Family Dollar Stores' CEO Discusses Q2 2011 Results - Earnings Call Transcript

| About: Family Dollar (FDO)

Family Dollar Stores (NYSE:FDO)

Q2 2011 Earnings Call

March 30, 2011 10:00 am ET

Executives

Kenneth Smith - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Kiley Rawlins - Vice President of Investor Relations & Communications

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

R. Kelly - President and Chief Operating Officer

Analysts

Bernard Sosnick - Gilford Securities Inc.

Aram Rubinson - Nomura Securities Co. Ltd.

David Mann - Johnson Rice & Company, L.L.C.

Meredith Adler - Barclays Capital

Sachin Shah - ICAP

Scott Kaufman-Ross

Austin Pauls

Deborah Weinswig - Citigroup Inc

Laura Champine - Cowen and Company, LLC

Michael Baker - Deutsche Bank AG

Operator

Good morning. My name is Sandra, 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 Rawlins

Thank you. Good morning, everyone, and thank you for joining us today. For those of you who have dialed in, please note that we've posted accompanying slides on the Investor Relations page of our website.

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 expenditures, 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 statement 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, March 30, 2011. 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.

With me on the call this morning are Howard Levine, Chairman and CEO; Jim Kelly, President and COO; and Ken Smith, Chief Financial Officer. We'll begin our discussion this morning with a review of our results for the second quarter and first half of fiscal 2011. Then we'll take a few minutes to discuss our plans and outlook for the rest of the year. Following our prepared remarks, you will have an opportunity to ask questions. In consideration of others on the call, please limit your question to one question and one follow-up question, if necessary. Remember that the queue for the question and answer session will not be available until after we have finished our prepared remarks.

Now I'd like to turn the call over to Ken Smith. Ken?

Kenneth Smith

Thanks, Kiley. This morning, we reported diluted earnings per share increased 21% to $0.98 compared with $0.81 in the second quarter last year, reflecting the effect of our stock repurchase program.

Net income for the quarter was $123.2 million, an increase of 9.8% over last year. While revenue growth was near the low end of our original expectation, improved purchase markups, combined with benefits from cost improvement initiatives, resulted in modest operating margin expansion during the quarter.

As we reported a few weeks ago, net sales for the quarter increased 8.3% to $2.3 billion. Comp store sales for the quarter increased 5.1%. Sales momentum increased through the quarter, with February sales benefiting from early spring-like conditions. Although customer traffic continued to be the biggest driver of sales, average customer ticket increased modestly, reflecting strong Valentine's Day sales and early sales of spring seasonal merchandise.

During the second quarter, we opened 61 new stores and closed 25 stores, compared with 43 openings and 19 closings in the second quarter of fiscal 2010. We remain on track to open our plan of 300 new stores this year. Even as we accelerate the pace of openings, we continue to improve new store profitability and returns.

Turning to sales by category. Sales in all merchandise categories increased compared to the second quarter of last year. Building on the momentum we saw in the first quarter, Consumables and Seasonal delivered the largest increases in sales during the quarter, while the sales in Home and Apparel posted more modest increases.

As a percentage of sales, Consumables increased to 62.2% of sales in the second quarter compared with 60.8% of sales last year. Despite the adverse mix shift, gross margin as a percentage of sales increased about 20 basis points to 35.7% of sales. The increase in gross margin was primarily a result of lower shrink expense, which more than offset higher freight expense. I would note that this is the 10th consecutive quarter of shrink improvement.

In addition, the impact of stronger sales of lower margin Consumables was offset by higher purchase markups. We continue to focus on improving our purchase markups through better price management, the expansion of private brands and our global sourcing efforts.

Markdowns in the quarter showed modest improvement, reflecting stronger seasonal sales and improved merchandise planning processes. We are actively reinvesting most of these savings to support promotional activities.

Total SG&A expense for the quarter increased 8.5% to $607 million compared to about $560 million last year. This expense growth was driven by the successful execution of our targeted revenue growth investments such as our renovation program, expanded store operating hours and the acceleration of new store growth. We continue to manage core SG&A expense growth in the 2% to 3% range.

As a percentage of sales, SG&A expense in the quarter increased about five basis points as compared with the second quarter of fiscal 2010. Most expenses, including occupancy costs, were leveraged in the quarter as a result of the 5.1% comp increase. These improvements were offset by 60 basis points related to our revenue-driving investments and 35 basis points of higher insurance expense related to actuarial valuation adjustments of prior year's reserves.

Operating profit as a percentage of sales was 8.9% in the quarter this year as compared to 8.7% in the second quarter last year. Reflecting the successful completion of our initial public debt offering last month, interest expense increased by $1.2 million in the second quarter. As a reminder, Family Dollar issued $300 million in 10-year notes with a coupon of 5%. The effective tax rate during the quarter was 37.2%, slightly above the rate in the second quarter last year of 37.1%.

Let me conclude our assessment of second quarter results with a review of some additional financial highlights, starting with a discussion of inventory. Over the last several years, we have repositioned our inventory to meet our customers' needs better, increasing our investments in consumable categories and reducing investments in more discretionary categories. This year, we continue to invest in additional inventory to support various merchandising initiatives to include the broadening of our assortment of food and health and beauty aids.

In addition, we have invested to improve in-stock levels in the stores. As a result, average inventory per store at the end of the second quarter was about 10% higher than last year. I would note that inventories in seasonally-sensitive categories ended the holiday season significantly lower than last year. As we begin to more fully leverage these investments, our inventory productivity improvement trends should resume by the end of fiscal 2011.

Turning to the cash flow statement. Our first priority for the deployment of capital is to reinvest in our business to drive higher financial returns. Reflecting this focus, we have invested approximately $139 million in capital expenditures this year, primarily to support new stores, store acquisitions and store renovations.

Year-to-date, we have returned about $448 million to shareholders through dividend payments and share repurchases. We have purchased 8.9 million shares at a total cost of approximately $408 million during the first half of fiscal 2011. As of February 26, 2011, we had approximately $350 million remaining under the authorization.

Now let's talk about our expectations for the third quarter and the full year. As we look to the second half, we expect Consumable category expansions, store renovations and improved promotional programs to continue to drive sales momentum. For the third quarter, we expect comps to increase between 5% and 7%.

After considering the impact of the Easter holiday shift, the sales trend, month-to-date, is consistent with this range. Reflecting our first half performance and our expectations for the third quarter, we continue to expect that comp store sales for the full year will also increase between 5% and 7%.

Although we continue to expect that gross margin will be flattish for the full year, gross margin in the third quarter will likely be pressured by the expansion of key consumable categories and rising fuel costs. We expect that much of this pressure will be offset by improvements in shrink and benefits from better price management, the expansion of private brands and our global sourcing efforts.

Through the first half of fiscal 2011, SG&A expense increased 8.8%. As we anniversary the store payroll impact from last year's introduction of expanded hours in the third quarter, we expect that the pace of SG&A growth will moderate to around 7.5%. For the full year, we continue to expect annual SG&A expense growth of around 8%.

Given these expectations, we estimate that earnings per share for the third quarter of fiscal 2011 will be between $0.92 and $0.97 compared with $0.77 in the third quarter of fiscal 2010. I would note that our guidance assumes that the weighted average diluted shares for the third quarter will be around 122 million.

For the full year, we have fine-tuned our earnings guidance to reflect our performance year-to-date and our expectations for the second half. We now expect that diluted earnings per share for fiscal 2011 will be between $3.13 and $3.23 as compared with $2.62 in fiscal 2010.

Now I'll turn the call over to Howard for some remarks. Howard?

Howard Levine

Thank you, Ken, and good morning. Before I discuss our performance year-to-date and our plans for the second half, I'd like to quickly review some recent developments.

As many of you know, in mid-February, we received an unsolicited conditional proposal to acquire the company. After reviewing both the proposal and our strategic plan, our board determined that the continued implementation of our plan remains the best way to deliver value to all of our shareholders. The board also determined that the proposal substantially undervalued Family Dollar and the pursuing of sale of the company is not in the best interest of our shareholders.

Family Dollar has a long history of delivering strong financial returns to shareholders. Specifically, over the last five years, we have distributed more than $356 million in dividends and repurchased more than $1.3 billion of our common stock, all while delivering a compound average annual growth rate in diluted earnings per share of 21% and increasing our return on average equity from 16% to 28%. These strong results have been reflected in the performance of our stock.

Since 2005, Family Dollar stock price has more than doubled, even as the return on the S&P 500 Index has increased 17%, and the value of the S&P 500 Retailing Index has appreciated 19%. This strong performance is due to the successful execution of our plan and our ability to effectively balance the achievement of short-term financial goals with longer-term investments needed to drive sustainable, profitable growth.

For example, several years ago, we accelerated capability building investments throughout our merchandising and store operations and increased our efforts to improve the in-store shopping experience. In late 2009, with these enhanced capabilities in place, our leadership team began developing the vision and plan to reaccelerate new store growth, drive stronger comp growth and expand our operating margin. In April 2010, we presented these plans to our board, and in September, we shared our plans with investors.

I'm pleased to report that our plan is on track. In the first half of fiscal 2011, we opened 146 new stores compared with 86 openings in the first half of last year and renovated 313 stores. Our year-to-date comp performance of 6% is well within our plan of 5% to 7%, and we have maintained this run rate even as we anniversary the expansion of operating hours. And despite an ambitious investment agenda and increasing pressure from rising commodities, we expanded operating margin and delivered our 12th consecutive quarter of double-digit EPS growth.

As we turn to the second half, our team is focused on maintaining this momentum. In the second half of fiscal 2011, we expect to open between 150 and 160 new stores and close around 40, resulting in annual square footage growth for the year of around 3%. More importantly, we are building the pipeline to return to annual net square footage growth of between 5% to 7% by fiscal 2013.

We have delivered strong mid-single-digit comps consistently over the past four quarters, and we are now facing higher two-year comparisons. Our sales performance during this period was built on a strong foundation, and I am confident that we have the programs in place to build on this momentum going forward, including our store renovation program, the expansion of key consumable categories, enhanced marketing, improved in-stock and the expansion of private brands.

Starting with an update of our store renovation program, I am excited with our progress to date. Through improvements in our operational processes, we have reduced the renovation time from three weeks to two. We have strengthened our team member engagement with enhanced training, improved recognition programs and more consistent team member branding. And most notably, our customer satisfaction scores in renovated stores have shown significant improvement above the chain. We have completed more than 300 store renovations to date and are well on our way to renovating more than 800 stores this year.

I know I've said this before, but I truly believe that this renovation effort is one of the most significant investments we've ever made. I believe the improvements we are making will strengthen the Family Dollar brand, enhance our competitiveness and drive sustainable productivity improvements in the future.

Our vision is to transform the customer shopping experience through significant improvements to the merchandise assortment, the store environment and most importantly, the way we interact with customers. Some of the notable improvements include: more intuitive merchandise adjacencies and improved navigational signage; an expanded assortment of key consumable categories; the utilization of new fixtures that enhance customer sight lines, increase merchandise capacity and simplify restocking and recovery; and a more customer-friendly checkout area that creates better merchandising opportunities, while also supporting our shrink control efforts.

In addition, we are creating a warmer, more inviting shopping environment for our customers. We're refreshing the building facade, replacing exterior signage to create a more consistent brand experience, and post-renovation, we are maintaining higher operational standards for services like floor care, cleaning and maintenance.

Perhaps most importantly, we are raising our customer service standards. Recognizing that customer satisfaction is highly dependent on the interaction with our team, we continue to enhance our employee training, increase our focus on store recovery and leverage technology to increase workforce productivity.

Based on the performance of the initial stores and the feedback from our customers, the improvements we have made are achieving our goals. Our customers are more satisfied with our merchandise assortment, customer service and convenience. We have also improved scores for in-stock levels, merchandise organization and cleanliness. And in other words, greater customer satisfaction in our stores continues to result in double-digit sales increases.

Several of you have expressed interest in seeing these changes for yourself. For those of you who would like to visit one of our renovated stores, we are hosting a store tour in Atlanta on April 11. Please contact Kiley after the call for more information.

While we are very excited about the longer-term impact of the renovation program on comps and unit productivity, the overall contribution to annual comp performance this year will be relatively small. This is why we are also investing in a number of other sales-driving initiatives.

Encouraged by the strong customer response to the assortment expansions in our renovated stores, this quarter, we intend to incorporate much of the expanded food and HBA assortments into the rest of the chain. Leveraging slightly higher shelf height and reducing space in some underperforming discretionary categories, we intend to add more than 350 new grocery and personal care SKUs. Throughout the chain, we are also improving in-stock levels, enhancing customer service and maintaining higher store standards. As a result, our satisfaction scores for the entire chain are also improving.

Customers are beginning to feel the impact of rising commodity costs. Through our price management efforts, the continued development of our private brand portfolio and our global sourcing capabilities, we have maintained a strong price perception with customers. Through the first half of fiscal 2011, private brand sales increased approximately 23%. I'm especially pleased with the growth we have seen in our private brand consumables, which has increased about 29% so far this year. Importantly, the investments we have made to increase merchandising quality are delivering results. Recent customer surveys indicate that our quality perception for both national and private brands has improved.

Looking to the second half of fiscal 2011, we have some exciting new launches in our Apparel and Seasonal areas, as well as continued expansion of our Family Gourmet and Family Pet lines. To communicate our new private brands offerings, as well as our new consumable assortments, we are launching a number of in-store and direct marketing campaigns. In addition, we are increasing our targeted digital marketing efforts and executing more promotional events to leverage our growing customer traffic.

The operating environment continues to be dynamic. Recent wage and job growth trends are encouraging, but unemployment for less educated workers remains high. Inflationary pressures continue to increase as energy prices reach levels we haven't seen since 2008. Predicting economic trends for the next several quarters remains difficult, and I continue to believe that value will remain an important driver for the consumer.

Leveraging our niche of value and convenience, we are pursuing an ambitious plan to increase productivity and financial returns, and we are executing well against this plan. We have accelerated new store openings, launched a multi-year store renovation program and expanded our operating margin, all while returning capital to shareholders and improving our capabilities.

As I look to the future, I am very excited about the opportunity for Family Dollar. We have a solid, experienced leadership team in place, and we have a strong balance sheet and cash flow model that can fund our vision. I continue to believe that our efforts to broaden our customer appeal, while improving our capabilities and returning excess capital to shareholders, will deliver strong financial returns in fiscal '11 and beyond.

And now operator, we'll be happy to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Kiley Rawlins

[Operator Instructions]

Operator

Our first question is from Scott Kaufman-Ross of Goldman Sachs.

Scott Kaufman-Ross

Just wanted to ask a question on the gross margin. I'm wondering if you could walk us through the sequential acceleration. The Consumable mix shift intensified and gas prices were sequentially higher. So it seems like the improvement in markups was pretty substantial. So just kind of wondering if you could give us a little more quantification of the buckets of that 30 to 40 basis points swing, and how to think about that for the rest of the year?

Kenneth Smith

Well, let me go ahead and give you the nature of the buckets, without pinpointing the exact numbers. I think the callouts start with continued shrink improvement, a trend that's, as we said, that is going on for a couple of years now. So we continue to see nice benefit from shrink. Freight, as we talked about for several quarters, has changed in nature, and I think we're all well aware of what's happening there. So it has created pressure; a bit more pressure as we move over the last few quarters. Markdowns, I think of that bucket, I think we're managing our inventory very well. And as I have said in my comments, we've been able to manage and slightly reduce markdowns in the core inventory that's allowed us to invest those in some more promotional activities. So markdowns, we're managing well. And the last, to your point on PMU, we did see some nice benefit mix that you can see the Consumables mix continue to skew more towards Consumables, which does give us some pressure. I would note, when you're looking at Q1 versus Q2, that the second quarter does tend to be more discretionary. So all things being equal, we can get a little bit less pressure on the markup rate with a more discretionary category. That being said, I think the main story is we did see some mix pressure and offset it by our key levers, price management, increasing benefits from global sourcing and private label.

Scott Kaufman-Ross

Can you give us a little bit -- you talked about the national brand mix shift in the first quarter. So did that abate a little bit? Was there more in the private label that helped to offset that? How should we think about that for the rest of the year?

Kenneth Smith

Well, I think as Howard indicated in his remarks, we had very significant growth in our private brand area. Overall, for the first half of the year, private brand grew 23%. And if you focus on the core Consumable area, private brand growth was 29%. We're investing aggressively in that area and are optimistic in terms of the growth for the remainder of the year.

Operator

Our next question is from Mike Baker of Deutsche Bank.

Michael Baker - Deutsche Bank AG

So Howard, you talked about the board determining that you thought you were better off going through your own company-specific plans. So can you discuss a little bit with us what you guys see the long-term margin, sales per foot and ultimate profitably of the company that leads you to have confidence that you can generate those kinds of returns?

Howard Levine

Sure, Michael. From a big picture standpoint, when I sit back and look at what the opportunity is for Family Dollar, I continue to be delighted and excited. I think the best years of our company are still ahead of us. I start with looking at the customer. When you're looking at any business, you want to have a lot of good customers, and we have a lot of customers. We've satisfied a number of them over the years and I think we still have tremendous opportunity to take care of even more customers. And I'm encouraged when I look at demographic trends. You can take a look at the growth in the Hispanic population, the growth in the aging baby boomer, all great customers for us, and they love our value and convenience. And I think that continues to grow for us and is a great opportunity. While all this is going on, Family Dollar has been working very hard on building our capabilities. Several years ago, we slowed down new store growth. We felt we needed to build a stronger infrastructure. We brought in some key folks to help us drive some of that, and now we're at the point where we're looking to get a great return and continue to get a return on those investments. So when you take all those and put them together, as I said, I think we have incredible opportunities in the future and are really looking forward to executing and continue to execute our plan.

Michael Baker - Deutsche Bank AG

Okay, good. It sounds like you're not ready to quantify that, so I'll ask one other question. Just on the remodels, I think back in October, when we were all together, you said that they were up in the double-digit comp range. Any update on that? Are you seeing similar trends, better or worse, now that you’ve, I think, added it to a couple hundred more stores since October.

Kenneth Smith

Well, I think, as I've said, if you've heard me, I'm just so excited about what these renovated stores are doing for us. When I walk those stores and hear customer comments and hear the enthusiasm from our store teams, it really encourages us and lets us know that we're on the right track there. Something else that we've also done since we've implemented these is we talk to customers that have shopped those stores to solicit feedback. Those surveys are very favorable, as I indicate in some of my prepared comments, that we continue to execute very favorably. We can't go fast enough, in my opinion, with this program. Yes, we are continuing to deliver double-digit returns. And even though we’re still early on in the process, we continue to find opportunities to even improve upon that. We were very encouraged that we were able to take the time down from three weeks to two weeks to do a renovation. What that means is first, there's less disruption as we're going through the renovation and gives us opportunities to do even more stores, since it takes us less time. So again, just delighted with the progress there. If you heard my comments, we're going to do at least 800, probably more than that this year, and look to get through the chain within that four-year time period. So we're delighted.

Operator

Our next question is from Deborah Weinswig of Citi.

Deborah Weinswig - Citigroup Inc

Howard, maybe to stay on the topic of the store renovations, it sounds like they are progressing exactly as you'd expected. Are the consumers shopping those stores any differently than you expected? And do the baskets look any differently than you had expected?

Howard Levine

It's a little early on to give a lot of color to that. Overall, we are very pleased with the progress on there. We think the basket continues to build, because one of the things that we really wanted to accomplish in the renovated stores was to improve the adjacencies and create more of a store-within-a-store concept. So for example, when you're shopping our food area in these renovated stores, what we've been able to do is improve adjacencies, group merchandise together for added basket sales. We've added cooler doors, so we’ll have a total of 10 cooler doors in these stores, and it's adjacent to the food area, instead of being in the front of the store. So when mom is shopping for that breakfast trip, obviously, we'll have the cereals, the breakfast bars and all of the things that go along with that, and it’ll be adjacent to the coolers, so the milk and the eggs and some of the things that would be complementary to that. We followed a very similar concept throughout the store that will enable us to try to leverage that basket a lot bit more than what we are. But again, from a big picture standpoint, we are very pleased with the progress that we've made there.

Deborah Weinswig - Citigroup Inc

Great. And in terms of a follow-up question, it sounds like traffic was a bigger driver of the comp in the quarter. And I just wanted to see if you believe it was more trips from existing customers, or if you're continuing to get a new customer in your stores?

Howard Levine

Let me answer you this way: we're very pleased with the traffic that's been generated and think that we have a significant opportunity to broaden the appeal of all of our customers out there. We're in a unique period today in this country where consumers are stressed. Job growth, while improving, is not as great as it is. I think Family Dollar, with the value proposition that we offer and the convenience that we offer, the growth in our Consumables -- so we've really repositioned our inventories for consumables, things that people need and use every day. I think we continue to leverage that. You couple that with the improvements that we’ve made in the quality of our goods, the shopability of our stores. And again, these renovated stores are really the new vision for Family Dollar. But many of those things we're trying to incorporate in the existing chain. So I think we're well positioned to continue to leverage the traffic. All of the things that we're doing, I think, are very appropriate for our core customer, but also position us very nicely for that trade-in customer.

Operator

Our next question is from Meredith Adler of Barclays Capital.

Meredith Adler - Barclays Capital

I was wondering if you could talk a little bit about what you expect to see happen with productivity. I know you've talked about the fact that the increased consumables are hurting the margin. But when you think about it on a returns per square foot, does the benefit of faster, more consumables sort of more outweigh the pressure on margins?

Howard Levine

Yes, Meredith, when I take a step back and just look at some of the things we have done over the years, and this is going back to the mid-'90s, we've been adding consumables for years. We've actually grown our gross margin through some of those periods even as there has been pressure on the mix and pressure on the margin. What we're focused on is delivering to our consumer what our consumer wants, and we need to figure out how to make it all come together. But again, from a big picture perspective, we're generating more gross margin dollars per store. You couple that with the efforts that we're doing to drive our margin through global sourcing. We were very excited and pleased with the growth in private branding. So we're doing a number of things to balance the pressure from the margin there. But overall, our goal is to deliver to our customers what the customers are asking for. And we'll figure out how to do the margin piece of it, just as we have done for many, many years.

Meredith Adler - Barclays Capital

And then I just have another question about, when I look at your footprint, now that you are beginning to accelerate square footage growth, you guys have a relatively spread out footprint. I mean, certainly, if I look at, at least one of your competitors, they seem to be more concentrated. Is there any advantage from your perspective in trying to be more geographically concentrated? Does that have a financial benefit or any operational benefits to you?

Howard Levine

Sure. I think having a tighter network is a nice thing to have. We have worked very hard to fill in some of those gaps over the years, and if you look at where most of our new store growth is today, we're continuing to fill in those gaps. So we think we have opportunities to do even more out of that, with the ramp up from new store growth. We'll see more fill-in where appropriate, but we also are looking to leverage a new state as well. But I think there's opportunity to continue to narrow some of those stem miles that we're facing, and we'll attempt to continue to do that.

Meredith Adler - Barclays Capital

And are there other efficiencies by having a tighter geography, just in miles?

Howard Levine

Sure, I think there's some advertising efficiencies, management efficiencies, absolutely.

Operator

Our next question is from Bernard Sosnick of Gilford Securities.

Bernard Sosnick - Gilford Securities Inc.

You'd mentioned that your expense rate growth, at the core, is 2% to 3%. There are things layered on top of that, including the expansion of payroll hours, which have anniversaried. Renovation and acceleration of store openings are increasing the expense rate. I know you're not prepared to give us guidance for the next year, but when might we see the growth of expenses averaging closer to 2% to 3%?

Kenneth Smith

Well, I think you called out the key components of expense growth. And we're very pleased with how we've successfully managed the core expenses in that 2% to 3%. And in this quarter closer to the lower end of that number. It becomes, when you look out into the future and you think of those three key expense drivers, one being core, two being our investment agenda and three being our new store growth, it's a balance. So as I look to the future, I think we'll continue to challenge our team to be efficient and look for more productivity in our core expenses. So then the big investment area or the big impact on that comp leverage point becomes our investment agenda. What you see in the back half is a slowing of expense growth as we anniversary extended hours but continue to invest aggressively. Our renovation program continues to be strong and is an investment for us. And we have a plan to continue that investment over the next several years. So it will be a balance. As we look forward, I expect us to continue to invest, to drive the top line and drive the business and continue to tightly manage the core.

Bernard Sosnick - Gilford Securities Inc.

On the point you made, the renovation is going to go on for several years but it will anniversary. And so the rate of increase in expenses year-over-year will not reflect the increase in renovation but should get closer to the core rate of expense growth. When do you think that might happen?

Kenneth Smith

I don't want to put an exact figure. Your point is right on. I mean, as we think of the number of stores and the dollars we're investing as the store counts grow perhaps out into the future, the amount of expense increase or decrease from an investment perspective will be driven by store counts. So again, our investment agenda as we look will have multiple components. But as you see through this year, as we begin to grow expenses slower in the back half versus the front half, I think it's reasonable to expect that, as we move out into future years.

Operator

Our next question is from Scot Ciccarelli of RBC Capital Markets.

Austin Pauls

This is Austin Pauls on for Scot. My question is on gas prices. As you think about higher cost of fuel from the perspective of your core customer, have you seen any impact on their buying habits in recent months, in response to the higher gas prices? And also, as you think back to 2008, the last time gas prices were at this level, back then, did you see any impact? And what impact was it on buying habits?

Howard Levine

Sure. Let me first tell you that it's very difficult to determine the impact of any one specific macro factor out there. But when you're dealing with a customer living paycheck to paycheck, when they have to spend an extra $5 to fill up their car with gas, there is some impact there. But I think we're well positioned with the value and convenience that we offer. Our stores are located often in the neighborhoods of where our customers live. One of the things that's a little different today than even back in 2008, which we did quite -- we got through those periods quite well, is we've even added more consumables to our mix than back even two, three years ago, which I think positions us well for the challenges that the consumer is facing today. But one of the things we're also doing is continuing to invest to broaden the appeal of our offering. We're working hard to improve the shopping experience to try to capture even more customers. But appreciate your comment, and the challenges that not only gas but other commodity price increases and the pressures that they put on our customer.

Austin Pauls

Okay. You mentioned that private brand sales were up 23%, and I think private brand consumables were up 29%. Could you tell us how that compares to 1Q, and then also, how that compares to the second quarter last year?

Kiley Rawlins

Austin, let me get you those numbers after the call. I don't have them at my fingertips.

Operator

Our next question is from Aram Rubinson from Nomura.

Aram Rubinson - Nomura Securities Co. Ltd.

One on the cash flow side of the equation. The earnings are up quite meaningfully year-to-date. I'm trying to know what we should expect from cash from operations for the year? Some lines on the balance sheet like pre-paids and other current assets seem like they've been restated, so it's hard to tell the puts and takes. What should we expect from cash from ops this year?

Kenneth Smith

I think if you look at that section of the cash flow statement and you compare the first half this year to last year, I think the key callout is inventory. And you can see the investment from a cash perspective in inventory. I think as you model and look to the back half of the year, I think you can benchmark, from an operation perspective, you can benchmark the rest of those components pretty consistently year-over-year and think of inventory growth moderating or coming back in line slightly south of sales. But that would be the key callout from the ops side.

Aram Rubinson - Nomura Securities Co. Ltd.

Is there a dollar amount to think about for, let's say, working capital related cash flow?

Kenneth Smith

I don't have a dollar amount. I mean, we can talk offline if you want to get a little bit more specific on the components of cash flow from ops. But don't have one right at my fingertips here.

Aram Rubinson - Nomura Securities Co. Ltd.

Okay. And just a follow up, you were up against a pretty terrific performance a year ago on the gross margin side, which included benefits from shrink and markups, both of which were further gains this year. Just if you can talk about any elements of the gross margin that might have surprised you from what you had originally expected, and therefore, give us a sense of sustainability of what might have surprised you.

Howard Levine

Well, I think the nature of all of the -- we talked about four main buckets of gross margin. And I think the nature and the trends of each of the four weren't surprising to us. Obviously, freight is becoming more uncertain and more volatile, shrink continues to trend as we have planned, and then markdowns, again, in line with our expectations. So the area that can move a little bit is the combination of mix pressure and the changes or levels of the contributions from pricing, global sourcing and private label. So I would say, no real surprises but perhaps, just tweaks within the various buckets.

Operator

Our next question is from Sachin Shah of Capital Global Markets [CapitalMaster].

Sachin Shah - ICAP

So I just wanted to get an update of what we kind of can expect from you as far as Nelson Peltz and Trian is concerned? You have a poison pill for shareholder rights that you kind of laid out. But just wanted to find out, was there anything else that you guys were doing to prevent Trian to move forward?

Howard Levine

No. Just to reiterate where we are, our board evaluated the proposal, along with our advisors and determine that the best way to deliver value for shareholders was to execute upon our strategic plan. Again, the proposal was conditional and substantially undervalued the company. And as part of that process, what the board decided was to adopt the pill at a 10% threshold for one year to basically prevent a creeping shareholder from coming in and taking control of the company without paying a premium. So we've been transparent about our actions and feel very good about where we are and management's focus is on executing that plan.

Sachin Shah - ICAP

Okay. So just curious, it seems like the focus is on the current operations and strategic plan regarding operations. But I'm just curious to find out, was there any other strategic alternative aside from viewing Trian's offer, such as maybe selling off assets or potentially, combination with another strategic peer?

Howard Levine

Yes. I'm not commenting on that. I think what I said is where we are, and I'll just leave it at that.

Operator

Our next question is from Laura Champine of Cowen.

Laura Champine - Cowen and Company, LLC

I wanted to talk a little bit about the May quarter comp guidance, because it marks in line to a little bit of an acceleration off of February, which came in at the low end of guidance, even though as you know, you’ve got a more difficult comparison, and I think the quarter's also -- I'd love to hear, do you expect consumables to drive the growth, or do you think that you'll see a pickup in discretionary spending in the quarter?

Kiley Rawlins

Laura, it's Kiley. I think that the second quarter was an interesting quarter, given all of the challenges we had with winter weather. If we set that aside, the trends coming out of the quarter, particularly in February, were pretty strong on top of some pretty strong results last year. So I think that, again, gives us confidence in our sales expectations for the second half. We are, as Ken and Howard talked about, adding a lot of consumables. And so we do expect that we'll continue to drive comps in the third quarter and the fourth quarter, in fact. Depending on some of those other factors, like the economic conditions, like weather, they tend to have more of an impact on the discretionary sales. So we'll have to see how that plays out. But I think we're really encouraged with the trends that we've seen here of late.

Laura Champine - Cowen and Company, LLC

And then just as a quick follow on, it's obvious to me that you're taking share in Consumables. What's your share performance in Home and Apparel? And do you think that it's a macroeconomic driver you need to turn those categories around or there are things that you can do in-house?

R. Kelly

No, I think you're right. Our Consumable business has been very, very strong, and as a result there, there has been growth in share there. But we're also very proud of the performance of some of the more discretionary areas. When you look at our performance versus the market, what we pointed out is that as lower end consumers are put under incremental pressure, they tend to basically constrain their spend on discretionary items. So if you look over a period of time, let's take the last 12 to 18 months, you've consistently seen that market-wide. On the other hand, we have had very strong seasonal sales and holiday sales, which were in the face of some very difficult market conditions. So we did report this quarter growth in our discretionary areas, particularly strong growth in the Seasonal area, but solid performance in both Home and Apparel. We will continue to work on those areas. They're a part of our strategy in terms of creating that exciting shopping environment. So we will work in those areas, but given the macroeconomic event, we will do so cautiously, if you will.

Operator

Our next question is from David Mann of Johnson Rice.

David Mann - Johnson Rice & Company, L.L.C.

My question is in terms of some of the product cost inflation you may be seeing, especially in Consumables. Can you just talk about perhaps on a like-for-like basis, what kind of inflation you're seeing in some products, or in the assortment? And then also what kind of price increases you may be taking on a like-for-like basis?

Howard Levine

Sure, David. First, yes, there are inflationary pressures in all the commodity areas from cotton to gas to coffee. And from our perspective, I think we're in a very good place to deal with that as a company. There's a number of tools that we have in place to help manage that in the pricing area. But to help manage through some of those difficulties, I can tell you some of the things that we're doing. Number one, we've talked about our global sourcing efforts and what that means to our company, in terms of dealing more directly with factories and working around some of the people that are in the middle of us in the final product. We've also been successful in identifying new suppliers, which creates more competition with existing suppliers. We've talked about our private brand strategy and the tremendous growth in our private brand categories. Even in spite of the quality improvements, we've been able to drive great comps and improvements there. We're in the process of continuing reverse auctions to ensure that we're getting great pricing on some of these commodities. And finally, we're doing it the old-fashioned way, trying to buy better, looking at garments, deconstructing, reconstructing items to try to fit into price points. There's not any one hard and fast rule. Sometimes, we're having to absorb price increases, other times, we can pass it on, depending on the category and the specific items that we're dealing with. But our number one goal is to continue to maintain that strong price perception. We're evaluating that on a very regular basis and feel very good about where we are today.

David Mann - Johnson Rice & Company, L.L.C.

And then for my follow up, you obviously have had tremendous success with shrink improvement. Do you feel like that's sustainable in terms of continued improvement over the next several quarters, let's say? And can you just clarify your comment about the remodels and sort of the shrink experience that you might be seeing there?

R. Kelly

Yes, I think as you know, throughout most of retail, most of shrink is influenced significantly by the teams that are in the stores. We've continued to invest significantly in our teams and the development of the right structure for our teams and operating more efficiently and effectively in the stores. As a result, we have seen our retention rates continuously improve now year after year. As long as we continue to focus on those areas, I suspect there'll be opportunities to improve shrink. On the other hand, we're also investing in understanding and having greater visibility to issues when they do occur in our stores. So we've introduced a series of technology that enables us to spot unusual situations and to investigate them faster and more efficiently and get rid of issues at a very early stage. All of that says we've got forward momentum, but we're not sitting on our laurels. We continue to invest in better controlling our inventories, and we expect results to be reflective of these investments.

Kiley Rawlins

Okay. Well, we've reached the top of the hour, and unfortunately, we did not get through all of our queue this morning. As always, I am available after the call for any follow-up questions. Thank you for your interest in Family Dollar, and have a good day.

Operator

Thank you for participating in today's conference. You may disconnect at this time.

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