FDO: 2Q Continues the Surge

FDO: 2Q Continues the Surge

 

Conclusion: Beat the Q with accelerating comp trends and SG&A leverage. Comp growth strength indicating discounters stores have some gas left in the tank here. Read throughs on DG, DLTR, and NDN.

 

1) Changes to our view on…

a) Company: Specific to FDO is the recent expansion of store hours, which is now chain-wide.  This has got to be helping but there has been no quantification as to what extent.  Net, net consumables driven traffic and some benefit from internal efforts (store hours, POS reset, improved consumables merchandising) is clearly taking hold here.  We’re no more inclined to own it here, but have a bit more evidence to consider before shorting.

 

b) Industry: Management was quick to point out that the payroll cycle appears to be as pronounced as it has been for while, which is interesting given the pick-up. Demand is coming across the store, even in consumables which has already been strong.  Overall demand is seemingly improving across all demographics, channels, and product offerings.  Pent-up demand, a slightly improve employment picture, and a favorable year over year tax credit environment (especially for lower income spectrum) contributed to uptick. 

 

2) Key Issue: Management expects same store sales to continue to accelerate throughout the year- largely a result of easing compares and the culmination of the company’s latest strategies. They’d better! With 1-year compares getting easier (especially in 4Q), the company’s guidance already suggests that 2-year trends are starting to flatten out. The big question here is whether there is some real underlying strength that we simply can’t explain (ie they’re sandbagging), or is this setting up to be a big deceleration story in 2H?

 

3) Read through for peers: Positive for DG, DLTR, NDN, WMT, HBI and GIL. Perhaps even positive for other retailers geared toward lower-priced discretionary items, such as Collective Brands (PSS).

 

FDO: 2Q Continues the Surge - FDO Comps Chart

 

EPS

Clean Headline: $0.81

Guidance: Updated on March 4th to $0.70 - $0.80

Street: $0.78

Last Year Clean: $0.43

 

Sales growth: +4.9% -- Revs slightly higher due to 3.6% comp growth which marked a 1 and 2 year acceleration. The increase in comparable store sales was a result of increased customer traffic, as measured by the number of register transactions, and an increase in the value of the average customer transaction. Consumables growth slowed sequentially to 5.1% from 5.8% in Q1 10 while home products, apparel, and seasonal/electronics improved on the margin.   

 

GM %: 35.4%, up 175bps yy. Result of higher purchase mark-ups and reductions in markdown expenses, freight expenses and inventory shrinkage.

 

SG&A: +4.1%, -20 bps, margin declined primarily as a result of lower utility costs and lower insurance expense which more than offset higher expenses related to expanded store operating hours and certain store maintenance and repair costs.

 

Balance sheet: Inventories down 10% on 5% sales growth. Good spread, sequentially improving. Capex as a % of sales was in line with Q1’s levels but increased on a TTM basis.

 

SIGMA: In sweet spot; positive trajectory to the upper right with better margins and improved sales-inventory delta.

 

Guidance: Increased 2010 guidance to $2.48 - $2.58 from $2.15 - $2.35, Street at $2.77. Expects Q3 EPS at $0.71 and $0.76 compared with $0.62 last year and street $0.70.  Comps for Q3 expected to increase 6% to 8%.  Favorable weather trends and the impact of the Easter shift have March comps +11%.

 

FDO: 2Q Continues the Surge - FDO SIGMA

 

 


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more