The well-acclaimed discount retail store in the U.S., Family Dollar (FDO, Financial), reported its second quarter earnings of the fiscal year 2015 on April 8 before the bell and left investors and analysts’ wide agape by posting better results than expected by the Street. As the discount retailer’s takeover by Dollar Tree (DLTR, Financial) stands impending, and is expected to get completed by the third quarter of the fiscal year 2015, the management did not issue any further guidance. Let’s dig in deeper to find out the facts that were shared in the second quarter earnings report of Family Dollar.
Both top and bottom line beat estimates
Adjusted diluted earnings per share for the quarter stood at $0.74 a share on revenue of $2.8 billion. This was comparable to $0.80 per share as EPS on revenue of $2.72 billion reported a year earlier. Both earnings and revenue were able to meet Thomson Reuters’ estimates of $0.73 a share as EPS on revenue of $2.8 billion.
In fact, the growth of same-store sales was by a nominal 0.5% in the second quarter, which was attributed to the rise in transactions being partially offset by a decrease in average transaction value. The rise in revenue was majorly due to higher sales of consumables such as refrigerated items, frozen foods, and tobacco which accounted for about 72.3% of the company’s total net sales for the second quarter.
Gross profit for the quarter improved to $931.1 million, representing about 33.3% of net sales, compared to $902.3 million, or 33.2% of net sales in the same quarter a year-ago. However, the selling and general expenses went up in the quarter due to rise in store occupancy costs, higher store payroll expense and higher insurance costs. The SG&A expenses represented about 28.8% of net sales, compared to 28.1% of sales in the second quarter of last year.
Net income in the second quarter was $76.7 million, including fees related to the pending merger with Dollar Tree. However, adjusted net income stood at $84.9 million, compared to $90.9 million earned in the second quarter of the fiscal year 2014.
CEO, Howard R.Levine, commented– “We continue to see tangible benefits from the investments we have made to strengthen our value proposition for customers. Our comparable store sales and customer traffic trends are improving, and we are beginning to see stabilization in key categories. While our trends in late-February were adversely impacted by severe winter weather, our sales trends in March rebounded nicely, reflecting both improved traffic trends and the benefit of an earlier Easter…”
New store openings continue, inventory on the rise
The merchandise inventory as on February 28 increased around 3.5% to $1.72 billion, compared to $1.66 billion a year ago. The growth of average inventory was about 3% on a year-over-year basis. The rise in inventory was majorly driven by the expanded assortment of tobacco and food.
Not only did the inventory witness an increase, the number of stores opened in the first half of the fiscal year was an impressive 161 new stores. Around 291 stores have been relocated or renovated in the first six months of the fiscal year 2015, while 19 stores have been closed down.
No guidance provided as merger stands impending
The management has expressed their excitement about the pending merger with Dollar Tree and is confident on a successful integration, going forward. In fact, all eyes are now glued to the finalization of the merger which is expected to be completed by May this year. In a filing with SEC, Dollar Tree has stated – “As of April 1, 2015, the FTC’s staff has substantially completed its review and identified approximately 340 stores for divestiture, representing approximately $47.4 million of operating income. The Company expects that all or almost all of the stores that will be divested will be Family Dollar stores…”
It is expected that after the merger enters the completion phase, Dollar Tree would gain control over 13,000 stores that’s been generating more than $18 billion in annual revenue. This would aid the acquiring company to move ahead of chief rival Dollar General (DG, Financial) which currently has around 11,789 stores (not taking into account the new store openings due in 2015).
Hence, Family Dollar’s management has just refrained from providing any further earnings guidance for the upcoming quarters of the fiscal year 2015.
Final word
It’s a fact that Family Dollar did do well in the second quarter, and investors should wait and watch how the merger affects the company post its acquisition process. Though this might be the last earnings reported by Family Dollar as an individual business entity, the financials of the merged entity needs to be analyzed in detail to get an idea on how Family Dollar’s business could be positively impacted, post the merger. So, let’s wait and watch for the merged entity’s first earnings report card to do the assessment on the company’s future performance.
