Family Dollar Stores Inc (FDO) First Quarter 2015 Earnings Call Transcript

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Operator
Our next question comes from John Heinbockel with Guggenheim Securities.

John Heinbockel, Guggenheim Securities
Howard, a couple of things. If you look at the improvement in December, how much of that was discretionary?My guess is discretionary, even though it may have improved, was still on the weak side in the month, is that fair?

Howard Levine, Chairman and CEO, Family Dollar Stores Inc
It was kind of mixed in some of the discretionary categories, John. On the plus side, we saw good sales improvement and profitability improvement in trim-a-tree and gifts, so we were pleased with the progress we made there. Toys, while a little bit better than last year, was not where we wanted to be and we are actually analyzing those results and coming up with some new strategies for the next season here. But overall, discretionary was mixed. What I was most pleased about was some of the traction we saw in some of these consumable categories that have been troubled and particularly in household where that overall market has tightened up and contracted.We saw some nice growth and stabilization in those consumable categories and those are the higher margin consumable categories that we were missing. We are hoping those trends continue. On the plus side, we also have some resets planned for the spring of this year to try to address some of the challenges that we still think we have in those categories. Overall, we feel positive about some of those trends.

Apparel, specifically, had gotten some traction through the back half of the year. We think a little of that was just some timing issues and we are looking forward to getting back into the spring season there. Home, we still have opportunities there but we also think that we have got some good plans to address some of those shortfalls. So it was kind of mixed, but to sum up, hopefully, the stabilization of those Consumable categories will continue through the calendar year here.

John Heinbockel, Guggenheim Securities
Let me ask a longer-term question because you sort of wonder, if discretionary, because it has been weak for a while. The economy’s been a challenge, but if discretionary is going to be softer than consumables, and food and tobacco probably grow faster than the other parts of consumables, there is a pretty consistent, I do not know, call it 40 basis point headwind from mix. What do you have to do? I know getting the comp up to 3 or 4 would be good. But when you think about it structurally, the things you have to do differently if you want to improve EBIT margin and get somewhere back to where you used to be. You have to rethink the cost structure of the stores, the field organization. Do you agree that probably mix will be a longer-term headwind?

Howard Levine, Chairman and CEO, Family Dollar Stores Inc
It is a great question, John, and I think our efforts here are on a number of fronts, to try to address some of the shortfalls. Specifically, while we saw some strong growth in food and tobacco, those are the lower margin consumable categories and candidly, we would like to see those continue to grow. On the other hand, household and HBA are higher margin categories within those consumable categories that we need to address. As we said, with traffic improving over 2% in December, which was the highest traffic counts that we saw in nearly two years, gives us some encouragement that some of the things that we have done from a pricing standpoint, from an assortment standpoint are starting to get traction. To me, the real key is to get the household business back on track, get our HBA business on track. To your point, there will be volatility in discretionary categories and we realize that.

We still think we have some opportunity there, as the consumer hopefully continues to do a little bit better. Longer run, I got to believe that the reduction in gas prices will help us. Albeit, there are still some other headwinds out there in terms of job growth and labor participation, but we have got all those things that you mentioned. We are looking at costs. We are looking at any number of things that we need to.

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