Once a quarter, Family Dollar's (NYSE:FDO.DL) management team gets a chance to explain the company's performance and defend its strategy in a conference call with analysts. You wouldn't know it from its stock price -- which is relatively stable due to a pending merger with Dollar Tree -- but Family Dollar's performance this year has been nothing short of awful. This makes it even more important for investors to find out how management justifies its actions. Let's take a look at some of what management had to say in its Oct. 9 conference call, which covered the company's fiscal fourth quarter.
2014 was awful
From a financial standpoint, fiscal '14 was one of the most difficult years in our company's history.
-- CEO Howard Levine
Family Dollar CEO Howard Levine does not shy away from the truth; he readily admits that fiscal 2014, which ended Aug. 30, was one of the worst on record. Same-store sales declined 2.1% and adjusted earnings plunged 19%. This led to a fourth-quarter earnings disappointment. Analysts expected $0.77 earnings per share, but the company delivered only $0.73 earnings per share. In fact, the company earned less than analysts predicted in every quarter during fiscal 2014. This is a troubling trend.
The economy is still taking a toll
Our core customer is still struggling. Low income is still not getting the jobs like higher income folks are and in fact some of the data we even questioned as so many people have dropped out of the job market.
Family Dollar's low prices appeal to the poorest Americans -- the very group that has yet to experience a strong recovery from the Great Recession. The company's pricing actions haven't helped, either. Family Dollar raised prices in 2013, causing consumers to flee. It reversed course in 2014, slashing prices on almost 1,000 items.
The price cuts were designed to boost volume, but sales are still sluggish. Meanwhile, the company's profit margin continues to deteriorate. This is not a good sign.
2015 won't be much better
If you thought fiscal 2014 was awful, just wait until you see Q1 2015 results. Levine warned, "We anticipate that the first quarter will be our most challenging quarter of fiscal 2015 but we expect momentum will build as we move through the rest of the year." He declined to give earnings guidance for fiscal 2015, citing the pending merger with Dollar Tree.
However, it is also likely that Levine doesn't really know how fiscal 2015 will pan out. At the end of fiscal 2013, management expected Family Dollar to earn between $3.80 and $4.15 per share in fiscal 2014. That prediction turned out to be wildly optimistic, with the company actually reporting $3.05 in adjusted earnings per share. It may be that Levine did not want to set expectations too high again while the company continues to battle economic headwinds.
Closing underperforming stores
Reflecting the ongoing pressure on revenue growth in early 2014, our team conducted a comprehensive analysis of our cost structure. As a result, in April we took action to reduce corporate overhead and realign key organizational functions to improve execution and reinforce our commitment to being an efficient low cost retailer. In addition, in the second half of fiscal 2014 we closed 377 underperforming stores.
Management knows cost cutting and price slashing only go so far. Family Dollar is under fire from competitors as well as a struggling core customer, forcing it to admit defeat in certain markets. As a result, the company took steps to close stores that were less profitable than average and were growing less profitable. The company expects to save up to $45 million as a result of these closures.
In addition, the company's deteriorating fundamentals caused it to scale back plans to open new stores in 2015. The company plans to add 375 stores in fiscal 2015, down from over 500 new stores opened in each of the last two fiscal years. This reflects management's reduced expectations for the year ahead. Family Dollar had more than 8,200 stores at the end of October.
Takeover plans continue
Family Dollar's poor operating results have not quelled its competitor's interest in acquiring the company. Family Dollar continues its preparations to merge with Dollar Tree, which include lease write-offs and other charges related to the merger.
Family Dollar CFO Mary Winston explained during the conference call, "In the quarter, we booked $65.6 million of write-offs related to future lease obligations, impairment charges and other costs related to store closures and $9.4 million of fees related to our pending merger with Dollar Tree."
With that, Family Dollar is taking all of the steps necessary to merge with Dollar Tree. It looks like the company's accepting a more attractive offer isn't in the cards. Given the company's poor business performance, Dollar Tree's offer may ultimately be the best thing that could have happened for Family Dollar's shareholders.