Wednesday, January 07, 2009
(Cont'd from above)...

Jim (cont'd):   

Still this dollar store is improving itself by accepting food stamps… and credit cards at more locations. If the street… and in this case I mean Wall Street, not main street… which loves the product just could not get behind this stock in time. Then this morning Family Dollar delivered a better than expected quarter… it earned .42 cents… holy cow.. the street was only looking for .40... and the company raised its phone guidance for 2009...from $1.58 to $1.78... to the $1.63, $1.81 range... how many other stocks have actually raised their range other than Monsanto… as well as giving fiscal second quarter guidance of .48 cents to .52 cents above the streets consensus estimate of .47 cents… most analysts either expected to lower or maintain their 2009... not to raise it… wow… inventory levels were down 4.5%… we like to see that in retailers. Family Dollars gross margins increased by 80 basis points… so the stock is up 20... wow, it is up 14.3%… up to $27.81. This is one day of trading, while the market was down 245 points… no one saw this coming… except for you if you have been watching the show… so now, we want to know… is it time to take profits and cash out… or is this just the beginning… I mean think about it..

Remember during the 2000, 2002 recession Family Dollar was up 38.8% in 2000... 40.6% in 2001... and 7.4% in 2002... these were all years when the S&P were down double digits like last year… nobody can deny that we are in much worse shape now than we were back then… and that is a reason to buy Family Dollar… as more shoppers trade down to try and save money…. and even though this stock historically performs best when the economy is weak… it is trading at a discount to its 5 year average price to earnings mobile… well 17.… right now it trades at 16 times earnings… there is a strong case to be made that it should be trading at least 18 times earnings… I want to make that case, frankly.

Family Dollar has doubled the number of stores that except food stamps… that’s bullish… it should make it a beneficiary of Barack Obama’s patchwork stimulus package… and, even though this one is big… with over 6600 stores… it still has the potential to add another 1000 stores in the West coast alone… and it’s rolling out much better systems throughout the company. The analysts are going to have to raise their estimates higher… Fineman is right… now I think that you should stick with Family Dollar.

But first I want to hear from Howard Levine, he is the company’s Chairman and CEO…

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Interview comments:

Jim: Mr. Levine, welcome to Mad Money.

Howard: Thank you it is nice to be here.

Jim: First I am an old school guy, congratulations on a great quarter.

Howard: Well, thank you, I appreciate that.

Jim: Okay, I am trying to figure out is there more to come or not. And I am thinking there is a lot of interesting places that you could still improve. You are just beginning to roll out a couple of things. Food stamps and credit cards, not in all your stores. Do we have the best is yet to come situation?

Howard: Well, Jim, the way we look at our business. We are in the business of providing value and convenience. Part of our program includes a robust food program. And part of that is enabling us to take Food Stamps. Thru December we have about 3000 stores with that capability. And we expect to complete that by this time next year. We will have 100% of the chain complete with Food Stamp capability. In addition to that with the new technology, we will be able to take credit cards as well. And with the growth in Food Stamps, which is up over 17% year over year, we think that is the right place to be. In additionally by the credit card capability we will be in the position for the trade down customer as well.

Jim: See , that is what I thought. I am thinking, I see multiple good quarters. Now, Wall Street is currently fascinated in thinking that things are better, that people are living large again. I am looking at your numbers, I am looking at your share take. I have to believe that people are just beginning to trade to what Family Dollar offers. They are not about to go back to the high prices spread, are they?

Howard: Now, it is important to understand , we have been in business for 50 years. We’re celebrating our 50th year this year. We have been through many cycles, good and bad. And have figured out how to compete effectively in all those cycles. And we always get attention during the slow times, when others are not doing as well, and we are hanging in there pretty nicely. But, we expect that to continue, and think that not only will we do well in the challenging times, as we are somewhat recession resistant. But as time as proved, we also think that we have a valid and important part in the value conscious segment of the business.

Jim: Let’s talk about that. I see that you have… and I have one in Asbury Park that I go do… I happen to like it. And I see a lot of the same foods that look like I would be getting them at an expensive store. But you still have a lot of things that can be private labialized, right?

Howard: Oh, no question about it. You know everybody has heard or read about the growth in private label. And that is something that is very important to us, and our customer. Right now, we are working on seeing how we can even further improve our private label program. In the HBA, the health and beauty areas, in particularly, if you will note we have improved our packaging. We have upgraded the quality of that merchandise and very happy with the results that we are seeing.

Jim: One last question. I am concerned as many of my retail friends are… and I have friends a lot in retail business.. that this recession could be so hard that we could see a big spike in pilferage… in shrinkage… in people stealing stuff. What are you going do to about it? Is it true? Or are things just pretty much the same as usual.

Howard: No, I think it is a good point. I think you can be in a position where you do see an increase in pilferage. Fortunately, we have done a number of things to help improve that. With our store manager retention levels at the highest level they have ever been. With the way we have reduced inventories on a per store basis. We are very pleased with the direction that we are having on the shrinkage line and would expect it to continue as we have improved these important metrics like store management retention, etc.

Jim: Alright, Mr. Levine, I think the whole street is underestimating what you capable of doing in this cycle. Congratulations on a good quarter… Family Dollar... Good to see you sir.

Howard: Thank you.

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Jim's comments AFTER the interview:     Alright, look everybody is suddenly saying that the worst is over…. I don’t believe that… I think Family Dollar is at the first of many good quarters… I think many street analysts are going to upgrade it…. I did not have to upgrade it… I liked it before this…. stick with Family Dollar… hey, buy some Family Dollar Stores Inc. (FDO).

[verbatim recap]

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