Family Dollar Stores Q2 Earnings Call Transcript

123jump.com Staff
18 Apr, 2009
New York City

The discount retailer quarterly sales increased 8.7% to $1.99 billion on comparable store sales rise of 6.4%. Net income surged 33% to $84.1 million in the quarter. Earnings per share rose to 60 cents from 45 cents a year-ago quarter.

Family Dollar Stores, Inc. ((FDO))
Q2 2009 Earnings Call Transcript
April 8, 2009 10:00 a.m. ET

Executives

Kiley F. Rawlins – Vice President of Investor Relations and Communications
Howard R. Levine – Chairman and Chief Executive Officer
Kenneth T. Smith – Senior Vice President and Chief Financial Officer
R. James Kelly – President and Chief Operating Officer

Analysts

Meredith Adler - Barclays Capital
Mark Miller - William Blair & Company, L.L.C.
Wayne Hood - BMO Capital Markets
Deborah Weinswig - Citigroup
Mitchell Kaiser - Piper Jaffray & Co.
Joseph Parkhill - Morgan Stanley
Michael Baker - Deutsche Bank Securities
Adrianne Shapira – Goldman, Sachs & Co.
John Zolidis - Buckingham Research
David Mann - Johnson Rice & Company
Patrick McKeever - MKM Partners LLC
Randy Stewart – Merit Asset Management

Presentation

Operator

Good morning. My name is Diane and I will be your conference facilitator today. I would like to welcome everyone to the Family Dollar 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 begin your conference.

Kiley F. Rawlins

Thank you, Diane. Good morning everyone and thank you for joining us today.

Before we begin, you should know that our comments today will include forward-looking statements regarding various operating initiatives; sales and profitability; capital expenditures; and our expectations for future financial performance. 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, April 8, 2009. We have no obligation to publicly update or revise our forward-looking statements except as required by law, and you should not expect us to do so.

With me on the call this morning are Howard Levine, Chairman and CEO; Jim Kelly, President and COO; and Ken Smith, Chief Financial Officer. We’ll begin our discussion today with some comments from Howard then Ken will discuss our financial results. Following our prepared remarks you will have an opportunity to ask questions. Please remember that the queue for the question-and-answer session will not be available until after we have finished our prepared remarks. So that we may accommodate as many people as possible, please limit your question to one question with no more than one follow-up question during the Q&A session.

Now I’d like to turn the call over to Howard Levine. Howard?

Howard R. Levine

Thank you, Kiley. Good morning and thank you everyone for joining us today. This morning we announced double digit earnings growth for the second quarter and the first half of fiscal 2009. Given the challenges presented by the current economic environment, we are especially proud of these results and I want to recognize the hard work and effort of all of our Family Dollar team members. While the year isn’t over, I am pleased with the progress we’ve made to increase our relevancy to the customer, manage risks and improve our profitability.

Today families of all incomes are looking for ways to save money and our strategy of providing both value and convenience continues to resonate well with budget-minded consumers. Our focus on quality and compelling price points, combined with better store level execution, have resulted in more appealing merchandise presentations and customers are responding. Comp store sales for the quarter increased more than 6%, driven primarily by increased sales for consumables. And for the third consecutive quarter, both customer traffic and average ticket increased. We continue to see more trips and higher average purchases from our core low income customers, and we continue to capture additional trips for more middle income customers.

Building on the improvements we have made, we are increasing the productivity of our inventory while also managing risks. Reflecting customer demand we are investing in key traffic driving categories, while constraining purchases in more discretionary categories. As a result, we are limiting our markdown risk, driving inventory turns higher and delivering stronger gross margin return on investment. And we are maintaining our strong focus on increasing profitability. Despite additional mix pressure from higher sales of consumables, we are increasing our operating margins. Through our global procurement, merchandising and price management efforts, we are enhancing purchase mark-up.

And our process improvements and increased store manager retention have helped us to significantly reduce inventory shrinkage. We have also maintained our focus on controlling overhead expenses, and we are leveraging our investments to lower our cost of doing business in a sustainable way.

Over the last 18 months, the economic environment has changed significantly. Energy costs have fluctuated more than 100% and unemployment rates have almost doubled. Last year, the Federal government provided more than $100 billion in stimulus money to consumers and is just beginning to roll out a second relief package. Most consumers, not just low-income consumers, have been affected by these changes. While discretionary incomes have benefited from lower gasoline prices and government stimulus packages, unemployment and the contraction of credit markets has had the opposite effect. Clearly our strategy of providing value and convenience has positioned us well in this volatile environment.

While the current environment has provided us with a unique opportunity to serve more customers, our strong performance also reflects the impact of strategic investments we have made. We have invested significantly to understand our customers better, improve our merchandising processes, enhance the in-store experience, and build strong employee teams. These investments are individually and collectively driving results.

At Family Dollar, we have undertaken significant efforts to understand our customers better. In addition to utilizing third party databases and panels, we regularly conduct proprietary research to evaluate customer satisfaction and price perception. Using insights from this research, we are expanding our assortment, strengthening our value proposition and improving the in store experience.

More than two years ago we began a multi-year effort to enhance our merchandising and supply chain capabilities. We’ve strengthened our employee teams, developed new decision and planning processes, and invested in new technology tools. These investments have provided us with better visibility to market, sales and inventory trends, enabling us to adapt more quickly to this changing environment. As a result, we have increased the productivity of our inventory and lowered our markdown risk. We have enhanced our merchandise quality, invested in stronger testing protocols to insure that we meet our customers’ expectations for quality and safety. And we have strengthened our price perception during a period of rising inflation, while also enhancing profitability.

As we integrate our customer research efforts with our category management and assortment planning tools, we will continue to meet our customers’ needs better and continue to improve merchandise presentations and adjacencies within the store. Using customer insights, we are making significant investments to enhance the in-store experience and make our stores easier to operate. We have strengthened our promotional presentations and enhanced our in-store signage. We have invested in new fixtures that provide additional capacity and make key areas easier to shop. And we are reducing clutter by decreasing use of perimeter ledges and floor stack outs for merchandise. The result is a more open, appealing shopping environment.

Reflecting customer demand, we continue to expand our assortment of consumables to satisfy more of the trips that our customers make often. And we continue to improve the store layout and merchandise adjacencies. As part of our continued efforts to improve the shopability of our stores, this summer we will initiate additional efforts to realign space in our stores, expanding space in high growth areas while reducing space in underperforming categories.

Finally, as we work to increase the convenience of the shopping experience, we are upgrading our point of sale technology to expand the payment choices for our customers. Today, more than half of our stores accept food stamps and credit cards and we plan to have the new technology in all stores by early 2010.

In addition to investing in improved processes and new technology, we are also investing in building a stronger Family Dollar culture and great employee teams. We are strengthening our coaching and leadership development programs. We are creating career paths for talented, ambitious team members who want to make a larger contribution. And to support our focus on driving results and continuous improvement, we are improving our performance management programs.

Nowhere is the customer experience more impacted than at the store level. Stable, experienced teams can make the difference between customer satisfaction and disappointment. Building on the improvements we have seen in our store manager retention, we have expanded our workforce stabilization efforts to the entire store team. We have improved our ability to project future personnel needs and strengthened our processes to identify and develop candidates for promotion. As a result, our internal promotion rates and retention levels are improving throughout our entire organization.

In summary, while the economic downturn has provided us with the unique opportunity to serve more budget conscious consumers, the investments we have made to be a more compelling place to shop, work and invest position us well for continued strong performance as the economy improves.

These are some of my thoughts about our performance. Now I’ll turn the call over to Ken for more a more detailed review of our financials. Ken?

Kenneth T. Smith

Thanks, Howard. This morning I will review our performance for the second quarter and then discuss our outlook for the rest of the year.

Today, we reported second quarter earnings of $0.60 per diluted share compared with $0.45 per diluted share in the second quarter last year, an increase of 33%. Strong top line growth and better than expected gross margin performance resulted in approximately 150 basis points of expansion of operating margin during the quarter.

For the quarter, net sales increased 8.7% and comp sales increased 6.4%. Consumables continued to be the primary driver of sales during the quarter, increasing approximately 13% on a comp basis.

Sales results in more discretionary categories were mixed. While sales of apparel continued to be soft, sales in our seasonal and electronics category increased approximately 6% on a comp basis, and sales of home products stabilized during the quarter.

From a mix standpoint, consumables increased to approximately 61% of sales as compared to approximately 57% of sales last year. Despite this significant mix shift, gross profit as a percentage of sales increased approximately 100 basis points in the quarter as compared with the second quarter last year.

Markdowns, inventory shrinkage and freight expense were all lower as compared to the second quarter last year, and purchase mark-ups were higher. These improvements more than offset the margin effect of higher sales of lower margin consumable merchandise.

Similar to the trends we saw in the first quarter, markdowns in the quarter were lower as compared to the second quarter last year. Stronger sales particularly in seasonal categories and a continued focus on managing inventory risk resulted in lower seasonal markdowns. These improvements offset the impact of increased markdowns related to the Consumer Product Safety Improvement Act of 2008. As many of you know, this legislation went into effect in February, 2009 and addresses a number of consumer product safety issues including the permissible levels of lead and phthalates in products. In response to the new legislation we incurred approximately $8 million in unplanned markdowns during the quarter. I would note that these markdowns were more than offset by lower seasonal markdowns.

Lower inventory shrinkage was also a noteworthy benefit to profitability in the second quarter this year. Higher store manager retention, lower inventory and more discretionary categories and improved analytics in monitoring processes have resulted in significant improvements in shrink. At the end of the second quarter, average inventory per store increased modestly as compared with inventory per store at the end of the second quarter last year. As we expand our assortment to meet the growing demand for consumables, we are making selective investments in traffic driving categories. As a result, consumable inventory levels at the end of the second quarter this year were higher than consumable inventories at the end of the second quarter last year.

Reflecting a continued focus on managing risk, inventory levels in more discretionary categories were significantly lower at the end of the second quarter this year as compared with the second quarter of fiscal 2008.

SG&A expense as a percentage of sales decreased 40 basis points to 27% of sales in the second quarter this year as compared with 27.4% of sales in the second quarter last year. Reflecting the effect of the 6.4% comp in the quarter and our continued focus on expense control, most expenses including labor and occupancy costs were leveraged in the quarter.

Two items that pressured expenses this quarter were higher incentive compensation and higher insurance. Reflecting our strong year-to-date performance and our pay-for-performance philosophy, incentive compensation expense increased approximately 50 basis points in the second quarter this year as compared with the second quarter last year.

In addition, insurance expense related to workers compensation and general liability claims continues to face some strong headwinds as we cycle last year’s improvements. Reflecting our ongoing efforts to manage inventories, increase store manager retention, and improve our operational processes, we continue to see favorable trends in the number of workers compensation and general liability claims. However, while the actuarially determined valuation of prior year claims continued to improve, the rate of improvement was lower than last year, resulting in 30 basis points of de-leverage in the quarter.

Our tax rate in the second quarter was 36.4% compared with 34.4% in the second quarter last year. As a reminder, the lower effective tax rate in the second quarter of fiscal 2008 was primarily a result of a decrease in our estimated income tax liabilities and changes in state income taxes.

Turning to the balance sheet and cash flow statement, we continued to maintain a strong liquidity position. Cash and cash equivalents as of February 28, 2009, were approximately $300 million as compared with approximately $80 million as of March 1, 2008. I would note that we did not incur any credit facility borrowings during the first half of fiscal 2009.

Now, let’s discuss our outlook for the rest of the year. As we think about the second half of the year, I would suggest that we will see a continuation of the trends we saw in the first half. The fourth quarter, however, will be more challenging as we anniversary the effect of last year’s stimulus package. We expect that sales trends in the third quarter will be similar to what we saw in the second quarter. Our March results have gotten the quarter off to a good start, with comps increasing more than 7%. Overall, we expect that comp store sales for the third quarter will increase between 5% and 7%.

We have seen strong expansion of gross margin in the first half, driven by lower markdowns; lower transportation expense; better inventory shrinkage; and higher purchase mark-ups. These improvements have offset increased mix pressure. As we look to the third quarter, we expect that directionally these trends will continue. However, we anticipate that the impact from lower markdowns will moderate somewhat as we anniversary better inventory management in the third quarter of fiscal 2008. We also believe we will continue to face challenging headwinds from insurance and incentive compensation costs.

Reflecting these expectations, we anticipate that earnings per diluted share in the third quarter will be between $0.54 and $0.58, as compared with the $0.46 in the third quarter last year. We anticipate that many of these margin and SG&A trends will continue through the fourth quarter. However, as we have discussed, we expect that the comp trend will moderate somewhat as we anniversary last year’s stimulus package.

In addition, we anticipate incurring some additional expense related to our efforts to realign space in our stores to accommodate the expansion of high growth consumable categories. As a result of these expectations, we project that earnings per diluted share could be between $0.34 and $0.40 in the fourth quarter.

For the full year, we expect net sales will increase between 5% and 7%, and that comp sales will increase between 3% and 5%. Reflecting these expectations, we now project that earnings per diluted share for the full year will be between $1.90 and $2.00 as compared with $1.66 in fiscal 2008.

Now I’ll turn the call over to Howard for some final remarks. Howard?

Howard R. Levine

Thanks, Ken. Before we open the call for your questions, I want to leave you with a few final thoughts. First, I am very proud of the management team we have assembled here at Family Dollar. We have blended together a diverse set of backgrounds that include both strong retailing experience and dollar channel expertise, creating a cohesive team that is excited about the future.

Overall, I am pleased with the improvements we have made and I like how we are positioned today. With a better understanding of our customer, we have strengthened our merchandising capabilities; improved the in-store shopping experience, and built strong employee teams. These investments are driving sustainable improvements and delivering strong financial returns. The current environment offers us a unique blend of challenges and opportunities, but I am confident that the investments we have made to strengthen our business has positioned us to profitably navigate through these challenging times. I also believe that these same investments will position us to deliver strong financial returns as the economy improves.

And now, operator, we’d like to open up the call for questions.

Question-and-Answer Session

Operator

We are now ready to begin the question-and-answer session. If you wish to ask a question, please press “*” then the “1” key. As a reminder, if you press the “*” and the “1” key during the company’s comments you are not placed in the queue. If you would like to ask a question, please press the “*” and the “1” key now to enter the queue. Also, we have limited time remaining, please confine your comments to one or two questions. One moment. Our first question comes from Meredith Adler with Barclays. You may ask your question.

Meredith Adler - Barclays Capital

Thank you very much. I’d like to talk about specifically about store growth. I know you’ve said that you feel pretty good about the returns you’re generating now and you think the returns are better than they have been. Can you talk a little bit about the availability of real estate, the pipeline, and what you think the growth potential would be for the remainder of this year and looking out over the next couple of years?

Howard R. Levine

Sure Meredith. First let me mention that, you know, a couple of years ago we decided to slow down new store growth. We thought it was important to drive better returns in our existing stores and we’re beginning to see some of those improvements and I think we’ve made a lot of progress there. We do see opportunities growing in the real estate market as it is becoming a more tenant friendly market and look to take advantage of those opportunities as they arise. But in the near term, we continue to focus on improving the profitability of existing stores. We’ll continue to monitor market conditions. With our strong financial position we do believe that there’ll be a lot of opportunities for us to take advantage of. But right now we’re focused on continuing to improve returns of our existing stores.

Meredith Adler - Barclays Capital

Okay. I forgot to say congratulations on a good quarter. Then talking about the existing stores and the business itself maybe just talk a little bit more about the opportunity to continue to manage expenses and expense growth. You’ve done a good job. Is there a point at which you want out of opportunities, given how much you’ve accomplished so far? Shrink especially is an area you’ve done a lot.

Kenneth T. Smith

Thank you, Meredith, and no need to apologize. We think we have substantial opportunities in front of us. You know, to go back to your first question in terms of store opportunities, we think we still have a number of opportunities to open up new stores in this country. But at the same time we think there still is a number of things that we can do to improve existing stores sales, as well as expenses. You know, as we learn more and more about our customer and what’s important to them, we’re going to continue to execute upon some of those things and that includes expenses as well. You know, we’ve formulated a group here, a procurement group that is starting to get some traction and we have some continued expectations for them in the future. But the way I look at our business is that we have performed well during a difficult environment, but we still have substantial opportunities to drive even stronger returns and are really focused on doing that as we navigate through this environment today.

Meredith Adler - Barclays Capital

Thank you.

Operator

Our next question comes from Mark Miller with William Blair. Go ahead, Mr. Miller with your question.

Mark Miller - William Blair & Company, L.L.C.

Hi. Good morning. I was hoping you could expand on the layout changes forthcoming. How much of the store is going to be impacted by the layout change? How many of the stores? Is it all of them? And over what timeframe? I’m asking because I recall in the past there’s been some element of disruption at times when you’ve undertaken similar layout changes. How do you assess the disruption risk just go round?

R. James Kelly

Mark, this is Jim Kelly. Since I am primarily responsible for this project I’ll kind of give you an overview. Fundamentally what we’re doing is just adapting some of the major consumable areas that have shown such strong growth in the last year or so. And when I say strong, as you know we have been comping in excess or in double digits consistently in many of these areas. So we’ve got to provide those areas of our store with a little bit more room and we’re investing a little bit more in terms of meeting our customer demand in those areas.

On the other hand, we have talked about other areas of our stores, particularly those that deal with discretionary items for which sales have been much softer. So basically what we’re doing is in a very controlled way resetting schematics in some key areas to reflect current consumer demand. I think our ability to control major initiatives like this have improved by light-years in the last three years. So we’ve very confident that we’re going to progressively go through our chain and align our assortment to better meet current customer demand.

Mark Miller - William Blair & Company, L.L.C.

And then as you’re allocating more space to consumables, I’d like to know how do you look at the historic peak operating margin obtained in the business, 8% range, you know, up quite a bit from where you are currently? Does this diminish your ability long term to get back to that? Or how are you just assessing your opportunities to improve margins over time? Is it therefore going to have to come from better SG&A leverage or how do you look at the two, SG&A versus gross margin potential? Thanks.

Kenneth T. Smith

Mark, I think we have said now for several years that there are numerous opportunities throughout the organization, both at the gross margin line as well as the expense line, for us to expand our operating margin. I’m particularly pleased here in recent quarters. You’ve seen the results of some of our investments, and some of our ability to expand margin even with a very, very significant shift towards consumables. As the economy improves we would expect that our discretionary sales would likewise improve. So that will take some of the pressure off that we’re currently facing. But we still have an awful lot of opportunities in the gross margin area, not only in shrink and in freight, markdown optimization, but also such things as private label and global procurement.

As Howard just mentioned, on the expense side we have an awful lot of identified areas today. They are using various techniques, be it more efficient procurement or outsourcing, etc. to more efficiently operate our stores. So we’re optimistic that over the long term we’ll be able to improve our operating margin.

Operator

Thank you, sir. Our next question comes from Wayne Hood with BMO Capital. You may ask your question.

Wayne Hood - BMO Capital Markets

Yes. Good morning. My question kind of centers around the expense rate in the second quarter, and as I kind of looked at it as you went through, it was down 40 basis points year-over-year. But if you look back, that’s still the highest rate if you take out last year’s number since 1989. I know you mentioned that incentive comp was a drag of about 50 basis points, but if you were to take out incentive comp, I mean, where does that rate look like relative to, you know, periods past? Because it still was at a very high rate relative to previous periods.

Kenneth T. Smith

Well, I think first and foremost isolating, you know, we did call out the incentive comp and the insurance as headwinds. And that accounts for about 80 basis points. So when our leverage absent those two items, it’s over 100 basis points. So I think year-over-year comparison that lines up pretty well with our internal targets when we look at working towards, you know, normal growth rates and needing a 2% to 3% comp to leverage. So we will continue. Certainly, if you look over a historical period, and you get into multiple years, you go back to the ’05 period when our expense rate did increase a bit at that time, and we’ll continue to work on expenses.

I think, you know, as both Jim and Howard said we’ve got opportunities ahead of us to improve on the expense side and our focus there. But we’ll continue. You know, as we look forward we expect a bit of headwind to continue on the insurance and incentive comp side, but internally continue to work hard on the expense side.

Wayne Hood - BMO Capital Markets

How much of the incentive, you mentioned 50 basis points in the second quarter, how much of a drag do you expect in the third and fourth quarters? Similar 50 and then 30 for insurance in the third and fourth quarter or does that accelerate or diminish somewhat? Thank you.

Kenneth T. Smith

I don’t have an exact number I can pinpoint for either of those. I would suggest that when we look at the third quarter, you know, the data point we do have is last year we saw about 70 basis points of benefit last year in our third quarter. So I would just say that the trends we expect that we saw in the second quarter directionally we expect to continue.

Operator

Thank you. Our next question comes from Deborah Weinswig with Citi. You may ask your question.

Deborah Weinswig – Citigroup

Good morning and I will say congratulations up front. What a fantastic quarter!

Howard R. Levine

Thank you, Deborah.

Deborah Weinswig – Citigroup

You’re welcome. So Ken, when you’re discussing the back half outlook for your fiscal year, you had said that you’re concerned more about the fourth quarter than the third quarter from a fiscal stimulus perspective but, at least according to our numbers, there’s about $43 billion that was paid out between June and August and there was almost $50 billion paid out between April and May. Can you help us understand that?

Kenneth T. Smith

I think when we look at the stimulus, you know, we’ve analyzed -- obviously we have hindsight on last year’s stimulus and we see the benefit we saw clearly spiked in June of last year when we saw the 8% comp and that dumped the trend we were seeing. You know, our view as we analyze both stimulus packages is last year’s stimulus was very tightly -- the money was given out in a very tight 10-week window and this year as we’ve analyzed the impact to our customer and the potential impact for the current stimulus, we just see that over a much wider time span. And you know instead of a ten week payout of significant dollars, it breaks out over 10 to 12 months.

So we certainly have analyzed the impact but when we look at lapping the fourth quarter, we believe the stimulus last year that impacted our end of May, June, July timeframe that the stimulus over stimulus will be very difficult to lap that strong comp we saw last year. So that’s the pressure we see for this fourth quarter.

Deborah Weinswig – Citigroup

Okay. And then Howard, you had talked about some steps that you had taken to strengthen your price perception. Can you talk about how you measure the success in those initiatives? And then in addition, can you please provide some color around some of your price optimization initiatives as well?

Howard R. Levine

Sure. I think the most important thing to take away is that we’re hitting our goals, both in terms of customer satisfaction and our price perception. You know, we use external data to gather facts about the price perception and we also do our own internal price shops as well. We also talk to our customer and solicit surveys from our customers to understand what they’re feeling in terms of our price perception. And it’s been very strong and continues to be very strong. The price optimization efforts are part of that and I think was very helpful in utilizing our new processes during this difficult inflationary period. I think the results and the way we were able to come through about as high an inflationary period as I can remember as successfully as we did demonstrate that our abilities to use software and improve processes and good people helped us navigate through that period very nicely.

Operator

Thank you. Our next question comes from Mitch Kaiser of Piper Jaffray. You may ask your question.

Mitchell Kaiser - Piper Jaffray & Co.

Thanks guys. Good morning and my congratulations as well. Obviously March is off to a very good start, starting the quarter off. Curious if Easter played into that at all. And then you talked about stimulus. We’ve looked at some numbers from the IRS that suggest that tax rebates are up about 13%, 14% year-to-date. I’m wondering if maybe that’s played into some of the strong March as well. Just any observations on that? That’s the highest it’s been up since 2003 I think.

R. James Kelly

I’ll start with the Easter effect. I think the shift of Easter from March to April, in the aggregate, is generally considered a good thing for retailers and certainly we consider it a good thing. In terms of its impact on March, it did provide March with an extra day but it also resulted in the loss of many Easter sales. Net-net, it probably didn’t have a significant impact on March one way or another.

If you look at March and compare it with January or February and merge those together, what you saw was a continuation of a strong trend and that 6%, 7% range. So overall we think that there’s a core trend line there that’s being driven by the high demand for value in today’s marketplace and we expect it to continue. So we don’t see any net noise that should be interfering with that trend and promotion.

Howard R. Levine

Mitch, in terms of the tax rebate question, you know it’s very difficult to isolate on any one component of what’s going on in our economy today. You know, in addition to the tax rebate we’re seeing gasoline prices at a low level, although rising from some of their lowest points. We do see some of the stimulus starting to be impacted out there as it’s starting its rollout. You know, in addition to the things that we’re doing within our business I think that sometimes gets lost in the shuffle that you know here at Family Dollar we’re doing a lot of things to improve our business when you compare it to last year and the years before. So I think some of those things are also beginning to take hold in a positive way.

But you’ll hear us talk about how difficult it is to isolate on any one component. Generally things like lower gasoline prices, tax rebates going up, stimulus money going up, they’re all very good things for us in addition to the upcoming minimum wage increase that’ll be in effect this July. You know, unemployment, job loss, things of that nature impact us in a negative way. So there’s just a number of things going on there, some positive and some not so positive.

Mitchell Kaiser - Piper Jaffray & Co.

Sure. Clearly. But the results speak for themselves. Just curious, you know, certainly you’ve done a good job on the gross margin line. It’s been very impressive. Can you just talk a little bit about how the mix shift to more consumables is driving some of the results on markdown and shrink? Is that helping improve it just by the mix shift to consumables? I mean, certainly there’s a number of process changes you’re making, but I was just curious about that.

R. James Kelly

When you look at how we run our business on a category level or what we call a line of business level which combines various categories, we’re seeing that investments in the project accelerate area which really redefine how we were going to go to market and meet our customer needs have resulted in improvements across all areas of our business. So we’re seeing better performance in the markdown area, in our apparel area, in our home area, as well as in many other areas. So it really is influenced by mix in the aggregate, but it is not driven by mix. It’s driven by overall improvement throughout the merchandising organization.

Operator

Thank you. Our next question comes from Joseph Parkhill from Morgan Stanley. You may ask your question, sir.

Joseph Parkhill - Morgan Stanley

Hi. Good morning. I was wondering if you looked at your store base in the clusters of urban versus suburban versus rural, if there are sections that are performing better than others with regards to either sales or margins?

R. James Kelly

We look at our stores in hundreds of different ways quite frankly, by regions, by individual towns and cities and states, by size categories, etc. And what we found is where we’re operating well we’re getting the highest returns. So we have some urban clusters that are some of our top performers. We have some urban clusters that are more challenged. We have some rural clusters that are among our top performers and we have some rural clusters that we have opportunities. So I don’t think that a given clustering of stores really drives that much useful data.

Joseph Parkhill - Morgan Stanley

Okay. Thanks. And as far as real estate goes, I mean are you seeing anything different between those different dynamics as well? And also in renewing rents, have you been able to lower your leases?

Howard R. Levine

Yes, Joe, you know we have about 15% or 20% of our chain coming up for renewal every year so we are definitely leveraging the current market to negotiate better rents. In terms of opportunities, I’m not in a position to tell you whether there’s more opportunities in rural markets versus urban markets. I think in general the real estate market has increased its opportunities. The market has shifted to a more tenant friendly environment and we look to leverage some of those things in an opportunistic way as we navigate through the next several months.

R. James Kelly

You know, Howard, if I could I’d like to add an interesting point here in that Family Dollar’s core structure has been to lease stores in five year increments, five-year base with subsequent five-year renewals. This provides us with an awful lot of flexibility during a time like this. And that really is an area of opportunity that we’re looking hard at today.

Operator

Thank you. Our next question comes from Michael Baker with Deutsche Bank. You may ask your question, sir.

Michael Baker - Deutsche Bank Securities

Thanks. Could you guys discuss or quantify the impact of having more credit cards and the opportunity around food stamps? I don’t know if you have any sort of industry wide, country wide data how many people use food stamps and that kind of stuff? Or at the very least how that’s impacting your same-store sales?

Howard R. Levine

Thanks Mike. I think the best way to look at credit card utilization and food stamp utilization is currently we’re in about half the chain. We last call talked about accelerating the completion of the POS rollout by you know January, February of 2010, which we’re well on track of doing. And those decisions were primarily driven by the acceptance and the desire of our customers to offer more convenience, as well as some of the data that shows double-digit increases in food stamp utilization today. And if I recall correctly I also believe the stimulus plan that was recently passed also is generating some additional utilization of food stamps. So we’re very excited about getting this thing out there. You know, when you look at what we’re doing in the food area and the business we’re doing that having food stamp capability in the remainder of the chain is something that is really driving us and is something we’re really looking forward to getting in place.

Michael Baker - Deutsche Bank Securities

So fair to say when you put your experiences there, when you put in the credit card and the food stamps at those stores do you see any comp lift?

Howard R. Levine

Yes.

Michael Baker - Deutsche Bank Securities

Great. And one more question if you could, food as a percent of total sales I think it was about 15% of the mix in a store going to 20% as you were doing your expanded assortment. Do you have any updated statistics on how much food is a percent of your business?

Howard R. Levine

No, I think you’ve got it pretty good for where we are right now, Mike. It continues to be a traffic driver for us, particularly that fill-in trip and we’re very pleased with the progress we’ve made thus far and are continuing to work on improvements.

Operator

Thank you. Our next question comes from Adrianne Shapira with Goldman Sachs. You may ask your question.

Adrianne Shapira – Goldman, Sachs & Co.

Thank you. You know, you had mentioned that the discretionary category, it sounds like we’re seeing some green shoots in some categories. I’m just wondering your comment about March above the 7% comp, has that trend continued with discretionary continuing to see strength? And then just following on that, you’ve done a very good job managing inventory in these categories to mitigate markdown, but how do you think about managing the risk but also not potentially walking away from sales if in fact you start to see continued improvement in these categories? Thanks.

R. James Kelly

Well, it’s a good observation there. We are seeing some new signs of growth in various discretionary areas, but I think it’s really at a very moderate level right now. We don’t want to leave an opportunity behind. On the other hand, we need to carefully manage risk during this time period because there still remains a great deal of uncertainty. To achieve both of those, what we’re trying to do is work very hard on how we allocate our merchandise and present our merchandise of particularly discretionary merchandise in the stores. So we believe there’s an opportunity to first improve sell throughs in various categories. And then secondly we will as demand indicates begin to buy in greater quantities.

Adrianne Shapira – Goldman, Sachs & Co.

Okay. And then could you just comment on March, were you seeing the same sort of category strength as you had mentioned in the second quarter? The same sort of discretionary categories?

R. James Kelly

I think overall the trends that we saw in the second quarter have continued.

Adrianne Shapira – Goldman, Sachs & Co.

Okay. And then a follow up question, just as it relates to the advertising and how you think about lapping the stimulus, maybe help us understand what you did last year to capitalize on it and perhaps your plans this year as it relates to advertising and marketing?

Howard R. Levine

I’m not going to go into a lot of detail about our future advertising plans, Adrianne. I’d leave you with a couple thoughts though with that, you know, from the time we started this a few years ago when we decided to ramp up our advertising to today, I think we’ve made substantial improvements in the productivity of our events. We’re executing better at the store level. Supply chain is much stronger and we’re beginning to see some of those results pan out. So I think as I look forward to the rest of the year, we’re very pleased with where we are in terms of the improvements and expect that would continue through to help us fight through some of the challenges of the stimulus from last year.

Operator

Thank you. Our next question comes from John Zolidis from Buckingham Research. You may ask your question.

John Zolidis - Buckingham Research

Hi. Good morning and congratulations on improving the results versus last year. I have two questions. The first, Howard, I was wondering if you’d give us an idea of how much you think the improved results are attributable to efforts from the team and how much do you think is as a result of the environment kind of helping out your business model? Would you say it’s 50-50, 60-40, how would you characterize that?

And then the second component of the question is for that element of the improved results that you think is creditable to the team, what do you think is the most important individual factor driving the improved results? Thank you.

Howard R. Levine

Sure. You know, in terms of your first question I think you were talking about we’re gaining a lot of benefit from the trade down customer. And the external data that we look at has shown that we have gotten some trade down from a middle income customer. But I think it’s important to understand that by far most of our growth has been from our core customer. So, I think all the things that we’re doing to improve the shopping experience for our core customer plays nicely to the middle income customer. When you talk about concept renewal, the leverage in national brands, the increase in our tender types, the initiatives to improve our quality, our merchandise all make a lot of sense for our core customer, and I think we’re also getting some credit from the trade down customer.

You know, when the economy improves I believe that a lot of that trade down customer will stick. I think they’ve seen the improvements that we’ve made in our business over the last few years and, you know, I feel very good about where we are with that. So, you know, when you ask me is it between the team or is it between the economy, I think it’s hard to answer that question exactly. Obviously getting some trade down has been a benefit to us, but frankly I think when I think about all the things that we’re working on today and some of the things that we’ve accomplished that a good part of the increase is just we are performing better, and executing better and I give a lot of credit to our management team and associates for executing stronger. I think that continues. And if you look at history, what’s happened is while, you know, we certainly are defensive stock in challenging times, I think when you look back over last recessions, as the economy comes through we perform pretty strongly too. You know, as we’ve talked about today in the call while consumables have been very strong, what we’ll see when the economy improves is the discretionary categories pick up, so things like apparel and home and seasonal categories will improve. And those are margin categories and help us get back to some of the desired operating margins that we’re shooting for.

So at the end of the day, you know, we’re operating successfully in a tough environment, which we’ve done over the years. And as the economy improves, I think our performance will also continue to improve.

Operator

Thank you. Our next question comes from David Mann with Johnson Rice. You may ask your question, sir.

David Mann - Johnson Rice & Company

Yes. Thank you. Good morning. Let me add my congratulations and say that the stores obviously look very good.

Howard R. Levine

Thank you David.

David Mann - Johnson Rice & Company

Can you just give us an outlook on what you’re seeing in terms of product inflation and possible deflationary pressures later in the year?

R. James Kelly

Yes, I think the last 12 months as Howard indicated earlier have been a most challenging time period. We’ve seen that mitigate significantly. It’s been as you might expect stickier on the down slope than it is the up slope, but we are seeing opportunities there with various commodity pricing change that we’ve been able to flow through the merchandise. Also, global demand has subsided providing still other opportunities. I wouldn’t describe it as a deflationary time period yet, but I think the overall situation has certainly moderated significantly.

David Mann - Johnson Rice & Company

And then for my follow up, can you just clarify in terms of the store resets exactly when you expect that realignment to start and how long will that last?

R. James Kelly

I think you’ll see stores being adjusted from a schematic perspective starting this summer, late May, June, and continuing for a matter of months. The exact speed and course hasn’t been finalized and won’t be quite candidly until we get 1,000 or so stores under our belt.

Operator

Thank you. Our next question comes from Patrick McKeever with MKM Partners. You may ask your question.

Patrick McKeever - MKM Partners LLC

Thanks. Good morning everyone. Jim, could you just clarify that Easter shift again? You were saying that you don’t think it had a material impact on March. And do you expect some benefit in April? Is that right?

R. James Kelly

What I was highlighting was you’ve got two offsetting considerations. One is, we close on Easter or have traditionally. So that’s a day of lost sales. Last year we had that day in March. Offsetting that, and actually slightly more than offsetting that is the benefit of the Easter sales. So what I said is you have both sides of that occurring, and net-net I don’t think it’s going to be that significant an impact on either March or April.

Patrick McKeever - MKM Partners LLC

Okay. Now March last year, same store sales were down more than 4%. Was the fact that stores were closed on Sunday a big factor in that number? I just can’t remember what the big factors were last year on the comp.

R. James Kelly

Yes, I think it was a combination of things. Earlier Easters are less dynamic and less powerful than later Easters, but in addition as you’ll recall last spring was one of the more challenging weather springs in a decade. So I think there was a little bit of the Easter shift and a little bit of weather impacting last April.

Kiley F. Rawlins

Diane, I think we have time for one more call, one more question.

Operator

Yes, ma’am. Our next question comes from Randy Stewart with Merit Asset Management. You may ask your question, Randy.

Randy Stewart – Merit Asset Management

Hi, guys. Thanks for taking my question. Great job on the quarter, too. Okay, so I am wondering about the consumables and with respect to the mix there. Now, do you see like an upper bound in consumables as a percentage of revenues? Do you see that ever topping or do you just, you know, go with whatever is (inaudible) much?

Howard R. Levin

Randy, we don’t have a target there. I think our goal is to continue to be relevant to our customers. Right now our customers are focused on needs so that’s why we’re really focused on driving consumables. I think as you look out and the economy begins to improve it’s my hope that we’ll continue to drive consumable sales strongly, but additionally would like to and hope to see some of the discretionary higher margin categories begin to pick up. You know, we’re at a point in time today that’s very challenging and our customers are focused on consumables. And that’s where the action is today and that’s what we’re focused on.

We have not longer term relaxed any of our goals for driving discretionary. It’s just at this time we’re being more cautious on some of those categories as a result of the environment.

Kiley F. Rawlins

Okay. So, it’s about 11 o’clock and unfortunately we didn’t get through all of your questions today. As always, I’ll be available after the call for any follow-up questions that you may have. Thank you for joining us this morning and have a good day.

Operator

Thank you. That concludes our call for today.