FDO Drops GPM% Bomb in Q1 – New CFO
Suggests Forecasting “Processes” Are Sound
Last week, Family Dollar (FDO – $57.20) shocked investors with a dramatic -112 Bps GPM% decline in Q1 versus the prior year. This represented possibly the company’s worst year-over-year GPM% decline in the last decade. In addition, the company’s inventory growth out-stripped its revenue growth for the 9th consecutive fiscal quarter (see chart).
Rarely do traditional sell-side analysts ask compelling questions on conference calls for fear of upsetting management (negatively impacts the ability of the analyst to stage managerial access events). But, near the end of the conference call, Aram Rubinson of Nomura posed an extremely interesting question to the company’s relatively new CFO, Mary Winston.
“It is clear that most of your top-line initiatives entail lower margins. It is not a surprise that gross margins are being pressured. Perhaps the surprise is that we just didn’t see it sooner than we are. My question thought is what are you doing from a procedural or a process standpoint to make sure that the finance department and the merchants are aligned and planning together to prevent margins from surprising in the future.”
“Well, I will start on that and then Mike or Howard can join in, but from a process standpoint within finance, we have done a number of things to shore up our analytical capability, our forecasting process. We have made sure that it is a collaborative and aligned process where finance, merchandising, retail operations all look at what we are projecting in terms of sales forecasting and margins and what the impact of that is going to be. So I think our processes are sound in that regard and all the groups that are closet to the business are involved in making those projections and we think our projections take into consideration everything we are aware of.”
Note to Ms. Winston, it’s ridiculous to suggest that your “processes are sound” if you just dropped a -112 Bps GPM% ‘bomb’ on your investors (again, implies possibly the company’s worst YOY GPM% decline in the last decade).
But, it gets even more interesting. In the company’s subsequent 10-Q filing, the company made the following disclosure:
“The decrease in freight expense was a result of our changing business model as it relates to our newly formed relationship with McLane, which results in less merchandise being handled through our own distribution network.”
Two things here.
First, it appears that FDO’s disastrous GPM% decline in Q1 could have been worse… if not for the freight expense benefit via McLane. This begs the question, was the freight expense benefit via McLane material?
Second, why no mention of the freight expense benefit by Ms. Winston on the company’s conference call? It appears that FDO management may have been afraid for investors (on the conference call) to have fully understood that the massive GPM% decline versus last year was even worse than reported if not for the McLane benefit.
Most management teams realize that an overwhelming majority of buy-side investors don’t actually read SEC filings. But, for FDO management to exclude the McLane benefit when discussing the -112 Bps GPM% decline versus LY on the company’s conference call (or, press release) forces us to question FDO management’s desire for full transparency in their communication with the investment community.
