美元樹 (DLTR) 2002 Q4 法說會逐字稿

Welcome to the Dollar Tree Stores Investor Relations conference call.

Following today's presentation, we will have a formal question and answer session. Instructions on how to ask a question will be given at that time. Until that time, all lines will be in listen-only mode.

Today's conference call is being recorded at the request of Dollar Tree. If you have any objections, you may disconnect at this time.

I would now like to introduce today's moderator, Mr. Macon Brock. Mr. Brock, you may begin.

Thank you and good afternoon, everyone.

I'd like to remind everybody that the remarks we'll make about future expectations, plans, and

for company constitute forward-looking statements for the purposes of Safe Harbor provisions under the Private Securities Litigation 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 report on Form 8-K, quarterly report on Form 10-Q and annual report on Form 10-K, which are on file with the SEC. We have no obligation to update those forward-looking statements, and you should not expect us to do so.

And welcome. Thank you for joining us this afternoon. With me today is Erick Coble, our CFO. Bob Sasser, who is usually with us, is in Oklahoma with our buying team. Erick and I will answer the questions after this, and we'd cover as usual the press release, some operational details. Erick will cover some more details, and then we'll open it up for questions, which I would respectfully ask you to limit so that we could answer or give everybody a chance. Thank you.

Regarding sales, despite a challenging environment across the retail AmEricka this year, Dollar Tree set a record for sales in 2002. Record sales and earnings were highest of - among our achievements. For the year, sales were 17 percent

at 2.3 billion, operating margin improved 60 basis points, and earnings per share was $1.35 - a 24 percent increase versus last year's $1.09. And that's materially higher than our beginning of the year expectations. I am pleased with our ability to show solid improvements on both the gross margin and SG&A lines in spite of the conservative consumer spending patterns.

For the fourth quarter, sales were 827.5 million - up from 714.8 million in the third quarter last year. EPS increased to 76 cents for the quarter. Fourth quarter sales met our plan with December benefiting at November's expense due to the late arrival of Thanksgiving this past year. Our seasonal assortment took on a more basic theme this year, and we were successful in capturing business late in the season because we were more in stock on holiday essentials when the holiday surge hit.

Our Store Operations Group did another fabulous job appropriately aligning store staffing with customer traffic. Despite having already lapped the cost saving programs we put into place more than a year ago, we again reduced our payroll expenses.

We have been pleased with store appearance, and our stores are now set with our Valentine merchandise. We have begun shipping our Easter, as well. This holiday falls later this year on April the twentieth. It was actually in our stores at this time last year in January, so we're a little bit later by plan this year. We think our merchandise quality continues to improve, and we do think that this is key motivator of our customer traffic.

We also are taking steps to increase brand awareness. We are delighted to have

, a retail marketing veteran, join us as VP of Marketing. Her contributions are evident already, and she is beginning to work on programs to aid brand awareness in select markets. Our goal is to reinforce our customers that Dollar Tree is a store where everything really is a dollar.

As anticipated, we gathered a lot of information from our POS systems this year. Our buying organization already is making preparations for upcoming Christmas buys, and the information that we obtained from POS this past Christmas will provide invaluable information to us as we strive to buy better for our 2003 season. Our target is to gradually improve our inventory turns and we continue to believe that this is a very realistic goal. On DC front, we completed a construction of our Marietta, Oklahoma distribution center. Steve White and his team have done their usual fabulous job, on time and under budget delivery. This facility started receiving merchandise in December and we will begin shipping to stores in February, alleviating some of the pressure Chicago and Olive Branch, DCs, which of course saves

mileage. This DC is running well, I've already gotten early reports, the latest today, of how well it is doing so we will not be interrupting our business with this new addition. We will look forward--we look toward adding additional infrastructure to support our growth in '04 and beyond and, as you know, we like to stay ahead of our needs by about a year. We're reviewing our needs now in a couple of regions and we'll have some details later on in the year about that.

On the real estate front, remind everybody that we opened 318 stores, closed 30, and expanded another 111. So we set records for square footage and number of stores added in '02 and ended the year with 2,263 stores in 40 states. In 2002 we entered three new states; Nebraska, Maine and North--South Dakota, excuse me. We will continue our growth in '03 and expect to increase our retail square footage by approximately 22 percent this year. We can achieve that number with fewer stores than we opened in '02, a result of our store size continuing to increase. There is no question that our customers prefer a larger store format. The stores of this size will be our focus going forward. These stores give us the flexibility to better display certain merchandise, to allocate space for faster turn on goods, as well as provide the customer with a more user friendly shopping experience. We believe there's a significant opportunity to optimize the merchandise mix and sales productivity, especially our mid-size stores. Those in the four to six thousand square foot range are certainly a focus for this year.

In conclusion, let me say that '02 is a challenging year, certainly, in many respects. The economy, the calendar, the number of other factors outside our control gave us plenty of hurdles to overcome. Our strong performance is even more impressive considering these factors. We would like to be optimistic about '03, and we are, but the news as we enter this year appears challenging. The consequences of a potential war with Iraq, sluggish economic conditions and more retail failures are not helping. We made some strong strides in improving our performance in '02. We were able to improve our margins while enhancing our offerings to our customers. Our costs are well-controlled, our merchandise is fresh, and the availability of goods remains robust. Customers love our single price point, easy to shop stores and they--and that keeps us all here very motivated and really still very committed to and loving this business. I will now turn it over to Erick and let him fill you in with some details and then we'll have Q&A.

Thank you, Macon. Macon's already reviewed our sales highlights. Comps grew one percent, with the remainder of our sales growth coming from new stores opened in 2001 and 2002. Selling square footage increased 29 percent, to 13 million square feet. New stores in 2002 averaged 7,800 selling square footage compared to a base of 5,100 selling square footage last year. Newer, larger stores performed well for the year. Productivity, in terms of sales per square foot is where expect, but we certainly want to improve it. Inventory turns are approaching our standard as well, which is higher than our older, smaller stores and we want to improve that as well.

Sales increased 17.2 percent for the year and 15.8 percent for the quarter. Sales for the quarter came in right in the middle of our guidance at $827.5 million. For the year, gross margin was up 38 basis points. Shrink improved as we anniversaried high shrink from closed distribution centers and systems conversions from 2001. Distribution costs improved for the year with a full year of operations at our

distribution center and the expansion of our stocking distribution center, which happened in January 2002.

We were pleased to be able to maintain merchandise costs, including freight, even with a more domestic and consumable mix. For the quarter, gross margin was pressured by slightly higher domestic shipments in the last two weeks of December. As you may remember, we were shipping Easter merchandise at that time last year. With Easter falling later this year, the shipments of Easter merchandise began in January.

For SG&A, our expense ratio improved 26 basis points for the year and 14 basis points for the quarter. For the year, savings came primarily from labor management in stores and distribution centers and improved manager trainee programs and decreased reliance on temporary help, particularly in the DCs. For the quarter, savings came from payroll related costs like health insurance and workers compensation, which showed good cost trends during the quarter. As you know, all insurance costs continue to climb, but we've tried to institute programs to reduce the number and severity of our claims.

Costs that increased and are continuing to increase as we roll out new things has been clear technology related costs as a result of our wide area network, with is a combination of frame relay and satellite in our point of sales stores. Our wide area network is much more reliable and provides more data throughput than conventional dialup. This throughput is essential for point of sales stores and the benefit of having the information real time is immeasurable.

We also are affected by higher depreciation. Technology assets have shorter lives than our store and distribution center assets. As we roll out our supply chain system, which initially cost over $25 million, convert more existing stores to point of sale and update our back office PCs, all within a relatively short time, depreciation will remain relatively high over the next few years.

This year and 2004, we will continue converting existing stores to new systems, enhancing our supply chain systems and upgrading hardware to be positioned for future growth. We anticipate that in 2005, at the earliest, we will begin to reduce the growth of our technology assets to be more in line with overall company growth. In addition, depreciation has increased as a result of higher costs associated with building larger stores.

Operating margin showed a strong 64 basis points of improvement to 10.9 percent in 2002. Earnings per share increased 24 percent for the year from $1.09 to $1.35. We're very proud of this level of performance and one of our goals is to continue to increase earnings faster than sales over the next few years. As a reminder, accounting rules required us to amortize goodwill in 2001. Excluding the goodwill amortization recorded in 2001, earnings per share increased 23 percent for the year. For the quarter, earnings per share came in at 76 cents.

On the balance sheet, cash and short-term investments increased almost $100 million versus yearend 2001. Cash flow is strong and it is an indicator of our earnings quality.

Inventory increased 20.6 percent, slightly outpacing sales growth. The increase is due, in part, to an increase in Easter buying. Easter is three weeks later this year than in 2002, extending the selling season a bit. We also had a better in-stock position of basic, everyday merchandise in our stores. Our new supply chain systems will help us continue to improve our inventory management skills going forward.

I'm gonna give you an outlook now for some changes that we're making in reporting, as well as an outlook into what we're calling fiscal year 2003.

First, as we previously reported, we are switching to a January fiscal yearend to better match up our financial calendar with our merchandise calendar. Our new fiscal year 2003 will run from Sunday, February 2nd through Saturday, January 31, 2004. You can expect data for the fourth quarter restated on a fiscal basis to be released as soon as it is available and audited. That period ends Saturday, February 1st.

Second, we will be providing an intra-quarter sales update, which will take place approximately 30 days prior to our sales release. The purpose of this update is to give you, our investors, an additional communication during the quarter between the previous quarter's earnings release and the current quarter's sales release. The update will take the form of a pre-recorded message that is accessible by phone and available for about four days. We will file the message on a current form -- on a current report on form 8-K so it will be accessible through our website or the SEC's website. The update will give you an indication of whether we are above, below or on plan for sales, as well as any other material information we believe you should know.

Just to be clear, we cannot, have not, and will not comment on or divulge material information privately with any investor in accordance with the SEC's reg FD. We neither confirm nor deny rumors, and we will neither confirm nor deny information that is obtained from any other source other than our company spokespersons, who are Macon Brock, Bob Sasser,

,

and me.

For our new fiscal year, we are planning new store growth to continue the majority of our sales increase and require the majority of our capital expenditures, which are budgeted at 160 to $170 million, excluding the distribution center. We will strive to maintain gross margins as high as possible, but there is pressure on it as a result of increased domestic merchandise in our mix.

Operating expenses in 2003 will include some new items. I've already talked about technology-related costs and depreciation. In addition, as Macon said, we're budgeting resources to improve brand awareness, so this will be an additional expense in 2003. This test in select markets will give us information on how to proceed in the future to reach the most customers and generate the highest sales increase.

In addition, I want to remind you that we have over $113 million in a synthetic lease facility for three distribution centers. We are evaluating the new FASB release, which just recently came out, and we'll make some decisions in the coming weeks. If these distribution centers come onto the balance sheet, depreciation expense would be about five million dollars per year. The new Marietta, Oklahoma distribution center may also be added to this facility. We also anticipate that more guidance will appear in 2003 or 2004 about stock option expensing. We have chosen the disclosure option of the current rules, and detailed information is included in our most recent Form 10-K.

A number of cost-saving programs are in place in addition to workers' comp and healthcare that I discussed. We are also addressing bank-related fees such as credit card and debit card fees, store supplies, repairs and maintenance, and store utility usage. In addition, we will continue to use systems to improve labor management. We are developing new models for stores openings and leasing, and we are finding ways to reduce our local state and federal tax burdens. We want to use the money we save in these areas in order to invest in areas that will directly increase sales.

In a subdued comp environment, it will be difficult to improve operating margin. With that said, we still expect sales and earnings for the year to grow at 15 percent or more even if the economy doesn't improve at all. Our seasonality should be similar to the past fiscal year. We are focused on increased sales per square foot while reducing cost per square foot in stores. We will add the same amount of selling square footage in 2003 as we did in 2002 with larger stores and more expansions, and they will have better systems.

We still believe that even in difficult times, it's right to grow as much as we can as profitably as we can. We've seen our stores and new markets succeed and surpass our expectations where the customer is underserved. We have seen increasing acceptance of the $1 price point from customers, suppliers, and other vendors, and we must use our capital the best way we can to grab market share and enter new markets.

We've hired new management to help guide our decisions in the field. Most of the work that was produced - that produced these 2002 record results happened in the field one store at a time, one day at a time, and one customer at a time. Our store management team has responded extremely well to the pressures of a slow to recover retail environment.

The stores looked great this year, and customers responded well to new merchandise and our seasonal offerings. We can promise that we will be bigger and better in 2003.

We're now ready for questions, and in the interest of time and so that we can accommodate as many people as time permits, we would like to ask you that you limit your questions to no more than two.

Thank you. At this time, we are ready to begin the formal question-and-answer portion of the call. Should you wish to ask a question or have a comment, please press star, one. You may need to lift your handset prior to pressing star, one. To cancel your question or comment, simply press star, two.

Once again, to ask a question, that's star, one. One moment, please, as our questions register.

Our first question comes from

of CIBC.

the detail you gave us, Erick. Couple of quick questions - one, I'm a bit confused on the - how the late Easter negatively impacted the inventory growth. I thought it would have actually had slowed the rate of inventory growth.

How the late Easter affected the inventory growth?

Yes, if I understood correctly that ...

Right.

... one of the reasons for the inventories growing at a faster rate was bringing Easter in earlier, but if Easter is later than last year, I would have thought that that would have shoved off some of the growth into ...

Right.

... the first quarter of the new year - not accelerate it.

OK. Easter buying is a little bit higher because of the seasonal sell through. It was here in the DCs in the stores last year. It's on the water this year. So the pre-paid merchandise piece of inventory that's on the water is higher than last year's amount. So that's how it affects inventory.

The second question I have, you talked about a number of challenges to the operating margin in '03, but I'd have to think one of the developments that would help is slowing the rate of square footage growth from 29 percent to 22 percent. You know, if you could talk about how that impacts store business one way or the other.

Right. Really what that does is it does affect our capital expenditures, which I talked about. You know, the stores are extremely profitable and what we're really looking at is all the stores, not just the new square footage that we're growing, but all of the stores and sales being affected by the environment. So the 15 percent is really more of a reflection of that than slowing down selling square footage growth.

It's also a larger number. By the percentages.

Great.

Our next question comes from Michael

of Frontier Capital.

Hi, congratulations on a pretty good quarter in a really tough environment.

Thanks, Mike.

My first question is can you please talk about the gross margin

you saw and can you break it out into merchandise margins, freight and occupancy, and in the merchandise margin part will you talk a little bit about how much was the higher domestic mix versus other factors. Thank you.

Well, I can say that the higher domestic mix is primarily due to what was happening at the very end of the year. With Easter earlier last year we were pushing Easter out in the store and the way that our retail inventory method works, when it's pushed out to the stores is when it's recognized as margin. So that's really why the domestic mix affected us more this year. It really wasn't so much more of domestic as it was a lack of the import items being pushed out at the end of the year.

As far as the components, basically, as I talked about the components is basically how we rank the effect that each of those components has on gross margin. So, you know, instead of getting into the details of the components of margin, I think it's safe to say that--and I'm not talking in order of magnitude, but, you know, distribution costs did improve over the year, shrink improved over the year. And the occupancy cost was a little bit hurt by lower comp

this year, you know, as we couldn't leverage some of those costs. And we've talked about the level of comps we need to continue to leverage to fix costs both in SG&A and gross margin. But, you know, to comment about merchandise costs, I think we are seeing that as we open the larger stores and are selling more of the stable basic, even basic import goods, that the margin is lower in those areas.

And how much on an ongoing basis would you expect that to pressure margins?

I think as long as we're growing square footage the way that we are we're going to continue to be battling with pressure on margins.

Due to the larger store.

Right.

The larger store has a larger mix of the domestic goods, Mike, and that is to continue. We've planned our budgets around declining merchandise margins. Of course, we don't disclose merchandise margin, but it is pressure on that.

In the past, I believe you've said that it's about 10 basis points of pressure that you're dealing with. Has that changed or would you expect that to be the same going forward?

Yes. I really can't address that right now. The difference between a domestic margin and an import margin is pretty substantial. We've talked about, in terms of what the retail environment or the selling environment is - what that effect could have on some of the fixed costs. We're definitely concentrated on - if merchandise margin - if merchandise costs are going down, what are the things that we have to do to improve occupancy costs, to improve distribution costs, to hold down shrink and control markdowns.

With the systems that we have, I can assure you that we're going to do the best we can at managing the inventory mix so that, for example, markdowns slow down. And that we get the merchandise that's going to turn - and inventory turns are going to improve. Inventory turns themselves, because of the lower investment in inventory will help margins indirectly.

Our next question comes from Patrick McKeever of Suntrust Robinson Humphrey.

Question on product cost deflation. And that is are you seeing any of that, particularly as it relates to your imported merchandise from the Far East? And if so, did you see it in any different variation throughout the year? In other words, did you see it in the fourth quarter? Did you see it in the second, first, I don't know.

Well, there's a normal lead time on that and the orders are set as far as foreign purchasing well in advance. But we have not seen the deflation on that. We've been able to manage that quite well throughout the year. Yes. The people are not back from Hong Kong on this trip, but early reports are that margin was just fine. So we're not seeing that move. We are in the matter of choosing the margins, so it's not like we're held to a product and the product went out.

We're much in control of what we make and build, so we are in control of the margin that we're able to target. So that's the way you manage the margin. Remember the story of - that we've told to the Street. We can change the actual size of the product, making it larger. And in many of the cases we have done that. And in this deflationary environment, we've been able to improve the products and we are continuing to do that and we expect to continue to do it because it's still favorably - the buying power that we have and the world economy being off gives us great buying power. And so, we're continuing to improve that. So it's not a factor.

And then, Erick, I know you don't want to talk too much about the details behind - details of gross margin during the fourth quarter, but you mentioned freight and my question is - was the higher freight cost as a percent of sales, was that largely a function of higher stem miles in front of this new distribution center that's going to open in Marietta, Oklahoma or are there other factors as well?

about freight? I don't recall that I said anything specifically about freight in my comments.

But in the press release it mentions freight.

OK. I understand.

Behind the declining gross margin.

OK. Hold on just a second. Let me gather up what I need to look at. OK. We talked about higher - but, OK. Let me clear this up. It's higher merchandise which includes freight. It's not necessary freight in a vacuum.

OK.

Yes. We talked about merchandise cost including freight because it follows the inventory along, you know, through the DC and into the store.

OK. I understand that.

You're gonna have to look at that as one component.

OK. Fair enough. Thanks.

Our next question comes from David Cumberland of Robert Baird.

One, does shrink have an opportunity to improve materially in 2003? And second, what is the planned number of store expansions this year?

Shrink does not have a material opportunity to improve next year. We're finding that as we move into certain areas of the country and it's a large store and its more urban mix has a slightly higher intrinsic shrink number than stores in the suburbs or in the rural areas. And I think most retailers see that.

So, shrink is a very manageable number which has stayed under two percent for a number of years, and it fluctuates here and there, mostly because of acquisitions, rather than anything that we do internally. But, intrinsically, there's gonna be pressure to keep shrink where it is because of where the large stores are going. Also, a consumable increase does tend to lead to slightly higher shrink.

And on the number of expansions?

I think it's gonna be more than what we announced this year. I think we had 111 this year, and we're targeting more than that -- not a material number more, but it is gonna be a higher number of

expansion.

Thank you.

Our next question comes from Wayne Hood of Prudential.

Yeah, Erick, I was just curious about the brand building that you plan to undertake. Could you talk a little bit about the dollars you plan to spend there? And are you finding the model changing so much that you have to -- you know, that you feel like you're gonna have to go to print or broadcast to send this message about value, because, you know, I would think that the value proposition was already there? And is this gonna occur in the smaller stores or larger stores in terms of what's going on? And then, if you could just provide some color, I guess, as you look at the quarters over the coming year, is there anything that we should be thinking about that will impact the quarterlies that you might be doing on this brand advertising, or anything else that might swing the margin numbers -- or growth-rated earnings?

As far as the brand awareness, we're going to pilot some marketing, both internal and some broadcast sometime during the year in select markets. But, we're not forecasting any movement. It's just a test, and so we really don't know what effect it will have. The idea is to try to take advantage of some of our key markets where we have a lot of stores and try to distinguish ourselves as the quality player that we are.

So, we're gonna test some of that for one of the things that

is bringing to us, as we do a lot of internal advertising and focus on brand products, as well, not just imported products -- featuring as many brand connections as we can within the company, and then an effort aimed at our associates at branding their concept of who we are and identifying ourselves as a stronger, bigger company. So, we've got an internal campaign going on, as well. So, this is just merely blocking and tackling and nothing significant at this time, and really nothing to report on quarters or movement there. We're not forecasting anything for it. We're being very conservative in our plans, and in our forecast around them.

Our next question comes from

of Wasatch Advisors.

Hi. Could you give me some more insight into the synthetic lease? I think you mentioned there was a $5 million incremental addition

to that. I'm assuming there's an offset on that. Could you give us the net effect

?

Yes, there is - yes, there is no offset. It is a financing vehicle, and under the current rules, it's treated as an off-balance sheet financing. The financing would stay in place - at least right now we think the financing would stay in place so depreciation would be an added cost, but the interest cost would not go away. Basically, Jeff, it's a balloon payment type of financing. You pay interest only that's classified as rent under the synthetic least facility, and then you pay a balloon at the end of the term.

So is the $5 million a one-time number then

?

No, that's an ongoing

...

That's an ongoing expense.

... estimate of depreciation if the assets come on the books. Basically the asset and the note would come on the books, the asset would depreciate, and the note would be paid off with interest as a balloon payment.

OK. Now is that - sorry, I may not be following this all the way, but is the $5 million a cash - ...

No.

... incremental cash expense? So the cash flow number ...

No.

... doesn't change.

No, it does not. It's depreciation.

So it's just an added depreciation number.

Yes, sir.

OK. And would your earnings estimates - would they include that five million as an expense, or are they excluded from that estimate on your forward-looking statements?

We haven't put anything out, but my belief is that, you know, the analysts do not have that in their current estimate.

OK, but it is in - you - I think you mentioned you expect earnings to grow 15 percent next year. Would that include or exclude that?

It excludes that.

OK.

Our next question comes from

of Janus Capital.

Thank you. Two questions - first, would you

maybe follow with the previous question - will you manage the margin of imports and specialty items to offset or more than offset the pressure of the larger stores and the more basic merchandise?

Well, we can do it. We haven't made plans to do it in the past because one of the ways we are able to improve our customers' love of us is to give them better deals year over year, but we have the power to do it if were to lower the value of the goods. But we don't have a plan to do it. So what we're able to do is offset changes in product, commodity prices - things like that with a change in the product requirements - the size, so forth - the packaging.

Right.

But the pressure comes,

, from the balance of mix if you - if you buy more domestically produced goods and faster turning consumable goods for example which is on the grow with larger stores that's where the pressure comes in. It's just the overall mix. The import margins are set. We set them artificially and then try to achieve them. The domestic margins are set, as well.

Right.

Little bit harder to always maintain that one.

OK, thanks. So no plan to manage them in such a fashion right now.

Well, we - it's always a balancing act, you know. It's fine-tuning. You're trying to buy the right merchandise and come in on your margin target. That's sort of the way we look at it in a macro sense.

Yes. Yes, OK. And Erick, can you provide any breakdown for the cap ex for this year?

Traditionally, about 80 percent of our capital expenditures is on stores and we'll have more detail in the 10-K about our investment in our stores and everything else. But basically, I mean, that is the bulk of it. we do have a number, a large number of stores that we're expecting to convert to point-of-sale and roll out the new back office, so that is a significant number. And then we have improvements to our existing DCs that are also in there.

Thank you very much.

Sure.

Our next question comes from Michael Baker of Deutsche Banc.

Hi, thanks. Can you hear me OK?

Sure.

Good. I just also wanted to gain a little bit more clarity on the outlook for 2003. You commented that you did hope to grow EPS faster than sales, but then you may not be able to improve the operating margins in the subdued comp environment which I think is what everybody's looking for. So are there items

below the operating margin that'll help the EPS grow faster than sales or can we reasonably forecast maybe a flat operating margin on something like flat comps?

I mean, you know, I think that below the EBIT line there, of course, is our cash balance that we'll continue to carry and as that increases and--I don't know what interest rates are going to do, I wish they would, but, you know, that could definitely help us.

And then share buy backs, is that...

No, I think it's going to be tough, Michael, but that's what our goal is and we're going to do the best we can, just as we did this year, to improve operating margins. But it's--you know, the forecast has to be conservative right now and it's our goal to do it, but, you know, we're going to do the best we possibly can.

OK. And then just a quick follow-up. So, again related to that sort of outlook of plus 15 on the sales and earnings and trying to grow the earnings a little bit faster, all those other items you mentioned in terms of impact to gross margin and SG&A are included in that outlook? I guess with the exception of

Yes. Yes.

OK, great. Thank you.

Thank you.

Our next question comes from

of

.

Can't hear it.

Can you hear me now?

Yes, got you now.

I'm sorry. Erick, back on October 24th, when you talked about your outlook for the fourth quarter in your third quarter conference call you were forecasting flat comps and total sales up 15 to 16 percent, which is exactly what you did. But you said at that time that you thought the operating margin would be about the same as last year, despite the flat comps and it came in about 40 basis points lower.

Yes.

What changed in the last five weeks of the year in your buying decisions or did you misestimate shipments in those last two weeks of the year to cause the operating margin to come in so much less than you thought it would?

I think--I think it was all in gross margin and, you know, to get the--to get the sales, a lot of our sales increased and the improvement really came late in the quarter. I mean, customers were out very late. And there is no question that during the quarter our domestic merchandise continued to turn just as well as it ever has and there was more that was coming out of the system domestically and we replenished it. I mean, we bought it, we replenished it, we kept inventories high, and, in my opinion, that's what really grows margin. It wasn't anything we could forecast, what the sales patterns would be, and after Christmas, we did have an After Christmas sale. It was a big success, but a lot of the things that we marked down were the seasonal items and import items. So it's a combination of both of those things that I think contributed to the shortfall in gross margin.

So it was really a different mix there towards the end that was necessary to get the sales forecast, but it ended up being a lower margin mix than you expected.

That - I think that's correct. OK.

And my other question has to do with the comment that you made, very quickly, about seasonality of 2003 being similar to 2002. And I just wanted to make sure you meant that because, as I recall, in the first two quarters of 2002, we had a big calendar shift that caused your same store sales to be higher in Q1 and ...

Right.

... be down in Q2 and your earnings growth was much higher in Q1 than in Q2. Do you expect that to be the case this year as well?

Well, I meant - and I'm sorry I didn't clarify. From fiscal quarter to fiscal quarter. We've restated our fiscal quarters so the Easter shift is all within the first quarter.

OK.

So we've restated the first three of those quarters and the fourth one will be coming out. And when you see the restated quarters, we expect the seasonality to be similar.

OK. Thank you very much.

Yes. Thanks,

.

Our next question comes from David Campbell of Davenport.

Good morning, Macon, and congratulations on a solid quarter in a difficult environment.

Thank you.

Or good afternoon, I mean.

You were very successful last year in adjusting your assortments for the holiday to focus on the basic merchandise.

Yes.

How have you changed those assortments for the upcoming holiday periods. And then, I was wondering if Erick could comment on what the plan for comps is this year as well as what the economics of the larger stores are that you're opening versus the average. Thank you.

Well, the focus on all the seasons that we like to present - even Valentines, Easter as well as the fall seasons - particularly Christmas - has been a renewed emphasis on faster turning SKUs. With our SKU capability now, we've accumulated wonderful information this year on our Christmas, for example and what's the best sellers. We'd already focused, with what little information we had the year before, and we took advantage of it this past year with great success.

So I expect we plan to plan better and buy the faster turning SKUs, eliminating slower turning SKUs. That's simply it in a nutshell and we had them longer later. And in this particular Christmas, since it was such an unusually late Christmas, the sales were slow until the last minute in December - while the last week, so we really got a surge. We found ourselves in stock with things that people want last minute. And we can anticipate that. We'll follow that through each of the seasons this year again and I expect with greater satisfaction to the consumer. And, of course, a better turn with us and maintaining our margin with that same mix. So, I hope that explains that now.

The second question was ...

Comps.

The comps. I'll let you take that.

OK. Kind of in our forecast, we're looking at the comps to be similar to what we experienced this past year. So I would say in the one percent range. So pretty modest, conservative is baked in there. And as far as our larger stores, you know, the larger stores are showing some very good patterns in sales. They were our best performers overall as the year went along. And, you know, we'll have a little bit more information on their store economics to put in our - in our reports in the 10K. But we're pretty happy with them. I think we're targeting about $140 per square foot or so in our models. They are producing the cash contribution that we want them to have. They're doing very well. They cost a little bit more to build, but we're very happy with the return on investment that they're showing, as well. Again, it's not up to speed to what we used to open, but again, they're still at the very high end of retail does in general.

And will the timing of these new stores be spread out fairly evenly during the year? Or, do you expect it to be more backend-loaded again?

I think most of our stores are gonna be open in the first three quarters of the new fiscal year. And again, they'll follow the same patterns, basically, that you saw last year.

Thank you.

Our next question comes from

of

Equity.

Hi. Thanks so much.

The question for Erick on the balance sheet -- just looking at how you -- it looks like you changed the classification of accounts payable for last year. It was 68 million in your 10-K and it's showing 58 million on your release, and I'm wondering why the change. And it looks like you threw that 10 million into other current liabilities. Can you tell me why you did that -- what that is? And then if you could break out this year's current liabilities within there -- that 94 million. Thank you.

Right. Basically, what we did -- there were two major sources of our reclassifications,

. One was we moved a -- we looked at a certain liability that was classified as long-term, and in the next operating cycle we expect that that potentially could turn around and require assets to satisfy. We moved that up this year.

Well, to be comparable, we moved the same amount -- that same item -- up last year. So, that's why you saw from long-term liabilities going up to other current liabilities.

From the accounts payable line what we did was this year we decided to show non-trade accounts payable as other current liability, or, as we call them more in detail, accrued liabilities. So, we showed that properly or differently this year. We took last year's number, took it out of accounts payable, and then threw it back down into other liability.

The main part of other current liabilities is our accrued expenses, which is accrued payroll, accrued operating expenses. They're things that have been incurred, but just have not yet been paid.

And the change this year -- the up 30 million in other current liabilities -- are these increases year-over-year, or are they expenses that you just didn't run through the income statement.

They're expenses that we -- if you look at last year, and pull out last year's 10-K, you'll see a similar move in last year's numbers. Basically, it's taking accrued expenses out of the accounts payable line, so accounts payable shows more of a traditional trade amount.

OK. I'll have a look at that. Thank you.

Our next question comes from John Rouleau of Wachovia.

Hi, guys.

I'm just wondering if you can comment on the most recent K-Mart closings -- the number -- maybe, talk about the overlap between your stores and those stores. And maybe now that you've went through the first round of closings, what you've experienced and learned from those.

Yes. Well, of the last round, we were affected, and a good deal more than this one. I think the number was 40 or so stores. And when we calculated those all in, they were only very slightly below what the average was. So, you would expect that -- I was surprised it wasn't worse, frankly. So, I don't think that the Kmart closures on this group was as bad. I mean they must have already been weak centers - I mean Kmart chose to close them.

Right.

So, of the next round, we have identified 28, I believe. And we expect, looking through it, to have the same result. Now, this is not a positive, but it's not as bad of a negative because you'd have to lump in with it - I think part of our lackluster comps comes from not just Kmart's closings and the like in shopping centers, but

, Ames, a weaker department store chain, malls, closures within those. There's a lot of closing retail around us, and that does affect the traffic. So, Kmart is just one more.

So, it's really not that much worse than we expected, quite frankly. I was surprised it wasn't any worse. It was only about a point or something below the average.

OK. And then second question is you know you talked a lot about the merchandise mix changing towards, you know, slightly heavy domestic mix due to the larger stores. And obviously, that carries a lower gross margin rate, those products. You know, but this - but those products should turn faster. At what - my question really regards is once you get those products turning, you know, a little bit faster, you get to the gross margin dollars and equal gross margin - gross margin dollar amount, how close are you to turning that product quicker so that in gross margin dollar terms maybe you're equal to what you were generating before even though the rate itself is going to be lower?

Well, wish I knew that. It's a - that's a hard one. We realize and embrace the faster turning products. And we have a philosophy of controlling it, frankly. We only allocate - it ends up being in space allocations. So, I really don't have the answer to how close we are crossing the line with the gross margin numbers crossing because I just

.

Well, let me put it this way. I mean you're most productive in your larger stores that you've had open for some time in really good areas that are performing, you know, at the higher end of your expectations. How much difference is there between those stores and maybe some of the larger stores that are under-performing or for - still have opportunity to improve on the - on the productivity side? Is there a wide range between those two or are they pretty close?

That's a real good question. I'll take the example of our stores in the Northwest which are doing just wonderfully up there. Their sales are probably about 10 percent higher than the rest of our new stores. Their gross margins are lower. They're turning their inventory. You know, we just finished our analytical review of the - of the year, and I'm not sure where those stores stand, but my guess is they're closer to what we're going to hope to see as we increase inventory turns and sales per square foot. But I don't have the exact numbers now. But they are very profitable.

But you have to have a larger store as well.

Right.

Part of the ability to do that is as you have a selling square foot to allocate space to those. So as we space allocate by category to control our mix to control our margin, we're giving up space. The bigger store will provide the both; the smaller store doesn't.

Right.

No, understandable, but I'm just trying to get at the fact that some of your more mature larger stores are actually performing, you know, where you need them to be versus none of the store - none of the larger stores where you need them to be.

Right. I don't think we're there yet. Because some of our newer--again, our newer stores in the Northwest are performing extremely well and we'd love all our large stores to perform that way. They're bringing in almost the same contribution margin on the lower gross margins because of that turn. And that's where I think we're going to end up being.

That's what we're striving for.

Great. Thank you.

Thank you.

Our next question comes from John Zolidis of Buckingham Research.

Hi. I see that you didn't buy back any stock in the fourth quarter and was wondering when you intend to start repurchasing shares.

Could you speak up a little?

Hi, can you hear me?

Yes, I can hear you now.

I'm sorry about that. I'm curious when you might become more aggressive repurchasing stock as it looks like you didn't repurchase anything during the fourth quarter. Is that correct?

Well, we were pretty blacked out during the fourth quarter so there wasn't much of a shot. We didn't

authorize

so we did not act.

OK. And so basically when the blackout period ends then you'll consider becoming more aggressive on that?

Well, it'll certainly be legally available to us.

And just on the larger stores, I know you said it costs more to build, but do you mean more to build on a per square foot basis? And then when you operate those stores, are the occupancy costs on a per square foot basis higher or about the same as the lower stores.

They do not cost more from a square foot basis from smaller stores. I mean, we're almost exclusively building stores now that are greater than ten thousand square foot so there really isn't a dichotomy to talk about unless you're looking at previous years. But, no, I mean, we've seen the real estate costs be the same per square foot. I can tell you from a rent perspective that although we are controlling it very well on a per square foot basis and it is better than what we have in the smaller store, our sales per square foot does tend to drop faster. So, you know, your percentage is a little bit higher, but the cost itself is not higher at all. As a matter of fact it's lower per square foot.

OK. And you would expect it to be lower per square foot.

Yes, and...

And I understand you saying rent, but what about other occupancy costs?

wrap that in...

Yes.

We call it landlord costs.

Right.

OK. And then I would also think that your payroll costs and distribution costs per store are lower per square foot--sorry, per square foot with the bigger stores. Is that correct?

I mean, I think that...

... yes, I think you could say that, yes.

You could say that. I mean, our hourly payroll as a percent is pretty close to the same and then we leverage a management team that's covering a larger store.

But that's not enough to offset the lower sales per square foot from the wider aisles and the higher mix of consumables?

I think that we see a lower gross margin in the large store. The cash contribution actually in the 2001 class was higher than the Company average so we are getting there. And it's something that we have been working on ever since we got the large store. And, you know,

and his team are working on productivity, not just sales increase, but labor productivity, what we're doing to move inventory flow from the backroom to the front and really make that a more efficient box. And I'm not going to say we don't have a ways to go, we do, but inventory turns is going to help, as well as just sales and costs.

OK, so let me make sure I understand and then I'll hop off. You say that cash contribution margin at the higher store--at the bigger stores is actually higher than the smaller stores?

It's higher than our average--our 2001 class was better, from a cash contribution standpoint than the rest of the company.

2001 class. So ...

Which is primarily larger stores.

Just primarily larger. So you would expect that to benefit the operating margin.

Yes.

OK.

Yes.

All right.

Their inventory turns are higher and their cash contribution was higher as well.

OK. Thanks a lot.

Thank you.

Our next question comes from

of CRM.

Hi, guys. Can you hear me?

Yes.

We can hear you,

.

I'd like to - sort of a deeper philosophical question and I've been needling you on this for probably about eight years now. But you would appear to be on the verge of a pretty significant wave of free cash flow. And even with growing the store base and square footage of 15, 20 percent a year, you can't put it all to work. And what's going to be the philosophy with what you're going to do with the excess cash, whether share buybacks, dividends. I mean, you know, you much have some game plan, at this point, with how you're going to get that back to shareholders.

Well, of course, the stock buyback is the first legal step we wanted to take to be able to do that. The board acted late last year and we're - we have that in place, in the coming year, that we can exercise. Of course, there's the dividend proposal by Mr. Bush. If dividends become tax free. I don't know, we'll have to take that back to the board and see what they say.

I mean, what's your view on, you know, to be conservative, how much cash you want to keep on the balance sheet. And you're at a couple hundred million now and ...

Well, we do have to build infrastructure still, Jim, because with the growth of this business and sales go up, you have to move a lot of boxes. And so distribution centers, as I said in my remarks, that we've got to look to distribution centers - to financing them. Obviously, the SEC doesn't like our current method of financing them, although very advantageous to a business to do the synthetic lease off balance sheet thing. That will come on balance sheet. So we've got to maintain debt ratios and invest in distribution centers and systems.

And when you - when you project it out at a rate we're able grow or - you need cash to be able to do that. And

like leverage and I kind of like having cash. It gives you - you know, we're looking down the barrel of a gun over there in the Middle East and I don't like debt covenants. I like being in a position to tuck in and do what you've got to do because I don't know what's going to happen. I don't think anybody does. So cash is a good place to be and it's a great problem. So ...

Well, it's - no, I mean it's - well, it is, but it's not because, as an equity holder, you're ultimately diluting my returns. And given your business model, I don't see why ...

Well, the quickest thing we could do - that if we could help your earnings would be to buy stock back. Put that in place and that's the first, I think, and most obvious move with it and it's in place.

Erick, to what level of the share prices that - are created to buy back stock?

Hey, Jim, I think you know the answer to that.

I don't, actually, to be honest with you.

Yes. I mean, you know ...

We're not going to be able to tell you.

Oh, well, OK. I guess I'll figure it out myself. OK. Thanks, guys.

All right, Jim.

Thanks, Jim.

Our next question comes from

of Dollar Tree Store.

Well, that's actually of

, but that's OK. Do you have any openings?

Hey, Mark.

It's been a tough year. Listen, one question on - you had mentioned that you achieved leverage on insurance and workers compensation costs, while a lot of other companies have not been so successful. I was just wondering, you know, how you're able to do this and how sustainable is this trend? In other words, you know, can you achieve leverage again this year?

Well, you know, our goal is to continue to work on safety in the stores, the welfare of our employees, and workers' comp is a big piece of that. You know, we have -- our experience ratios are getting better. That's offset a little bit by some of the higher risk states or higher-cost workers' comp states that we're going into as we grow. But, we definitely want programs in place to prevent those types of things.

So, even though the underlying insurance-related costs in healthcare and workers' comp -- and medical costs are going up -- we are primarily self-insured for both health and workers' comp. So, we can put in mechanisms internally to really hold down the number of claims there.

Our health plan is very generous to our employees because we have one of the highest company-paid ratios in retail. And we want to continue to optimize that ratio over time so that both the company and employees continue to benefit from that.

At the same time, we have cut out some areas of healthcare where our employees just weren't using the benefits and the benefits were costing both employees and the companies more than what they were getting out of it. So, there were some programs that we actually cut. If those programs need to come back we'll put them back, but right now it is saving us some dollars.

Those are really the trends we're talking about; it's claims, severity, making sure that employees get back to work, and really trying to offset the high medical and insurance costs that underlie the claims.

Is your best guess that -- I mean, even with a one percent comp, can you achieve some leverage in this area this year?

I think workers' comp we can. I think health insurance is gonna be tough, but we're gonna be working towards it. But, that's -- I think in workers' comp, yes, we can.

And just, you know, for my own benefit, could you just briefly run through the, you know, the calendar of events that we're gonna see here over the next few months? You had mentioned fiscal yearend -- that's January fiscal yearend -- results after the audit's complete.

Right.

And that, I guess, would be what -- around the spring?

I would say that that's -- yes, no later than when we would file the 10-K. Our 10-K will include not only the two calendar years, it will also show comparative one month comparisons for the short year that we're doing right now, which will end on February 1st. So, you'll see a January 1 to February 1 income statement ...

OK.

... and a comparable period for last year in the 10-K.

OK.

We will have a mid-quarter update on April the 7th.

Right.

And then, we will have earnings approximately -- having sales, yes -- four weeks later in May, followed by

.

I'm sorry. You cut out there for a second. Was that sales and earnings combined?

No, sales will be in early May, and then earnings in late May.

OK.

The third week or so.

OK. Great.

Yup.

That was it. Good luck. Thanks a lot.

Thank you.

At this time I would now like to turn the meeting back over to Mr. Brock for closing remarks.

OK. Well, thank you all for being here this afternoon. We're optimistic this year. We're gonna do it again, and I appreciate you staying tuned. And we'll be back on in what month?

In May.

In May. Thank you. Good day.

This concludes today's conference call. Have a good day.