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Family Dollar: Q4 & Year-End Results

September 28, 2011 | About:
The Science of Hitting

The Science of Hitting

In February of this year, Nelson Peltz, CEO of Trian Fund Management, announced that his fund was offering to buy Family Dollar (FDO) for $55-60 per share, which sent the stock soaring more than 20%. In March, management rejected the offer, saying the company was undervalued, while simultaneously adopting a provision to put additional shares in the market if any investor obtains a 10% stake in the company. Since then, the stock has traded sideways, with hope for a takeover or continued operational success still alive (Mr. Peltz said on CNBC this past week that “we are in continuing and very positive conversations with management and the board”).

The company reported fourth quarter earnings on Wednesday morning; here are some of the highlights:

Net sales for the fourth quarter increased 9.1% to $2.13 billion, compared to $1.96 billion in the fourth quarter of last year; for the full year increased 8.7% to $8.55 billion. Same store sales increased 5.6% in the fourth quarter (driven by both traffic and ticket) and 5.5% for full year, off of an increase of 4.8% in fiscal 2010. The remainder of the revenue growth is accounted for by the addition of 238 net new stores (300 opened, 62 closed); looking forward to next year, management plans to increase that pace substantially: "In fiscal 2012, we intend to accelerate investments to drive sales and profitability. We plan to open 450-500 new stores, a more than 50% increase over fiscal 2011 openings.”

For the full year, operating profit increased 10.9% to $638.1 million, compared to $575.6 million in fiscal 2010. As a percentage of sales, operating profit expanded to 7.5% in fiscal 2011 as compared to 7.3% in fiscal 2010.

In the fourth quarter, earnings per diluted share increased 17.9% to $0.66 (beat by 2 cents), compared with $0.56 in the fourth quarter of last year; this marked the company’s 14thconsecutive quarter of double digit EPS growth. For the full fiscal year, diluted EPS increased 19.1% to $3.12 (compared with $2.62 in 2010).

While they spent a ton of money on building the business, management also focused on giving back to shareholders in a big way throughout the year. Here is what CFO Kenneth Smith had to say:

After investing in our business, our next priority is to return excess capital to our shareholders through dividends and stock buybacks. This year, we increased our dividend per share by about 16%, resulting in a total [payout] of $83 million... We also purchased approximately $670 million of our common stock [13.9 million shares] as part of our efforts to optimize our balance sheet. At the end of fiscal 2011, the company had the authorization to purchase up to an additional $87.3 million of its common stock… I would note that our Board of Directors has authorized the additional repurchase of $250 million of our common stock. By most accounts, fiscal 2011 was another strong year. We invested aggressively, delivered double-digit earnings per share growth and improved returns.

For fiscal 2012, the company expects that earnings per share will be between $3.50 and $3.75, an implied increase of 12-20% compared to $3.12 in fiscal 2011. This is based on a sales increase of 8-10% and same store sales growth of 4-6%, among other tax and capital expenditure expectations. For the first quarter of 2012, management expects same store sales to increase 4-6%, and for diluted EPS to come in between $0.65 and $0.73 (up 12-26% compared to the first quarter of 2011).

On the day, the stock was down 1.61%, and closed at a price of $53.31 per share.

About the author:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves (potentially over a period of years). As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

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