美元樹 (DLTR) 2002 Q2 法說會逐字稿

Good afternoon, and thank you for joining the Dollar Tree Stores second quarter earnings release call.

All participants will be able to listen only until the question-and-answer portion of the conference. To ask a question, you may press star, one.

This call is being recorded at the request of Dollar Tree. If anyone has any objections, you may disconnect at this time.

I'd like to introduce your hose for today's call, Chairman and CEO, Mr. Macon Brock.

Thank you and good afternoon.

Before we begin, we'd like to remind everyone that various remarks that we will make about our future expectations, plans and prospects for the company constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors included in our most recent press release, most recent current reports from Form 8-K, quarterly report on Form 10-Q and annual report on Form 10-K, which are on file with the SEC. There is no obligation to update the forward-looking statements and you should not expect us to do so.

Welcome and than you for joining the call this afternoon. I've got Bob Sasser here, our President and Chief Operation Officer, along with Eric Coble, our Chief Financial Officer.

And I'll begin with some general comments about the business. Then I'll turn it over to Eric for some greater financial detail. And then, Bob and Eric and I will be available for questions when Eric finishes. Please limit them to two so we'll give everybody a chance.

For the second quarter, sales were 498.6 million, up from 440.4 million in the second quarter of last year. Easter moved up two full weeks from last year, landing entirely in the first quarter. So same-store sales fell 2.5 percent for the quarter.

Same-store sales for the first six months rose two percent, which we believe to be the underlying comp

Easter

. Post Easter business produced comps above two percent.

We continue to make an excellent progress in the expense management front. First half operating margin improved 149 basis points versus last year, somewhat better than we expected.

Store staffing, as one example, is much more appropriately allocated. And this is driving strong improvements to the bottom line.

For the second consecutive quarter, earnings grew faster than sales and we hope this trend will continue. Second quarter earnings per share were 22 cents, up 14 percent versus the same period last year. And for the first six months, EPS of 42 cents were 45 percent higher than a year ago.

Business has been consistent. And second quarter sales are right about where we expected. We had strong merchandise offerings for our Mother's Day, Father's Day and especially the 4th of July. Our customers recognize our stores as a destination for picnic supplies and water and pool toys and all the tools and fixings for the summer barbecue season.

I'm very proud of our purchasing team, which has been able to get much greater product while maintaining our merchandise margins. Eye catching back-to-school merchandise is in the stores now and looks terrific. Notebooks, large key calculators, packs of pencils, ball point pens represent just some of the values we offer.

We continue to focus on brand name merchandise across all categories, the

generated by carrying quality, well recognized merchandise for $1 keeps our customers coming back.

Brand development is still a key focus of our merchants. Inventory rose 14 percent year over year, reflecting a two-percent decline at same stores. These numbers include 20 million of merchandise we

early to mitigate the potential of a dock workers strike on the West Coast.

We have been asked about the depreciation of the U.S. dollar and its potential impact on our purchasing power. Let me say that over the years, we have seen both strengthening and weakening of the dollar. And we have not been impacted by either.

Remember that the bulk of our imports are sourced from China, where the local currency

the U.S. dollar. Also keep in mind that almost all of our purchases are in U.S. dollars.

During the quarter, we opened 82 stores, closed eight and expanded 22. Our focus on improving grand openings has been a success. And new stores continue to perform well on all metrics.

We ended the quarter with 2,105 stores and we remain on track to meet our ambitious

growth goal of 25 percent for the year.

While our preference clearly is to grow our company by opening stores, we closed most of the

cards and gift stores we obtained from the Dollar Express acquisition because they were unprofitable and a distraction to management. Eight of the 18 stores closed in the first half of the year were

.

April, the 22nd was a momentous day for Dollar Tree. That's when we converted our legacy computer systems to the

office software for planning, purchasing and allocation. This suite of software ties in with our point-of-sales system and represents a new level of commitment for Dollar Tree in terms of inventory management.

There was no disruption associated with the conversion. And we are proud that this integration was seamless. I congratulate the Dollar Tree team on a job well done.

This investment will provide the path to improve our performance and to

our growth. While we're still in the early stages of seeing benefits from these systems investments, we see a lot of opportunity, such as improving our inventory turns and better our allocation of merchandise.

We ended the second quarter with

sales of over 600 stores and we now expect total roll out for the year to reach 750 to 800 stores.

Let me just conclude. The first half performance was better than we anticipated. And sales continue to track to our plan. I believe Dollar Tree remains well positioned to continue our growth plan. This is a simple business with basic value products that Americans respond to in all seasons and all conditions.

The flow of new goods makes me proud of this company and all we have accomplished. I'm excited about our plans for the second half of this year.

Now, I'd like for Eric to cover a few more details with you. And then, we'll open it up for questions.

Thank you, Macon. And good afternoon, everyone.

Macon has adequately covered sales for the quarter.

And for the first half, the total increase was 19.4 percent, again, representing a two-percent overall comp.

Gross margin for the quarter improved by 47 basis points, a function of four factors. Merchandise margin was maintained close to seasonal levels of 2001. Slightly higher merchandise costs were offset by improved freight costs.

Shrink results improved over last year, which accounted for the bulk of the quarter's gross margin improvement. Our Dollar Express stores, in particular, turned in much improved results. We're very pleased with our shrink performance and will endeavor to hold at

levels.

Markdowns were well controlled during the quarter, reflecting better inventory flow, good seasonal sell through and lower inventory levels.

Offsetting these improvements, occupancy costs increased as a percentage of sales due to lower comps in the second quarter, again, a function of the Easter shift.

Selling, general and administrative costs improved by 61 basis points for the quarter, compared to last year. The primary driver was store-level payroll, reflecting better inventory management, a better allocation of store payroll during the sales day and a more concerted effort to apply payroll to specific activities within the store.

We will continue to develop strategies to control costs throughout the company. But particularly, this quarter, our field managers and store personnel are to be commended for the hard work and extra effort they've displayed during this mostly non-seasonal second quarter.

Depreciation and amortization has increased primarily due to the supply chain systems implementation. In addition, the accelerated roll out of point of sale, the larger stores we are constructing and our store relocation and expansion program affected depreciation.

We expect depreciation and amortization to total approximately $19 million in the third quarter and $20 million in the fourth.

First half operating margin improved 149 basis points, ahead of the 100 basis point expectation we spoke about back in January.

On the balance sheet,

investment stand at $176 million, a 94-percent increase year over year. This cash-rich position gives us the flexibility to continue to invest in our supply chain, new store openings and distribution centers.

Merchandise inventories increased approximately 14 percent from second quarter 2001 compared to a sales increase of 19 percent. As Macon mentioned, these figures include approximately $20 million at retail of import merchandise we received early, mitigating the potential of a West Coast longshoremen strike.

Inventory turns improved. And we are enthusiastic about how clean our inventory position is. We started a program this year to better analyze and optimize inventory levels at all our stores. And we will continue to manage inventory levels throughout the year lower than sales growth.

Please read the notes at the bottom of our financial statements issued with the press release. We are now valuing our distribution center inventory using the weighted average cost method. We were using the first-in first-out method. This better matches revenues to expense. And basically, our new purchasing system allowed us to do this.

In addition, I would say that the method was - lost my train of thought.

first half 2001 results, you'll note in note D included a million dollars of goodwill amortization. That did not take place this year. And also, in note C, we did experience an $824,000 expense for valuing our interest rate swap this quarter.

For the third and fourth quarter going forward, we are planning inventory levels commensurate with an 18 to 19-percent overall sales increase. And we have the flexibility to manage to a lower or higher sales increase.

Remember that there will be six fewer selling days between Thanksgiving and Christmas this year. And those days represent significant sales to us.

We expect operating margins to improve modestly,

a two-percent comparable

sales increase.

We see opportunity for additional operating margin improvement in future year in the areas of store level expenses, leveraging corporate overhead and the benefits derived from our new supply chain system.

In closing, you should know that this management team is working very hard every day to improve the company. As Macon said, this is a very simple business. We provide value products for $1 on a cash-and-carry basis. It's as simple as that.

We have a very conservative financial bias. And the quality of our earnings is reflected in our strong cash flow and the consistency of our long-term results.

While we operate in an uncertain economic environment and an unusually volatile stock market, we're focusing on the thing we can control, running a business to produce the highest return on invested capital in retail, turning inventory into cash as quick as anyone and making prudent investments of that cash to generate increase in profit.

Our company is run by people at all levels who are committed to values like responsibility, integrity, sound judgment, honor and respect. We encourage all of you to see these principals in action by visiting our stores and, of course, spending a little money while you're there.

We'll now open the call to your questions. In the interest of time and so we can accommodate as many people as time permits, please limit your questions to no more than two.

Thank you. At this time, we are ready to begin the question-and-answer session. If you would like to ask a question, please press star, one. You will be announced prior to asking your question. Please limit yourself to two questions. If you would like to withdraw your question, press star, two. Once again, to ask a question, press star, one.

Our first question today comes from

of Deutsche Bank.

Hi, guys. Congratulations on a great and above-plan quarter. Can you hear me, by the way?

Yes.

OK. Good. Just want to make sure. I'm hoping for some clarity on the comp guidance. In the sales release, you said that you're planning inventory to reflect a one to two-percent comp in the second half. So is that consistent with this 18 to 19-percent sales growth that you just spoke about?

But more importantly, I'm wondering, how does that compare to your previous inventory plan? As I recall, at the beginning of the year, you were planning for inventories to reflect a flat cost. So to me, it seems a little bit more favorable. I want to make sure I was correct in thinking that.

And then, one last related question is Macon had mentioned that sales are consistent. Is that consistent with how they were in May and June, in other words, even above the two-percent run rate? Thanks.

Yeah. I think I hear three questions,

.

Sorry. You can - you can just answer two if you feel like it.

Thanks,

. Yes, the - I think the guidance that you heard earlier is correct and that the one to two percent is consistent with an 18 to 19-percent overall sales increase.

And yes, the earlier guidance was to flat. And we have looked at what we've done for the first half of the year, which was at two percent. And we are going to be or have adjusted our inventory plans to two percent.

I just want to remind everyone that there's a lot of flexibility in our merchandise inventory planning. And if we see sales either increasing or going below that two percent, then we will be able to change the inventory mix to allow for that and

to plan.

As far as being, you know, the word being consistent, I think what we're saying is that we feel that the sales that we're seeing now is consistent with our plan and don't make - don't give us any alarm at all in having to change the plans that are in place.

Great. Thank you.

Our next question comes from

of Merrill Lynch.

Good afternoon. Let me add my congratulations, as well.

Thanks,

.

In your roll out of your POS system, can you give us some color on just how that's going in terms of are you getting any benefits now, what they are and

you have to get the whole system in to get the full benefit?

, we're getting a lot of benefits now. First of all, it's

a lot smoother,

extremely smooth. And that's why we're a little ahead of our plan on the roll out. As Macon says, we'll end up with 750 or 800 stores by year end.

In terms of things that we're looking at right now, first of all is the ability to look at each category and identify the best sellers so that we can allocate

the best sellers, sellers chasing that product, replenish it if possible.

We're also using it to better align our order guides to the type stores that we have and put the mix together based on the needs of a mall store versus a large store or a trip center.

Now, those are a couple of things that right off the bat, that we're getting from it. There's a lot of other benefits as we go down the line, as you know.

Just to mention another one that I'm excited about is we're also doing inventories in these stores as we're rolling out the POS, which gives us the ability to do a lot less counting on our seasonal products as we go forward.

just a few SKUs of our summer seasonal product basically at the end of summer this year versus over 1,000 last year. So there's a lot of payroll upside in there too.

And then, the second part of the question when you get the whole system in, what's the benefit then?

Well, we'll continue on leveraging the set. As we - as we're getting more POS stores, then we can begin looking at the opportunity to tie the distribution of product through the DCs and into the stores,

, based on the sales of those stores.

Right now, we're still using the stores that we have that's just less than a full complement as modeling guides, in addition to the specific stores. So as we get more information, we'll just be able to make better decisions, tying our buying to the sales plan and building our

plans based on sale plan and then allocating to those sales.

All right. Thanks.

Our next question comes from

, of Frontier Capital.

Good evening, everyone.

Hey,

.

My question is on the SG&A line. The - first of all, you had, you know, great cost control. In fact, SG&A has never been down sequentially in absolute dollars before. And I've looked back, I guess, four or five years. You mentioned some of the things that resulted in that in terms of store execution. But could you give us some more detail?

And, you know, how much leverage do you think we should see from these efforts over the balance of the year? And how much would you expect the SG&A to go up in dollar terms from the second to the third quarter?

Well, the SG&A leverage, a big part of that is just a better management of our payroll in the stores and allocating of the hours in the stores based on demand and the need in the stores.

And we're doing a lot of - our operations team is doing a lot of analysis of when the business is, sales by hour, what kind of staff it takes to unload the truck, to stock the shelves, to run the front end and all of those kinds of things.

They're using best practices and measuring one store against the other and building these payroll plans that are more productive and more efficient so that they're focused on the efficiency of an employee hour versus just

.

I think there's still some upside in that. I'll let Eric see if he can quantify that for you. But we do see some opportunity to continue improvement of that.

And our new supply chain system too, to

question earlier, you know, there's merchandising opportunities. There's also workload and efficiency opportunities that are coming from this with our new back office that we put in at the same time we put in the POS system. Eric?

Yeah. Thanks for passing the buck, Bob.

You're welcome. I'm only here to serve.

Yes.

, I would say that, you know, in the third quarter, I think we can continue to see some of the payroll improvement. But as we get into the deeper part of the third quarter and into the fourth, we actually started these initiatives last year. So we'll be hitting up against that.

We had a tremendous fourth quarter, with savings in the hourly payroll. And it did start in the third quarter of last year. So I don't think you'll see - the improvement of 61 basis points is a savings of about $3 million. And that primarily is the payroll savings that we have. And I don't think you'll see that extent going forward, some of it in the third and probably really not that much more in the fourth.

And you said that you saw - your occupancy is in gross margin. You said that deleveraged a bit. Right?

Yeah.

You know, to show the 60 basis points on a negative 2.5 comp, I mean, it could - you know, in your last sales release, you said that sales are currently above plan of two percent. It could be a pretty big leverage number, couldn't it?

If we continue that trend, yeah.

Thank you. Good quarter.

Thanks.

Our next question comes from David Campbell of Davenport & Company.

Good afternoon. You mentioned your mall stores. I was wondering if you might be able to differentiate how those stores are performing and, you know, whether there's any signs of an improvement in the malls?

I wish I could tell you they were improving but they're not. They're still our lowest performing class of stores, more as a function of traffic than anything else. But Bob has put together a plan to manage the inventory and change the mix a little bit on those in an effort to turn that. But they're still the weaker of our

stores. And that remains so.

I'd just remind everyone that they represent less than 10 percent of our

square footage. So, you know, even though they're there and we are paying a lot of attention to our mall stores, they do represent a small amount of our comp base.

OK. Thank you very much.

of Buckingham Research Group. You may ask your question.

Hi. Good afternoon. Was wondering if you could quantify the difference in shrink in this quarter versus last quarter. You said that benefited your gross margin.

And then, secondly, you said that you expect the operating margins to improve modestly on a two-percent comp in the back half. I was wondering if you can quantify the operating margin improvement that you expect on that comp. Thanks.

I can give you an example of the shrink instead of getting into the details of gross margin.

For example, our Dollar Express stores, which were running shrinks of five percent last year in the first half of the year are now down to three percent, which is pretty typical of what we're able to do given a year with an acquired store. So there was a lot of improvement in that acquired store base.

In addition, all around - overall within the company, I think there's been the focus of shrink. I think the inventory management techniques we've put into place, that has controlled inventory to a lower percentage increase in sales, have helped with shrink control, as well.

guidance, you know, at two percent, it's very difficult for us to leverage both in the fixed costs that are sitting in gross margin and in SG&A. And I think I'll go back to my comment to

. I think we still see some upside in our payroll for the third quarter.

And hopefully, the $3 million savings is an indication of what we can do over two quarters. So you can extrapolate what that could be over the next quarter.

Thank you.

of

. You may ask your question.

Yes. Thanks. Macon, you mentioned that you focused on improving grand openings. Could you elaborate a little bit more on what you did?

Well, we just got the management team and the operations team to just do basic - pay attention to it,

a little bit more emotion. That's mostly internal, not necessarily advertising. But be sure you've got the right mix, stage a few internal promotions and just make a little bit more of an effort to get stores off to a good start.

We fundamentally believe that a strong grand opening will have residual benefit. And so, the management team has pulled that up to the top of the priority list.

And we are mostly just focusing on it without a whole - I mean, certainly being sure inventory is in place, a little bit more inventory, be sure it's replenished quicker. You back up inventories. If you sell out, you have a sales burst, you want to

. So it's just mostly blocking and tackling retail

. That's all.

OK. And the second question, can you tell us, what have you brought in, in Christmas merchandise and when did you bring it in? Did you bring in any this summer? I know you did last year, you had some.

Well, the Christmas type things, I mean, we had some requests to deliver early. The dock strike out there, the potential. We took a little in. But, in fact, most of it is floating or on the way now. It's not really here.

But the assortment that we have of Christmas goods, I swear, I - every year, I can't say how it'd get any better. But I swear, it's such neat things that we're able to develop and get is very exciting.

The problem is you never have enough of them. It's almost like a close out. You know, you buy a lot and it's gone in a week. So those kinds of things that are hard to describe maybe might excite me and it'd be a bore to somebody else.

But I'm just very pleased with the assortment of goods that focus on basics, certainly a replenishment attitude towards the fastest selling things and then, a real nice, exciting assortment of fresh new things that are of clear value to the - to the

, to the consumers in a department store. We sell things that department stores sell for 10 bucks. We've got it for a buck. It's the same product. It's

.

If I could pitch my question just a different way. Last year, you had Christmas in July, sort of, to clear the leftover merchandise from the Christmas before. And this year, you didn't have all that carryover. So what did you put in your stores instead?

Well, the Christmas was a (clean). The Christmas in July was just an effort to clear some inventory to get ready for the following year. And it had moderate results. And we don't - it's much lower inventory this year. So we didn't have a need to do that. So we're

. We haven't really done anything else to replace it other than have the basic - back to school was a littler earlier...

OK.

... this year. And some basic goods - certainly, our summer picnic supplies got stronger. And...

OK. Thank you very much, guys.

Yeah. Thanks.

Our next question comes from

of Wachovia Securities.

Hi. Two questions. Going back to the shrink issue a little bit, if memory serves correct in the first quarter, shrink was still running, you know, a little bit higher than you would have like it.

What I'm really trying to get at is sequentially when shrink, you know, started to improve - it sounds like here in the second quarter - so that we have a better idea of, you know, how many quarters we potentially have left until we start to anniversary that lower number.

Is it really the second quarter where you're really seeing the type of results that you would have hoped to have gotten with the shrink?

Well, in the first quarter, we don't have a lot of store shrink that's done. And really, the second quarter, we have a better feel for the results of the inventory during the first half of the year. So we're able to be more confident with our adjustments to shrink.

And the first quarter was just slightly higher of where we wanted it to be. And the second quarter is much better than our goal. So, you know, somewhere in between is really where our target is. And I think that we're definitely on line to do that.

And the real turn in Dollar Express stores, when did that really start to happen?

It was really this year...

OK.

... towards the - in the fourth quarter, where we don't really take any inventories. So we don't really know. But I think in the fourth quarter, as we were changing out merchandise and going through our strong Christmas season and then, into this year, we saw a turnaround. There's definitely been a focus from a management standpoint up in that area.

Yeah. Great. So we've got a couple of quarters still here. And then, second question is the sales mix related question.

I mean, given the fact that you guys sell both the consumable merchandise and the discretionary merchandise, it's always, kind of, interesting to know or get some color on sales mix and sales trends and what you're seeing. Are you seeing any type of material shift between those two components of your business?

You know, as we build and can offer more of the consumer products with the bigger stores, we're adding that in. Second quarter and it didn't have Easter in it this year, so it was mostly picnic supplies in summer and all the things that you sell after Easter, spring and summer goods.

So the quarter we just finished was an example of selling the consumer goods, the paper, the paper plates, the ketchup, the mustard and those kinds of things.

So as we get more larger stores, we're able to get into those businesses. The shift overall, I wouldn't say is any different than what we've said earlier.

OK. So in terms of the overall macro, you know, economic condition, that doesn't appear to be changing your mix. It's really a function of, you know, where the quarter fell and, you know, the fact that you're opening up larger stores and you're just offering more of that product.

Yeah. We're not turning this model into a gross remodel or the consumer product model. It's still a variety store. It's the basic mix that it begun. But the stores are getting larger. The reason we're making them larger is because there's more product available. So there's more of the same - there's more of the same categories.

We're growing our household cleaning business. But we're also growing our household plastics and our party and our toys. And everything else is growing too, with these larger stores. But there is - there is not a shift in changing from the variety mix.

Yeah. OK. Thanks. Nice quarter.

Thank you.

Our next question comes from

with Robert W. Baird.

Good afternoon. Have sites been identified for new stores for the rest of the year? And can you comment on real estate availability and attractiveness of terms on leases? Thank you.

Yeah. The availability is there. And we continue to look for the availability of the kind of real estate that we like, the kind that fits our demographics and our price points. So our real estate team is always out looking for negotiating the deal. The product is there. You have to really work on it. And we've been

to do that.

As far as the rest of the year, we're continuing to - we'll expand our square footage this year 25 percent, as we stated earlier. And did that answer your question?

Yes, it does. Just any change in pricing that you're seeing lately?

Well, you know, you can always pay what - you can always pay more. I can't tell you that I can see a dramatic change. There's more available. We use a lot of

used real estate, mostly

used. And there is a lot more available out there.

The people that own it are a little slower to accept that it's not worth maybe as much as they thought it was. So I can't tell you there's been a big shift downward. At the same time, there's no shift upward either.

Thank you.

But I think the pressure is more down than up, though.

Yeah. I think with this larger square footage that we're getting, we're definitely seeing that the more square feet you can bargain for, the better the price that you will get.

Thank you.

with Banc of America Securities. You may ask your question.

Thanks. Most of my questions have been answered. But, Macon, earlier in your comments, you mentioned that back-to-school receipts were flowing a little bit earlier than they were last year.

Can you - can you, kind of, give us some insight as to how much earlier and whether or not you think that would be material at all to the business? And then, I have another question.

Well, I don't know that it's material. But in planning, we've started to recognize that the stationary category is earlier. Kids seem to go to school earlier.

And as we've got a bigger footprint around the country and learned which states go to school earlier - my son goes to school - back to school in August. So you have to set this up in July. And I'm a September guy from my school days. So we were used to being a little later.

And anyway, we moved it up.

we had the room to do it. And we get that in early in preparation for our fall goods at Halloween and Christmas. So we have gotten it in earlier than last year by maybe a full 30 days. It's

in the stores now. And we've made a real effort to make better stuff and to discipline to buy.

So I believe we have the basics this year. I think we have a strong set. And I hope it'll turn - I hope it'll be material and I'll be on the first quarter telling you it was if it is.

OK. And then, Eric, a follow-up question. Just in looking at the guidance over the balance of the year, you talked about some modest operating margin improvement.

Considering the trend line improvement that you saw, sort of, in the first half, your improvement in, you know, specifically freight shrink, inventory control, some good leverage to payroll, when we look at the easiest comparison of the year coming up here in the fourth quarter and the fact that trend line now seem to be running, sort of, above that two-percent run rate, should we expect, sort of, most of the margin improvement in the back half to be skewed more toward that third quarter and then become more modest in the fourth quarter?

I think that's probably a fair assessment, based on what we've said. And, you know, the fourth quarter again, was a very good quarter for us. So it is a tougher quarter than third. So I think that's a fair assessment.

Yeah. This is going to be the toughest quarter because it's very few times it's got this many few days between Halloween and Christmas - yeah, excuse me - between Thanksgiving and Christmas. Yeah. That's a - that's a key time. It'll be tough.

OK. Thank you.

Our next question comes from

of US Bancorp.

Good afternoon, gentlemen. Let me add my congratulations on a great quarter.

Thanks,

.

Just a couple of quick questions, most of it answered. Back on the SG&A, Eric, what - if you look at your SG&A on an

basis, what percent, roughly, would you say is non-store related?

Of our SG&A?

Yeah.

Something less than seven percent...

OK.

... overhead - seven percent of sales.

And then, last question, could you just remind us, what is the company's overall average transaction? And what is the differential between the smaller and the larger formats, roughly?

Yeah. The difference has been traditionally about a $1 to $1.50. And I think we're running close to $7 average ticket.

Great. Thank you.

Thanks,

.

, of

. You may ask your question.

Thanks. Hi, guys.

Hey,

.

As I recall, you put in your POS system late last year. I'm just wondering if the buying plan of 18 to 19-percent increase for the balance of the year was reached using this - these new systems, POS and merchandising systems? And if so or if not, how will you be in a position to react to shift sales and the information flow be better in the fourth quarter?

The - I think we ended up with 130 POS stores last year, 140, in that range. I can't remember the exact number. But - so using that small a base, we did use the information for the buy for this year. It wasn't - obviously, there's only

stores. So it will only get better.

And, you know, as far as how we're using the information now for the back half, you know, there's the buying plan and then there's the allocation plan. And by having more stores on POS, we can see the sales trend by category much better. And we can make some assumptions on like stores using the POS sales that we have.

So it's - we bought the Christmas wrap based on what information we had. We will be allocating it on much better information based on store sales trend and store tracking trends. And we're going to have - we're going to have a better sell through because of where we put the products.

OK. Thank you.

Our next question comes from

, of

.

Yes. Good afternoon. In terms of the first half comps, can you just talk about what two or three of the strongest merchandise categories were and what two or three of the weakest categories were?

You know, I really can't answer that. These categories are purchased consistent with these pie charts that we put out about how much we allocate to these various categories. And they're sold pretty much like that. Easter, of course, I could tell you it was big in the first quarter and zero in the second quarter because we didn't have an Easter.

But the rest of them, we don't measure it that way by quarter. And so, we don't have that information. We are more focused on the SKU management. You know, a lot of questions here about the POS and how we think about it.

Let me just - the buyer mentality is what is selling the best and buy more of it. And what is selling the least and don't buy it at all. So the goal is to trim the inventory offering while increasing the sales.

So that's really the low-hanging fruit of the POS project. And our buyers now, are - they can't hardly move without their POS information because they want to see how it's doing.

That's the refreshing new part of this system. And that will generate better selling merchandise and as Bob has pointed out, allocating it to the stores that's selling it. That's the low-hanging fruit of this system.

It isn't magically going to run for us because the way we're managing this business is the same way we managed and thought about it when we didn't have any of these systems. It's just that with six DCs and 2,000 stores, you're too blind to do it without input.

But, Macon, with the - with the limited POS data that you have, when you look at the SKU level data in terms of sales productivity, are the poorest performing SKUs congregated in any, you know, merchandise area or are they across the store?

I'd say they're across the chain. Now, some stores don't have things other stores do because we do

assortments. But if you've got a bad product, it's bad everywhere.

OK. And then, Eric, on quick question. The SG&A last year, you had a couple of non-recurring items. When you exclude those, do you still expect to see, you know, expense leverage in Q3?

Let Eric take that one.

Hold on. Let me look back at - are you talking about Q3 or q2?

Q3 last year, you had the

cost and the reserve for the Memphis DC. It looked like that was about 50 basis points.

Yeah. Third quarter, we had a

loss adjustment that we reported from - leftover costs from the Philadelphia DC. And really, that - the improvement would be outside of those numbers.

OK. Great. Thank you.

You're welcome. Thanks.

The next question comes from Patrick McKeever, with SunTrust Robinson Humphrey.

Thanks. Hi, everyone. Eric, you gave some more detail or color on operating margin in the second half of the year. How about same-store sales? Would it be safe to say that - I mean, obviously, third quarter is looking stronger than the fourth.

But are you planning three percent in the third and one in the fourth or four and flat? Can you just give us some idea as to what the plan is by quarter for comps?

I think we're going to be planning and looking at two percent for the full half of the - of the - of the - of the year. Between quarters, I mean, we have a - you can look at it. We have an easier comparison in the third than in the fourth.

But I think overall, it's going to be - you know, we're planning for two percent, you know. And I guess that's really the only guidance that I can give you at this point.

OK. And then, September 11th, can you just remind us what - did you ever quantify the impact of September 11th to the business in the third quarter?

Well, we didn't exactly quantify it by dollars. But what we did say was that it looked like

majority of the sales that we lost from store closures during the later part of that week and in the following week. It did have an affect. But I wouldn't say that was a material affect on sales for the quarter.

OK. Thank you.

Yeah.

Our last question today comes from

, with the Federated Kaufmann Fund.

Oh, thanks. Good afternoon, guys. Just a clarification on the real estate plan. Bob, did you say that the - all of the leases for the rest of this year are signed or did you not say? And can you just...

I didn't say they were signed. They're on the books. We have leases on the books. And some of them are always moving around. So what I did say is that we - I admitted to the 25-percent square footage growth. And we'll get that.

And have you gotten as far as into next year...

Yeah. Yeah. We're always - yeah.

... in the real estate

? And should we expect to see similar growth next year?

I believe what we've said is about 20 percent - 20ish percent square footage

20 to 25.

OK. Great. Thank you.

Sir, at this time, we have no further questions.

OK. Well, thank you, everyone. And we'll be on the call in the third quarter of next year. I appreciate this afternoon's attention. Good day.