Following is the transcript of the Family Dollar Stores Inc (NYSE:FDO) first quarter 2015 earnings call made on Thursday, January 8, 2015, 10:00 AM ET. The company reported financial results for the first quarter ending November 29, 2014. The company will also discuss business initiatives for the fiscal year 2015.
Family Dollar Stores Inc (NYSE:FDO) is a Fortune 300, publicly held company, and is the second largest retailer of its type in the United States. Currently having 8,100 stores in both rural and urban settings across the United States, it has been providing value and convenience to customers in neighborhood locations. It is the neighborhood dollar discount store which provides a diversity of everyday products the family needs at the lowest prices.
Host:
Kiley Rawlins –Vice President (VP) of Investor Relations and Communication, Family Dollar Stores Inc.
Company Representatives:
Howard Levine – Chairman and Chief Executive Officer (CEO), Family Dollar Stores Inc.
Mary Winston – Chief Financial Officer, Family Dollar Stores Inc.
Analysts:
Daniel Binder – Jefferies Group LLC
John Heinbockel – Guggenheim Securities
Edward Kelly – Credit Suisse Group
Matt Nemer – Wells Fargo Securities
Michael Lasser – UBS Investment Bank
Stephen Grambling – Goldman Sachs
Paul Trussell – Deutsche Bank
Anthony Chukumba – BB&T Capital Markets
Charles Grom – Sterne Agee
Meredith Adler – Barclays
Operator
Good morning. My name is Joshua, and I will be your conference facilitator today. I would like to welcome everyone to the Family Dollar First Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the company’s prepared remarks, there will be a brief question-and-answer period. The question-and-answer queue will not be available until after the company has concluded their prepared remarks. So please wait until after the speakers have finished their remarks before attempting to enter the queue.
I would now like to introduce Ms. Kiley Rawlins, Vice President of Investor Relations and Communications. Ms. Rawlins, you may now begin your conference.
Kiley Rawlins, VP of Investor Relations and Communications, Family Dollar Stores Inc.
Thank you, Joshua. Good morning, everyone, and thank you for joining us today. Hopefully, you have had a chance to review the press release we issued this morning.
Before we begin our discussion, 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 operational plans for future periods.
While these statements address plans or events which we expect will or may occur in the future, a number of factors as set forth in our SEC filings and press releases could cause actual results to differ from our expectations. We refer you to and specifically incorporate the cautionary and risk statements contained in today’s press release and in our SEC filings.
You are cautioned not to place undue reliance on these forward-looking statements which speak only as of today January 8, 2015. 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.
In addition, today we will reference non-GAAP financial measures, which are intended to help investors understand Family Dollar’s ongoing business performance. These measures include operating profit, net income and earnings per diluted share, each excluding merger related fees in fiscal 2015.A reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures is included in our earnings release issued today and is available on our website.
Our call today will begin with a business review from Howard Levine, Chairman and CEO; then Mary Winston, CFO, will review our financial results for the first quarter. Following our prepared comments, you will have an opportunity to ask questions about our first quarter business results and our operating plans for 2015.
Before I turn the call over to Howard, I would like to reiterate that the purpose of this call is to review our first quarter results. We do not plan to discuss the pending transaction with Dollar Tree or Dollar General’s tender offer. We appreciate your understanding and cooperation in this regard.
Now, I would like to turn the call over to Howard Levine. Howard?
Howard Levine, Chairman and CEO, Family Dollar Stores Inc.
Thank you, Kiley, and good morning everyone. This morning, we reported results for the first quarter of fiscal 2015. Earnings per diluted share for the quarter on a GAAP basis was $0.36, excluding fees related to the pending merger with Dollar Tree, earnings per diluted share was $0.44 in the first quarter this year, compared to $0.68 in the first quarter of last year.
As expected, the quarter was very challenging. Many of the headwinds we faced in the fourth quarter of fiscal ‘14 continued into the first quarter of fiscal ‘15. Our gross margin continued to be pressured by our EDLP investments and the strong growth of lower margin consumable categories. While our team did a good job of controlling expenses, ongoing topline challenges, and continued margin pressure impacted the quarter’s profitability.While our first quarter results were disappointing, there were some positive developments in the quarter worth highlighting. Our food business continues to drive traffic and increased as a percentage of total sales.
Last spring, we added approximately 400 new food items with the focus on key national brands to drive traffic and build customer loyalty. We also improved adjacencies within this category to make it easier to shop. These changes combined with key pricing investments are driving increased transactions and delivering strong comp growth within this category.
Tobacco also continued to be a strong driver of sales for us. Since adding tobacco to our assortment in 2012, our market share has grown to a little more than 4% of the overall market. This quarter, we expanded our assortment, adding new national brands and other tobacco products. Our customers responded well and we continue to see nice attachment rates to the tobacco transaction.
Finally, our seasonal businesses also did well during the quarter, building on a successful back-to-school season, our Halloween strategy focused on cross merchandising efforts to drive sales growth. This Halloween, we delivered more value to the customer with a greater assortment of national brands and a stronger focus on key opening price points. The result was an increase in transactions and market share growth in these areas.
Sales growth in food, tobacco, and other seasonal areas in the quarter was offset by weaker performance in other consumable categories, including household and health and beauty aids, as well as softer trends in apparel and home. Our merchandising teams are focused on stabilizing these categories and improving their performance.
Looking forward, we are encouraged by our results during the important holiday season. As a reminder, last year, in response to the competitive environment and challenging holiday sales trend, we leveraged significant in-store promotions to drive in-season sales and manage discretionary inventories. This year, our focus was on driving more profitability during this period.
Beginning last summer, our teams worked diligently to make sure that our seasonal receipts were delivered on time, despite severe congestions and productivity issues at ports on the West Coast.We also created stronger action plans to help our store teams transition from Halloween through Thanksgiving, and into the important gift giving season. To reinforce our value proposition, we leveraged more key opening price points and we reduced the number of promotional events.As a result of these efforts, we achieved record sales in the month of December and delivered a 1.2% increase in comparable store sales. Importantly, we drove increased traffic with fewer promotional markdowns.
As we reflect on the holiday season, we believe the customers continue to purchase later in the season and closer to need. This was evidenced by our sales on Christmas Eve, which saw the highest sales for single day in our company’s history.From a category perspective, our seasonal businesses in December was mixed. Gift and trim-a-tree saw positive sales growth. While in the toy category we continue to see more of a structural transition in the overall market to electronic toys and games.Importantly, we saw an improvement in the sales trend in many of our consumable categories, including health and beauty aids and household. And we saw the strongest growth in customer traffic in nearly two years.
While we are beginning to see some stabilization in key areas, we’ve recognized that we still have work to do. We continue to see broad trip consolidation and lower overall spending by consumers within the total market. And when we look at the Family Dollar shopper, it is clear that she has continued to face economic headwinds even as the broader market has experienced arecovery.
Macro challenges including lack of wage growth, persistent low labor force precipitation and rising housing and health insurance costs may continue to adversely impact low and middle income customers. However, lower gasoline prices should provide some relief in the near-term for many households who live paycheck-to-paycheck.
As we put the first quarter behind us and look to the rest of fiscal ‘15, our team is focused on improving execution and increasing profitability. Our store operations teams remained focused on improving the customer shopping experience in stores, key priorities include continuing to reduce employee turnover at store level and improving operational execution.The in-store experience starts with the quality and experience of the store team. I am especially pleased to report that we continue to reduce store manager turnover in our stores.We are also making it easier to monitor and track execution and compliance at store level. With our enhanced portal project manager, we can provide our store teams with specific easy to understand directions from merchandising displays, marketing campaigns, and price changes, and with our new mobility platform, our field leadership teams are able to access store level analytics and accession reporting to the newly deployed iPads, enabling them to identify opportunities and target store level tasks that have the greatest operational impact.
Our merchandising teams remained focused on strengthening our price perception and improving the profitability of our assortment. The pricing investments we initiated last year to strengthen our price perception and improve our [competitiveness]continued to mature.
As a reminder, in the third quarter of fiscal ’14, we invested more than $50 million on an annualized basis to improve our value perception with customers by lowering prices on nearly 1000 basic SKUs. While these investments are pressuring topline growth and merchandise markups, we continue to experience mid single-digit increase in unit sales on these items. To mitigate the impact of the price reductions and to reinforce our everyday value proposition, we have reduced our use of promotions. We have not eliminated our use of circulars, but we have reduced the frequency to reflect when our customers are most responsive. While we are still in the midst of this transition, we believe that most of the significant changes are behind us.
In addition to the pricing investments we initiated last year, we are strengthening our value proposition by continuing to expand our use of key opening price points. We are also continuing to refine the merchandise assortments to both consumables and discretionary categories to drive traffic to make it easier for our stores to manage the flow of merchandise and to improve inventory productivity.
Before Mary reviews the financials, let me give you an update on some of the longer term initiatives. First, our deployment of checkpoint, a new security tagging system is nearly complete. And we are on track to complete the rollout by the end of fiscal ‘15.To date, we have installed the new system in 7600 stores and we continue to experience very encouraging results. We are also expanding our supplier support of the program. Importantly, checkpoint stores continue to report better shrink results than stores without the new system.
Second, as we discussed last quarter, we have launched a multi-year effort to cluster store assortments based on a number of factors, including customer demographics, market dynamics, space productivity, and competitive influence. Our goal is to drive increased productivity through more customer-centric assortments in store layout, improve supply chain flexibility and increase store execution.
In our work-to-date, we have identified five clusters that share common traits and productivity trend. We have begun looking at merchandising strategies through the lens of these clusters to address some of our core business challenges. While we are still in the test-and-learn mode, we are encouraged by what we have learned and the opportunity to leverage the diversity of our store base to improve our financial returns.
Finally, we decided to slow the rollout of our power delivery program. Last year, we begin rolling out the new power delivery program and it has now been implemented in three distribution centers. While this process has tangible store level benefits, it also requires a significant capital investment to retrofit distribution centers, trailers and stores. Over the next several months, our supply chain team will evaluate our current process to identify opportunities to reduce the capital investment required to lower operating cost and to increase DC level productivity.
Now, Mary will review our financial results in more detail. Mary?
Mary Winston, Chief Financial Officer, Family Dollar Stores Inc
Thank you, Howard and good morning everyone. This morning, we reported financial results for the first quarter of fiscal 2015. And as we expected, it was a very challenging quarter.Top line pressure and corresponding SG&A deleverage combined with continued gross margin headwinds resulted in a decline in profitability. Total sales for the first quarter increased 2.3% to $2.56 billion compared to $2.5 billion in the first quarter of fiscal 2014.
Comp store sales for the period decreased 0.4%. The decrease in comp sales was due to a slight decline in both the average customer baskets and the number of transactions. Sales in the quarter was strongest in the consumable category driven by strong sales growth in tobacco and food. Although sales in the seasonal and electronics category delivered modest growth, discretionary categories overall continued to be pressured in the quarter.
For the quarter, gross margin contracted 91 basis points compared with the first quarter last year. Similar to trends we saw in the fourth quarter of fiscal 2014, the two main factors negatively impacting gross margin in the first quarter were lower merchandise markup and an adverse sales mix. These pressures were partially offset by lower markdowns. Freight and inventory shrinkage as a percentage of sales were approximately flat compared to the first quarter of last year.
Merchandise markups were lower in the first quarter compared to the first quarter of last year, largely due to the pricing investment we made in the third quarter of fiscal 2014 to lower everyday prices on nearly 1000 consumable SKUs. Although lower margin consumables continues to increase as a percentage of sales, the shifting mix within consumables also continues to pressure gross margin.Reflecting recent assortment expansions, food and tobacco grew significantly as a percentage of total sales in the quarter, increasing about 160 basis points and 80 basis points, respectively. These categories also have average markups that are lower than the overall consumables category, resulting in gross margin pressure.
Offsetting some of this pressure, markdowns in the first quarter of fiscal 2015 were lower than the first quarter last year, reflecting our ongoing focus on everyday low pricing and fewer promotional events. SG&A expenses in the quarter increased 5% compared to the first quarter last year and as a percentage of sales increased 79 basis points to 30.3%. The SG&A deleverage in the quarter was mainly the result of the slight decline in comp store sales. Store occupancy cost including rent, depreciation, property taxes and utilities deleveraged approximately 50 basis points during the quarter. Many of these fixed expenses are difficult to leverage with the flat-to-low comp store sales growth.Electronic transaction fees also increased in the quarter compared to the first quarter last year. Although cash remains the tender type most frequently used by our customers, the use of debit and credit cards has been increasing.
In the first quarter of fiscal 2015, the number of credit and debit card transactions increased about 8% compared to the first quarter of fiscal 2014, resulting in higher electronic transaction fees. As a percentage of sales, these fees increased about ten basis points in the quarter.As a percentage of sales, lower corporate payroll in the first quarter of fiscal 2015 partially offset the increases in store occupancy and electronic transaction fees. As a reminder, in April of 2014, we took actions to reduce corporate overhead and realign key organizational functions to reduce our infrastructure costs.These efforts resulted in the reduction of about 10% of our corporate workforce. In addition, we have experienced elevated turnover in our corporate offices over the last several months.
In the first quarter of fiscal 2015, corporate payroll as a percentage of sales decreased about 20 basis points compared to the first quarter of fiscal 2014. Operating profit in the first quarter excluding $8.9 million in fees related to our pending merger with Dollar Tree was $79.5 million or 3.1% of sales compared to $120.3 million or 4.8% of sales in the first quarter of fiscal 2014.
Excluding the impact of nondeductible expenses related to our pending merger with Dollar Tree, the adjusted effective income tax rate in the first quarter was 37.1% compared to 35.4% in the first quarter last year. The increase in the adjusted effective tax rate was primarily due to lower federal job tax credits.Many of these federal programs were retroactively reinstated in December 2014. If these provisions had been in effect during the first quarter of fiscal 2015, the adjusted effective tax rate would have been approximately 35.2%. Net income in the first quarter of fiscal 2015 was $41.4 million, excluding fees related to the pending merger with Dollar Tree, adjusted net income for the first quarter was $50.2 million compared to $78 million in the first quarter of fiscal 2014.
Now, a few highlights from the balance sheet and cash flow statements. Merchandise inventories at the end of the first quarter increased 4.1% to $1.71 billion compared with $1.65 billion at the end of the first quarter last year.Average inventory per store at the end of the first quarter was approximately 3% higher in average inventory per store at the end of the first quarter last year. The increase was primarily the result of the company’s expanded assortment of tobacco and food.Despite the softness in discretionary sales, average discretionary inventory per store at the end of the first quarter this year was lower than the average discretionary inventory per store at the end of the first quarter last year.
Working capital at the end of the first quarter was $771.7 million compared to $695.8 million at the end of the first quarter last year. During the first quarter of fiscal 2015, our private placement notes were reclassified as short term, which resulted in an increase in the current portion of our long-term debt and a $169 million decrease in working capital.
Capital expenditures in the quarter were $103.5 million compared to $112.5 million in the first quarter of fiscal 2014. The decrease in capital expenditures was primarily the result of fewer new store openings in the quarter and a reduction in corporate technology investment. These reductions were partially offset by increased investments in existing stores to support the continued rollout of Checkpoint and new merchandise fixtures to support the expansion of our tobacco and adult beverage program.
As we discussed last quarter, we are slowing new store growth. During the quarter, we opened 59 new stores and closed no store, compared to 126 openings and one closure in the first quarter last year. In addition, we expanded, relocated or renovated 178 stores in the quarter compared with 179 stores in the first quarter of last year.In the first quarter of fiscal 2015, we paid $35.3 million in dividends. Consistent with our merger agreement with Dollar Tree, we do not expect to pay any further dividends to shareholders.
And now, I’d like to turn the call back over to Howard for some final comments. Howard?
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Thanks, Mary. In fiscal ‘14, we implemented a number of initiatives designed to drive sales and reposition our business. The last several quarters have been challenging, as we have transitioned from a high-low pricing strategy to more of an everyday low price strategy. I believe that we are starting to see the benefits of those investments.Our traffic trends are improving. We are beginning to see stabilization in key consumable categories, and we are managing SG&A to reflect the challenging environment.
I want to express my appreciation to our team for their efforts and hard work through this transition. We still have work to do and the near-term will likely remain challenging as we work through the ongoing margin pressure from our EDLP investments and a continued adverse mix shift.
However, we are beginning to see positive results from the proactive steps we have taken to reposition the business. I continue to believe that we are on the right track to improve our long-term performance.
This concludes our prepared remarks. And now operator, we are ready to take questions.
Question and Answer Session:
Operator
Thank you so much, sir. We are now ready to begin the question and answer session. (Operator instructions). We’ll take our first question from Daniel Binder with Jefferies.
Daniel Binder, Jefferies Group LLC
Hi. Good morning.
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Good morning.
Daniel Binder, Jefferies Group LLC
I was wondering if you could comment on the price investment, specifically what parts of the store are getting most of that price investment and how much more you think you need to do to get to where you want to be?
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Sure, Dan. In terms of the price investments, as everyone recalls, we initiated those back in April of last year and introduced it from a marketing campaign through the year. We are seeing some nice traction in those SKUs. It is mostly all in the consumable categories, food and household primarily, and it has been a pretty consistent ride in terms of the mid single-digit unit growth that we are also seeing in those items.
As I mentioned, we will be lapping that investment coming in April, have a little more stability in terms of how that impact will be impacting our business, as well as we work through the balancing act of our promotional strategy. We have got most of that heavy lifting behind us. We still have a few tweaks to go, but we feel we are getting more balanced where we need to be and hopefully, as we work through the second quarter into the balance of the fiscal year, we will start to see some margin stabilization.
Daniel Binder, Jefferies Group LLC
Do you think that the improvement that you saw in December had more to do with those initiatives or just — I forgot — I’m guessing in comparison last year, it was probably easy with the weather? Do you think it was more the weather or more the initiatives?
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Dan, I do not know exactly how to break it down. But candidly, there was a rough holiday season last year. We had a lot of things going on and I think having a more stable environment here internally was a benefit. I think the economic backdrop started to improve a little bit. I think our strategy is starting to take hold. As I talked about in the last call, I was really concerned and focused about holiday. We were cautiously optimistic. We worked through the season in a pretty good way.
We would like to have seen a bigger comp than we did, but given the fact that we reduced promotional marks, we should see improved profitability as a result of that. I think it is a combination of a lot of different things, really difficult to break down one thing. I think it is encouraging to us to see not only the comp, but importantly, the consumable category saw some stabilization during the month of December and we would like to see that continue as we work our way through the calendar year.
Daniel Binder, Jefferies Group LLC
Okay. Thank you.
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
You are welcome.
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.
The other thing I had mentioned is the attachment rate on some of these pricing investments and some of the consumable trips we’d like to see picked up. We are selling a lot more units than we have had and we have got to get that velocity up and also see some attachment improve with that. Being thatconsumables is 75% of our business today, we really need to get a stronger comp out of that there and we think that’s doable.
John Heinbockel, Guggenheim Securities
Okay. Thank you.
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Sure.
Operator
Our next question comes from Edward Kelly with Credit Suisse.
Edward Kelly, Credit Suisse Group
Hi. Good morning, guys.
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Good morning, Ed.
Edward Kelly, Credit Suisse Group
You mentioned the store manager turnover improving. I was wondering if you could put some numbers around that. I think not too long ago, maybe a couple of years ago, you’re in the upper 30% range. I’m just curious as to where you are now and then how you are accomplishing that given the uncertainty really on the M&A front?
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Yes. Let me address the last part of the question first. Obviously, here at corporate, the M&A activity has definitely impacted the stability and the team with all the uncertainties that we have had for the last several months with that transaction. It is impacted corporate here. We have lost some people as a result of that,but I also have to say that I am very proud and pleased how many people have stuck to the business and have tried to help improve it. There is no question that has impacted our overall business with this uncertainty out there, and you know we would like to see that start to come together soon.
In terms of store manager turnover, we are in right around 30%, the high 20s. I think that from a turnover standpoint of the stores, we haven’t felt the impact from the merger in our stores. It’s primarily here at corporate. Hopefully, that answers your question, Ed.
Edward Kelly, Credit Suisse Group
Second question for you. What do you guys do in terms of new stores at this point? Are you actually still out there signing leases on new stores?
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Yes. What we talked about with slowing new store growth this year, down to 350 to 375 area. We kind of got off to a slow start in the first quarter, but I am not as focused on a number as I am focused on opening good strong profitable stores. We do think we will make up a lot of the slow start that we got off to in the first quarter as we work our way through the year. Yes, we are still signing leases. We are still growing the business and we are continuing to open up stores.
Edward Kelly, Credit Suisse Group
How are those new stores performing, Howard, just last question?
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
The new store performance has been impacted given the overall business challenges and that was one of the reasons why we reduced the new store openings, was to try to slow things down, get the overall business back on track and still see those improvements impact new stores. But new stores historically have been one of our strongest returns on capital and we expect to get that back as the business improves.
Edward Kelly, Credit Suisse Group
Thank you.
Mary Winston, Chief Financial Officer, Family Dollar Stores Inc
Just to add to what Howard said, I would say the maturity curve on new stores continues to be approximately the same. I do think that the performance on stores is reflective of the performance of the business overall.
Edward Kelly, Credit Suisse Group
Okay.
Kiley Rawlins, VP of Investor Relations and Communications, Family Dollar Stores Inc
Joshua, could we have the next question please?
Operator
Yes. Our next question comes from Matt Nemer with Wells Fargo Securities.
Matt Nemer, Wells Fargo Securities
Good morning, everyone. Just a quick question on the comp performance in the quarter. I am wondering if you can provide a little color on the rural stores versus your urban stores if there are any significant differences in the comp performance.
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Sure. I think given the focus of our renovation program, primarily on rural markets and in more suburban markets, those stores have performed better than some of the urban stores. As we begin to renovate and address some of the urban stores with our renovation program, we would expect that to pick up a little bit more. That’s kind of where we are.
Matt Nemer, Wells Fargo Securities
I guess this is as a follow-up.
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Go ahead.
Matt Nemer, Wells Fargo Securities
As a follow-up to that, are you seeing anything in terms of demographics or geography that would confirm some benefit from lower gas prices?
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
It’s hard to see it yet, Matt, candidly. I think it’s coming, as I talked about. I think it’s very much positive for our customer. It’s just hard to see it and certainly haven’t seen it specifically in any market types at this point.
Matt Nemer, Wells Fargo Securities
Okay. Then just lastly, is there any way to parse out the impact of fewer promo events and fewer circulars on the comp in the quarter? I am assuming that is pretty hard to do, but I just want to get some color on that.
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Yeah. I mean, the way we thought about this and how we addressed what events we eliminated was strictly on an ROI basis. While there could have been some contribution to the top line by the promotional events, when we look at the end results and the return of the investment, it was not as positive as we wanted, so those were the ones that we eliminated.
It’s just as we work through this transition, it’s very hard to see. Often look back to when we went through this in the middle 90s, a different era and a different situation. It was pretty painful.On top of the $50 million price investments, also look to start eliminating circulars. It’s almost like a double hit. I am encouraged by the fact that we have gotten most of that behind us now. The heavy lifting there in terms of the circular events is mostly behind us.
As I said, we are still going to have a promotional strategy and I have talked about approximately two per month. Our pricing perception continues to improve. We are really seeing some nice unit velocity as a result of some of those price investments. It is painful, honestly, as we are going through this. We are hoping to see some light at the end of the tunnel and we are encouraged by what we saw in December.
Matt Nemer, Wells Fargo Securities
Very helpful. Thanks so much.
Operator
Our next question comes from Michael Lasser with UBS Investment Bank.
Michael Lasser, UBS Investment Bank
Good morning. Thanks a lot for taking my question. I was curious by your comment about the attachment rate associated with the mid single-digit increase in the consumable area. Is there something that you think is driving the lack of attachment? Are you drawing in a different customer? Have you lost the customer that historically would have a higher propensity to attach? What do you think is driving that?
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
I think one of the things that I talked about this time last year was that we had lost our way with our core customer. Part of that was driven by our pricing perception, and we needed to do something about that. We took a big jump and took a big hit in terms of making those price investments and getting the traffic back into our stores. To me the real key is to get the traffic back in our stores. You know that traffic has been tough for a number of retailers out there and we were encouraged with what we saw in December. It has been building, but to have positive 2% traffic in December shows that we are on track there.
To your point, yeah, we want to get them in as we always had with food and tobacco and also want to get the sales up in some of those other areas. We think we are starting to build there. We are dealing with a low income customer and our customer is still struggling. Our customer is still facing the highest unemployment rates of any out there. It is much higher than the national rate. I think that’s even misleading, because the number of those folks are just completely dropped out of the labor force. I don’t want to be sounding like I am making excuses, because we own a lot of it here.
We are on a tough playing field in terms of where our customer is, and things like lower gas prices are a benefit, but not the only thing that’s out there that we are working on. We are hanging in there and hoping to see that this thing continues to develop. It hasn’t been. It feels like we have been dealing with these for a long time but these initiatives, the closed stores were towards the end of the third quarter last year and we finished the fourth quarter. The workforce reduction is still fairly new. I think we are trying to execute and trying to lift those mature and along with getting our customer back into our stores.
Michael Lasser, UBS Investment Bank
Do you think the 2% increase in traffic in December was in part because of gas, the lower fuel prices?
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Again, it would be hard for me to say that. I cannot break that out. I think the thing that I am encouraged about was we have the 2% increase in traffic and we were less promotional as a result of that. I think that is a data point that we are optimistic about and hopefully continues as we work through the year.
Michael Lasser, UBS Investment Bank
My followup question is on the decision to slow down the pilot program. You mentioned that it’s, in part, because of the investment associated with it? Are we just not seeing the results that you have expected? Or are the results there, and in order to scale them over the organization you will have to invest at a measured pace?
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
I think when we convert a distribution center, it is costly and there is a productivity hit as we go through that. In addition to that, as I talked about, there is a significant capital investment that goes along with that. We wanted to roll out the three distribution centers to see how things went and somewhat better than others. We now got it in three distribution centers and before we blow it out to the rest of our supply chain network, we felt we needed to understand some of the impacts.
Our stores love it. Our store teams love it. It makes the unloading of the truck much easier and that is the real positive. It is difficult to measure, but that means in terms of overall improvement in profitability, but we are not giving up on it. I do not think people should read into the fact that we have given up on it. We just want to give it some time. We want to get the business stabilized and then we will attack it in the future.
Michael Lasser, UBS Investment Bank
Okay. Thank you very much.
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Sure.
Operator
Next, we’ll move onto Stephen Grambling with Goldman Sachs.
Stephen Grambling, Goldman Sachs
Hi. Good morning.
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Good morning.
Mary Winston, Chief Financial Officer, Family Dollar Stores Inc
Good morning.
Stephen Grambling, Goldman Sachs
As a followup to the earlier price investment questions, have you seen any response from a competitive standpoint? Also do you feel like you are where you need to be in terms of price on other categories such as household, HBA, etc etc?
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Yeah. We feel pretty good about where we are. As you know, it is an iterative process, so we are continuing to understand what is going on in the market, but we feel pretty good about where we are right now.
In terms of the competitive response, if you recall when we made these adjustments, we did not undercut competition. We were more or less meeting competition in most cases. So we have not really seen a significant effort there, but there has been some and we continue to monitor that to ensure that we remain with our overall competitiveness. We feel pretty good about where we are and we are continuing to manage through it.
Stephen Grambling, Goldman Sachs
Just to confirm, there has not been a competitive response per se?
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Not one that is measurable that we could see. There is always price movements out there, up and down from all of our competitors, but that does not seem to be anything significant that we have seen out there to-date.
Stephen Grambling, Goldman Sachs
Okay. Thanks so much.
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Sure.
Operator
Our next question comes from Paul Trussell with Deutsche Bank.
Paul Trussell, Deutsche Bank
Good morning. I am just putting together a number of factors that are impacting margins including the reduced promotions and markdowns but also the mixed shifts. Mary, could you just help us think about the second quarter and the balance of ‘15 from a merchandise margin standpoint. I know you are not giving full P&L guidance, but is there an expectation for still meaningful margin contraction overall? Or should we maybe be moving towards a scenario where gross margins can actually expand since we were cycling the time last year where you made these initial pricing cuts?
Mary Winston, Chief Financial Officer, Family Dollar Stores Inc
Thanks for the question, Paul. You started or you commented on where are we going to start, which is, as you know, we are not giving specific guidance, so I would not do that. But what I will do is just tell you the trends we are seeing in the business and what we expect those trends to look like going throughout the rest of the year. As you saw in the first quarter, our margin was greatly impacted by a shift in the mix. We had about a 70 basis point shift just between consumables and discretionary. Then on top of that, within consumables, we had a significant shift in the mix to lower margin consumable item. That is a trend that we saw beginning in last year in the fourth quarter and we talked about that as having impacted our fourth quarter. We indicated that it was going to continue into this first quarter and present a challenge. That is exactly what we saw.
As I am looking at the second quarter, I am expecting those trends to continue. Remember, those are the categories that we focused on. We did resets in the food area. We have expanded our assortment in food. We expanded our assortment in tobacco. The positive side of that is those things have been successful. The downside of that is those are very low margin items.
As we go into the second quarter, we expect to continue to see pressure in those areas. I do not expect it to be quite as great as what we have seen. We do expect improving trends as we go through the year due to a number of the things that we are doing to focus on delivering profitable sales.
Paul Trussell, Deutsche Bank
Thank you for that color. Then just circling back to the comments around price perception, just wondering if you are able to give any more detailed color? Where is that perception at this point? I know you mentioned that you took action to closely match some of your peer group. Is there still a gap between where you are pricing and what the perception is? To what extent, you have mentioned it has improved, if you can maybe quantify to what extent that perception has improved? Just how should we think about Family Dollar’s price points across the store versus a basket at WalMart, at Dollar General, and grocery stores?
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Yeah. The best way to start, Paul, is it is much improved over where it was last year. Going back a couple of years, we had taken some price increases where we thought we had some inelastic items that we could get away with, did not work. We have reduced those prices and we measure this every quarter. As I said earlier, we are about where we want to be in terms of our pricing goals. As I said before, it is always changing. It is an iterative process that we are going to continue to valuate and not loose track of it.
I think, one key metric that is one that motivates us is the December traffic trends. As I said before, that is the strongest traffic trend we have had in nearly two years and we love to see that momentum continue. But as I also said back when we took those price adjustments back in April, it takes some times for that to sink into our customers. We are starting to see that and hopefully, that continues as we go through the year.
Paul Trussell, Deutsche Bank
Just lastly on that Howard, you have mentioned that units were up mid single-digits on those 1000 SKUs? What is the total sales then, so we can understand the pricing impact?
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Yeah. As I talked about, from a margin standpoint, we still are behind back. Sales have caught up somewhat there, but we are looking forward to reversing that come here in April and get most of that behind us.
Paul Trussell, Deutsche Bank
Thank you.
Operator
We will move on to Anthony Chukumba with BB&T Capital Markets.
Anthony Chukumba, BB&T Capital Markets
Thanks for taking my question. Howard, you mentioned that December traffic was up 2%, the comp was 1.2%, so that would imply that average ticket was down by 0.8%? I guess, I was just wondering, what do you attribute that decline to? I mean, is it just simply the price investments that you made or was there anything else notable in terms of sales mix or some other factors? Thanks.
Mary Winston, Chief Financial Officer, Family Dollar Stores Inc
Hi, Anthony. This is Mary. I know you asked the question of Howard, but let me jump in and then if he wants to add, that will be great. You are right. Our total sales were up 2.3% and our comp was slightly negative. Some of the factors affecting that are the lowest square footage growth, the lower opening price point as a result of our EDLP investment and then the impact of the stores that we have closed.
Anthony Chukumba, BB&T Capital Markets
Okay. Sorry, I was talking about comp store sales in December. I think that…
Mary Winston, Chief Financial Officer, Family Dollar Stores Inc
In December, okay. I thought you were talking about comp sales in the quarter. I am sorry.
Anthony Chukumba, BB&T Capital Markets
That is okay.
Mary Winston, Chief Financial Officer, Family Dollar Stores Inc
So…
Anthony Chukumba, BB&T Capital Markets
Yeah. Like I was saying, I was just wondering because I guess, it implies that average ticket was down 0.8% and I guess I was just trying to figure out what drove that decline in average ticket?
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Yeah.
Mary Winston, Chief Financial Officer, Family Dollar Stores Inc
Yeah.
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Go ahead, Mary.
Mary Winston, Chief Financial Officer, Family Dollar Stores Inc
I do think it is the opening price point associated with the EDLP investments we are making in, just the focus overall of having more lower opening price points that are going to resonate with our customer in this challenging environment.
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Yeah. And Anthony, just to expand a little bit on that. One of the efforts, in addition to lowering the retails on the 1000 basic SKUs, which on the seasonal and fashion side, one of the things that we did, have been working on really starting with this past back-to-school season was just getting more of those key price points out there like $1, $2, $3 in our assortment.
What we are seeing is a great velocity in unit sales. We need to see more of it to get it up — to get catch up there, but that is primarily what we believe impacted the basket size. We think as we continue to mature with that and get those season events out there that will continue to get more traction there, but that is the primary issue there with the basket size.
Anthony Chukumba, BB&T Capital Markets
Got it. That is helpful. Thank you.
Operator
We will take our next question from Charles Grom with Sterne Agee.
Charles Grom, Sterne Agee
Hey, good morning, Howard, Mary, and Kiley. You have been at Family Dollar your whole life and following your father. When you look back at what has happened here over the past couple of months with the declining gas prices. Just wondering if you can reflect back at any time in your history with the company that you have seen such a decline. I guess how long does it typically take the consumer to react and when the consumer does react, does it get reflected more first in traffic or ticket? Just wondering if you can give us some perspectives given your history at the company?
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Sure, Chuck. We were talking about that yesterday that throughout the course of time here, conversations with the Street in terms of when gas goes up, when gas goes down, what is the impact. What I think is consistent throughout time is that it is a plus for the consumer. It is clearly a benefit. Unlike other years, there is always other issues that are going on as well whether it is the competition, whether its employment or whether it is weather that also impacts when the consumer or when we actually see it impact our business.
There is not a lot of consistency there, but just from a big picture standpoint, I do believe that is a big benefit for us. We would like to see it come in. I also have to mention that there are some negatives out there. Unemployment rates, as I talked about for our core customer, are much higher than the national averages and the participation rate is much lower. It still have a lot of uncertainty. We can see how they shop our stores and very focused on value. I can assure they are getting a good deal. It makes it a little tough on us given those challenges. But I think we are attempting to reposition the business for that kind of environment and anything that helps us like gas prices or something on the employment side is a real plus.
Charles Grom, Sterne Agee
Okay, great. That was helpful. Then just a second question is just where do you think you guys are on the guide path to getting back to EDLP. I guess, can you reflect back on the changes you made in the mid-90’s and I guess do you feel that you may need to spend more than the initial $50 million investment? Then as a followup to all of that, when you talked about the units being ultimate single digits, where was that relative to what you thought you would get, when you decided to make the investments last April? Thank you.
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Sure. We’re pretty much where we thought we were going to be in terms of the unit list that we had projected when we took the price investments and it is nice to see that has been pretty consistent since we have done that. In terms of where we are, do we need to invest more or less, as I have tried to talk to you about is the pricing environment is an iterative process that it is not solely dependent on us. It is a lot of competition impacted and we are very sensitive to that and continue to make tweaks even as we speak, where necessary.
We do not think we have a substantial spin coming there. We are pretty much through the balancing out of the strategy, the promotional strategy and how it relates to the everyday low pricing piece of it. I would say asI have talked about in the prepared comments, we are about done with that. We still got a few tweaks to go, very keenly focused on remaining competitive with our everyday assortment and continuing to drive strong promotional events at the same time.
Charles Grom, Sterne Agee
Okay, great. Thanks a lot Howard.
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Thanks.
Kiley Rawlins, VP of Investor Relations and Communications, Family Dollar Stores Inc.
Joshua, as we are getting close to the top of the hour, I think we will take one more question please.
Operator
Thank you, ma’am. Our last question comes from Meredith Adler with Barclays.
Meredith Adler, Barclays
Hey. Happy New Year, guys. A lot of great questions were asked. I was wondering if you could comment at all about SNAP, it was never a huge piece of your business, but whether you saw anything different in the latest quarter or in December.
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Not really, Meredith, our food business continues to grow and we continue to gain market share there, but no significant trend changes with SNAP. SNAP is only about 3% of our transactions, so it is not a material amount at Family Dollar.
Meredith Adler, Barclays
Okay. I thought it was a little higher, but okay. Then I was wondering about your remodels. I know you talked about continuing to do them with a focus on fixturing and putting in checkpoint, but are you also still taking these steps to make the stores generally look better, or is it just a focus on those two kinds of opportunities?
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Yeah. No, it is the whole renovation program, Meredith. The stores are getting checkpoint and that is part of it, but that’s not the renovation piece of it. The renovation is just as we have always talked about. It’s with steel and with the layout changes and the other areas with the painting and the whole cleanup of the stores. No, that effort continues. What we are doing though is we are currently testing a less costly renovation that we get most of what we want to get, but without the capital investments there. Again, we continue to work through that. We are continuing to significantly invest and renovate those stores along with the checkpoints and other items.
Meredith Adler, Barclays
Great. Then just one other question about, you have had some corporate defections, which in my experience is not unusual under the circumstances. But what do you do when the people have left? Do you go out and do a search to replace them or do you reconfigure the work and who does it so that you just end up with lower corporate staff?
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Yes, yes, and yes. In addition, sometimes we cry. Meredith, one of the things that we worked hard on over the past many years is focused on succession planning and making sure that we develop that middle level of management when — not that we anticipate something like this but when you anticipate change and you are growing your company that you’ve always got to have a good crew in that middle level to come into positions when necessary.Fortunately, we have been able to handle most of those changes with promotions from within because as you could appreciate it, it is also difficult to recruit new folks into the company during this kind of time period. We have been fortunate that we have been able to promote a number of people in key positions and obviously that they may not have the same experience level as some of those that left, but are good Family Dollar people that have been here and are really grasping and excited about the opportunity that they have.
Again, I am very proud and appreciative of all the team members that have worked so hard under pretty difficult circumstances. I think we are working through that the best that we can, but you are absolutely right. It is challenging, it is difficult and fortunately, we have been able to handle it appropriately.
Meredith Adler, Barclays
Okay. Great. Thank you for answering my questions.
Howard Levine, Chairman and CEO, Family Dollar Stores Inc
Sure.
Operator
Thank you. I will now turn the call over to Ms. Rawlins for a final comment.
Kiley Rawlins, VP of Investor Relations and Communications, Family Dollar Stores Inc.
Thank you, Joshua. Thank you every one for joining us today. We unfortunately did not get to everybody in the queue. As always, I will be available after this call if you would like to followup. Thank you for your continued interest in Family Dollar and have a great day.
Operator
This will conclude today’s conference. We thank you for your participation.
