higher returns in those markets. We continue to see marked improvement in those markets. In fact as shrink is down significantly in those markets today, we’re managing our expenses much more effectively in those markets today and we’re learning how to deal with the logistics of the higher sales volumes in those marketplaces. So we’re doing the things that we set out to do and as we are getting better in our execution we’re seeing better results.
Your next question comes from the line of John Zolidis - Buckingham Research
John Zolidis - Buckingham Research
On the depreciation in the quarter, the depreciation came in roughly about $5 million below my estimate. It declined year-over-year and declined sequentially which is kind of surprising since your asset base is growing. Could you comment on why depreciation was down year-over-year and further what assumptions we should be using for depreciation in the out year? And then on the gross margin and the impact of mix shift, during the year you mentioned that consumables as a percentage of sales increased by 225 bps, and further that your inventory per square foot for three discretionary categories is down double-digits, so should we take that to mean that you really don’t think those higher margin discretionary categories are really relevant in these times and accordingly where do you see the long-term gross margins for this business?
I think the way to think about the mix and the impact of discretionary is that we have flexibility and I think that’s important to understand. We’re making some decisions to position inventory more conservatively in the environment that we’re facing.
Longer run discretionary items will be extremely important to us. We just are making some adjustments at this point in time based on the economy but those decisions are not permanent in nature. We have a lot of flexibility in the way we can turn that dial up or turn that dial down.
The question on depreciation is during the fourth quarter we had a reclassification between depreciation and expense and rent expense which accounts for that change in the trend line so related to some tenant allowances and the treatment there. So that when you’re looking forward from a depreciation expense, I would trend out kind of a normal trend using the first three quarters and assume that the fourth quarter has a dip in there that won’t recur going forward.
John Zolidis - Buckingham Research
Can you quantify the impact of that reclassification in the fourth quarter?
I believe it’s in the $4-ish to $5-ish million.
Your final question comes from the line of Dan Wewer – Raymond James
Dan Wewer – Raymond James
Your results along with Dollar General have obviously been spectacular of late; there does not appear to be any evidence of one of these companies losing share to the other. From your perspective who is losing share to the small box value retailers?
As I’ve said I think those retailers that offer both value and convenience can gain share in this kind of environment and what the research is telling us is we’re gaining some shares from the grocery stores and some of the convenience stores out there. So as long as we keep offering the value and convenience that we believe we can do, we will gain share despite some of the challenges that are out there today.
Dan Wewer – Raymond James
I know you don’t talk about sales market by market normally, but when you’ve looked at results like say in the last three or four weeks and markets with the gasoline shortages at Nashville, Charlotte, Atlanta, do you see any evidence that perhaps your business is benefitting because consumers are afraid of emptying their gas tank on a longer drive to the larger box competitor?
We’ll comment a little more specifically at the end of the quarter on comp trends for the month of September but as we talked about today, September comp trends continued to run comparable to the August trends so if you wanted to look at a high level I think that we are hanging in there.
We too in Charlotte have felt the pain that you have down in Atlanta. I’ve suggested that some of the guys in the room here start walking to work but thus far everybody showed up and we’re working through that and it does look like its improving, at least around here, and I hope it is down in Atlanta.
So if there is an impact I think it’s more short-term in nature.
Dan Wewer – Raymond James
On the credit cards, you noted that they’ll be in half your stores by the holiday season, when Dollar Tree began accepting credit cards; they saw their credit ticket size improve to about $16.00 compared to their cash ticket of $6.00. Are you seeing a similar type of increase early on?
Yes, I think there is an increase in the size of the transaction with credit cards.
Thank you for your continued interest in Family Dollar and have a good day.
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