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).
Clean Headline: $0.81
Guidance: Updated on March 4th to $0.70 - $0.80
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%.