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Tuesday July 22, 2014



Investors Like What They See From Family Dollar

Family Dollar Stores, Inc. (FDO) reported its fiscal 2013 third quarter results on July 10. Although the results beat expectations, some analysts worry about the company's fortunes going forward.

Family Dollar reported net sales of $2.57 billion for the quarter, a 9% increase from $2.36 billion during the comparable period last year. The company attributed this growth to a 14.8% increase in consumables, which includes food, tobacco and health and beauty aids.

Net income for the quarter was $120.9 million. Unfortunately for Family Dollar, this was a slight decrease from the same period last year when net income was $124.5 million.

Commenting on the results, Family Dollar Chairman and CEO, Howard R. Levine, had this to say: "Our consumables sales remained strong and we continued to gain market share. However, our discretionary sales remained challenged as our customers have been forced to make spending choices between basic needs and wants." He added, "I am confident that we remain well positioned for long-term profitable growth."

Family Dollar saw its stock rise by nearly 7% following its latest earnings report, no doubt a result of the company's better-than-expected quarter. However, many financial analysts remain less-than-upbeat about the company's fortunes in the foreseeable future. Particularly, analysts are concerned about the company's increased reliance on consumables, which carry a lower profit margin compared to discretionary items, such as home goods and apparel. As a result, analysts are concerned about Family Dollar's profitability going forward.

Family Dollar Stores, Inc. (FDO) shares ended the week at $68.40.

Yum! Brands' Earnings Starting to Look Good Again

Yum! Brands, Inc. (YUM) reported its second quarter results on July 10. Results beat expectations, a positive for the company, as the fallout from bad publicity surrounding suppliers to its KFC division in China continues to linger.

Yum reported revenue of $2.9 billion for the quarter, an 8% decline from the comparable period last year. Fortunately for Yum, revenue of $2.9 billion was in line with forecasts of $2.93 billion for the quarter.

The company reported earnings per share of $0.61 for the quarter, lower than the $0.69 per share during the comparable period last year. The $0.61 per share figure beat analysts' expectations, which were around $0.54 per share.

David C. Novak, Chairman and CEO, had this to say: "KFC sales and profits in China were significantly impacted by intense media surrounding Avian flu, as well as the residual effect of the December poultry supply incident. The good news is that China sales are recovering as expected. The extensive media surrounding Avian flu in China has subsided and same-store sales at KFC are clearly improving."

Yum is the parent company of Taco Bell, KFC and Pizza Hut. The company's KFC sales in China have declined since last December when a Chinese government investigation looked into alleged safety violations at its poultry suppliers. An Avian flu scare in the spring further added to the company's woes. Sales at its China stores, which usually make up half of the company's sales, fell 20% during the quarter. Still, better-than-expected numbers this quarter may indicate Yum's fortunes in the country are on the mend, which is good news for investors.

Yum! Brands, Inc. (YUM) shares ended the week at $70.64.

Rocky Mountain Chocolate Factory Tastes Good to Investors

Rocky Mountain Chocolate Factory, Inc. (RCMF), an operator of gourmet chocolate and confection stores, announced its fiscal 2014 first quarter results on July 11. The company reported strong revenue and income gains.

Rocky Mountain reported that revenue increased 5.4% to $10.2 million in the first quarter compared to $9.7 million during the same period last year. Part of the revenue increase was attributed to a 2.5% increase in domestic franchise same-store sales.

Particularly impressive was the company's net income for the quarter. Net income increased 11% to $1.18 million compared to $1.06 million during the same period last year.

Bryan Merryman, COO and CFO, had this to say about the quarter's results: "Same-store sales continued to increase, rising 2.5% in the most recent quarter after a 1.1% improvement in the first quarter of Fiscal 2013. Our pretax profit margin widened to 18% of total revenues, compared with 16.9% in the first quarter of the previous fiscal year. Other performance metrics of note included a 250 basis-point improvement in our retail gross margin, which reflected improved economies of scale at our majority-owned U-Swirl, Inc. subsidiary."

Following the earnings report Rocky Mountain's stock price rose, finishing up for the day. Unfortunately for Rocky Mountain, not everything has been good news of late. Last week it was reported that leading national securities firm Faruqi & Faruqi, LLP was investigating the company's Board of Directors for potential breaches of fiduciary duties. These breaches allegedly occurred when the Board recommended shareholders approve an amendment to the Company's 2007 Equity Incentive Plan to increase the number of available shares for issuance from 16,953 to 316,953.

Rocky Mountain Chocolate Factory, Inc. (RMCF) shares ended the week at $12.35.

The Dow started the week at 15,136 and closed at 15,464. The S&P 500 started the week at 1,632 and closed at 1,680. The NASDAQ started the week at 3,479 and closed at 3,600.

The Rise and Fall of Treasuries: A History

Treasuries rose for four consecutive days this week, a steep rise unseen since September. The rise in prices was halted on Friday when Federal Reserve Bank of Philadelphia President Charles Plosser said the central bank should begin to reduce its bond purchases in September.

Although yields on the 10-year note fell during early Friday trading to 2.53%, Plosser's comments caused yields to rise 6 basis points to 2.59%. Yields move inversely to prices, so as yields rise prices fall. Yields on the 30-year bond moved up slightly to 3.63%.

The benchmark 10-year note was set to match its largest weekly decline since September, having fallen nearly 17 basis points since Monday. Yields rose 36 basis points in June, the result of uncertainty surrounding whether the Federal Reserve would soon slow its bond purchasing program known as quantitative easing. On Wednesday, Fed Chairman Ben Bernanke assured markets that the central bank will keep the program running in the near future.

Charles Comiskey, head of Treasury trading at Bank of Nova Scotia, said that Chairman Bernanke was seeking to calm the markets and assure them that "even when QE goes away, they [the Fed] are still going to be accommodative. Inflation is well contained."

A pair of indexes released this week did little to affect Treasury prices. The Labor Department reported that the producer-price index, a measure of wholesale prices, rose 0.8% in June as the cost of gas increased. Economists had predicted the index would rise by only 0.5%. Also, the University of Michigan and Thompson-Reuters consumer-sentiment index fell, going from 84.1 in June to 83.9 in July, which surprised economists.

The indexes meant little, though, as the rise or fall in Treasuries has been driven by market speculation regarding the future of quantitative easing. Although Bernanke's comments on Wednesday seemed to calm investors, Charles Plossers comments on Friday once again stirred the waters, which means the uncertainty and speculation will most likely continue.

The 10-year Treasury note yield finished the week at 2.60% while the 30-year Treasury note yield finished the week at 3.65%.

Interest Rates Climb Toward Higher Ground

On July 11 Freddie Mac released the results of its weekly Primary Mortgage Market Survey (PMMS). Mortgage rates this week began once again to rise, the result of further concerns the Federal Reserve will reduce bond purchases in the coming months.

The 15-year fixed rate mortgage averaged 3.53% this week. This represents an increase from last week when it averaged 3.39%. Last year at this time, the 15-year fixed rate mortgage averaged 2.86%.

The 30-year fixed rate mortgage averaged 4.51% this week. This represents an increase from last week when it averaged 4.29%. One year ago at this time, the 30-year fixed rate mortgage averaged 3.56%.

Frank Nothaft, Vice President and Chief Economist at Freddie Mac, had this to say about the week's increase in rates: "June's strong employment led to more market speculation that the Federal Reserve will reduce future bond purchases causing bond yields to rise and mortgage rates followed. The economy gained 195,000 jobs in June, above the market consensus forecast, while revisions to the prior two months added 70,000 on top of that." He added, "the minutes of the June 18th and 19th Federal Reserve's monetary policy committee meeting, released July 10th, stated that many members indicated further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of bond purchases."

The money market fund finished this week at 0.4%. The 1-year CD finished at 0.6%.

Published July 12, 2013

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