美元樹 (DLTR) 2003 Q2 法說會逐字稿

Good afternoon, and welcome to the Dollar Tree Stores second fiscal quarter 2003 earnings release conference call.

All lines will be in listen-only mode until the formal question and answer session.

If you wish to ask a question at that time, simply press "*1".

At the request of Dollar Tree Stores, today's conference is being recorded.

I would like to introduce Mr. Macon Brock, CEO for Dollar Tree Stores.

Mr. Brock, you may begin.

Great.

Thank you, and welcome, everyone.

Thanks for joining us this afternoon.

We've got a lot to cover so I have Bob Sasser, our president, COO and Eric Coble, CFO.

Eric will cover the financial results and the press release, Bob is going to cover operations and I'll wrap it up and open it up for questions.

As always, we'd like to limit it to two.

Eric, take it away.

Thank you.

Before we begin, we'd like to remind everyone that various remarks that we will make about future expectations, and plans for the company constitute forward-looking statements for the purposes of 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 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 our forward-looking statements, and you should not expect us to do so.

Welcome, everyone.

Sales for the quarter were $626 million, representing a 22% increase over last year on a 5.1% same-store sales increase.

Excluding the first quarter of last year, which included Easter, this quarter's 5.1% comparative store sales increase reflects our best comp performance in three years.

Recent economic and retail sales news has been encouraging, and we have the inventory systems in place to take advantage of above planned sales.

Sales in larger, newer stores, particularly those in the 10 to 15,000 square foot range, were very strong.

We are pleased with our relocation and expansion program, which revitalizes and reinvigorates our oldest and smallest stores, and sales increases in those stores are also exceeding plans.

Earnings per share was 25 cents, up 19%, and I'm going to discuss the material changes in gross margin and selling, general and administrative expenses.

Gross margin was 35.3% compared to 35.7% last year, second quarter.

The majority of the difference can be explained by three factors.

A slightly higher percentage of sales in basic merchandise, second, a current year's cost of sales includes approximately $1 million of additional non-cash expense from the adoption of FIN 46, whereby we consolidated our distribution center's synthetic leases.

There's another $1 million of additional expense associated with FIN 46 that's booked in interest, and three, the inclusion of Greenbacks' lower margin sales in our numbers.

Offsetting these factors are 5.1 comps for the quarter, allowed us to leverage the fixed components of cost of sales, namely, occupancy costs and fixed costs of distribution, and that was with one fewer sales day in this year's quarter.

Operate expenses were 27.7% of sales, equal to the same quarter last year.

Generally, savings and payroll costs and the leverage in corporate and store operating costs due to increased sales were offset by increased depreciation from our store upgrades and technology improvements at the stores.

Technology assets have short depreciable lives, which means we are depreciating these assets very quickly, although we intend to use these assets longer.

We continue to believe that these non-cash expenses will plateau in 2005 or 2006.

Importantly, these systems are helping us improve our productivity and efficiency, and Bob Sasser will have more to say about these technologies in a few minutes.

Additionally, we incurred costs associated with the Greenbacks merger, namely, transition and integration costs.

As we expected, Greenbacks did not have meaningful income for the quarter, and we still expect it to be accretive 2 to 3 cents in the second half of the year.

Pre-tax income is up $6.8 million, which we think is quite impressive considering the increase was affected by a total of about $2 million from the effect of putting our synthetic leases on our books in January under FIN 46 and Greenbacks merger expenses.

Recall that our adoption of FIN 46 results only in non-cash accounting entries.

Our cash flow remains the same.

Overall, cash flow from operations improved nearly $25 million compared to last year's second quarter, and we're very pleased with our results.

We continue to have a strong balance sheet.

Cash and investments stand at $100 million, which is above plan and down only $54 million versus last year, despite paying $100 million for Greenbacks.

Inventory levels at $513 million also are better than planned.

You will see a new caption on our condensed balance sheet called "intangibles."

We have grouped goodwill with our other intangibles and included in this caption is goodwill related to our 1996 acquisition of Dollar Bills of $36.8 million and Greenbacks of $80.6 million.

For third quarter, our sales guidance is 665 to $680 million with the midpoint of the range equating to slightly positive same-store sales.

Thus far, in spite of the blackouts in the northeast mid month, August sales are tracking on plan.

As we indicated in our last conference call, we expect gross margin in third quarter to be lower than last year's 36.8%, and we expect fourth quarter gross margin to be higher than last year's 36.1%.

The comparisons to last year are affected by many of the same items that affected our second quarter, namely, synthetic lease accounting and the inclusion of Greenbacks.

We expect a slight improvement in SG&A percentage for the second half of the year as compared to last year, primarily in the fourth quarter.

Therefore, we believe we are ahead of plan toward our full-year goal of increasing sales and earnings by at least 15%, and we are now comfortable raising sales and earnings guidance to an increase of at least 19% over fiscal 2002 sales of $2.36 billion and earnings of $1.27.

I now turn the call over to Bob Sasser, our President and Chief Operating Officer.

Thanks, Eric.

As Eric mentioned, sales for the quarter were above expectations, and we are just really pleased with the results because we're well positioned as we go into our second half of the year.

We're seeing our customer confidence continue to improve, driving increases in foot traffic in our stores which accounted for the majority of our comp sales improvement.

Weather during the quarter was generally wet, but that didn't keep our customers away.

As a matter of fact, we were either smart or lucky or both, but our buyer just this year added a new umbrella program this spring, and we sold hundreds of thousands of umbrellas.

The value is so good, you might even buy one if it wasn't raining.

When the customers were out shopping, we were ready for them with improved in-stocks on basic items and better and more powerful merchandise offerings of branded goods and high value closeouts.

Our best performing departments for the quarter were Candy, Snacks and Beverage, followed by Hardware, which was mostly driven by later sales of Lawn and Garden, followed by Party, and Housewares.

Our branded basics continue to shout value, especially in our HPC and Household Supplies departments with brands like White Rain and VO5 and Colgate and Dial and Crest and Bounty and Sparkle and more.

High value close-outs have been plentiful, and there's been more available than we can buy.

Our Seasonal business continues to shine.

The addition of helium balloons and continued improvements in our party, greeting cards and photo frame business have driven increases around the seasons.

As many of you know, we've conducted a brand marketing test this Spring, and our goal was to determine if advertising can drive incremental traffic and what form of advertising works best.

We completed the test during the second quarter, and we are very pleased with our success.

We're now evaluating what makes the most sense going forward.

We believe some form of advertising will be a part of our future because there is a lot of confusion in our sector.

We view the differentiation and branding of Dollar Tree as a long-term goal and an opportunity.

We are, however, very sensitive to the costs and the return on our advertising dollars, and we intend to reduce our SG&A percent to sales while spending on advertising as we go forward.

Though we have no co-op allowances, so we're very keen to spend wisely here.

As reported during the quarter, we opened 61 stores, closed 12, expanded 35, and on June 29th, we added 100 greenback (ph) stores to our new store openings.

We ended the quarter with a tolal of 2468 stores in 48 states and we are on track to meet our growth goals for the year.

As a reminder, we are going to finish the year with approximately 28% square footage growth.

We continue to install POS scanning in all of our new stores as they open while refitting existing stores based on size and geography.

Today we've got 1,543 POS stores, and the data that we're gathering is invaluable.

I would remind you that 1543 stores on POS today compares to one-tenth that number at year-end 2001.

Our sales history continues to grow, and we're putting the data to use in many ways.

We're making better buys, more of the merchandise our customers want both seasonally and every day, which was evident in our second quarter sales.

We're putting more of the right quantities in the right D.C.'s.

Along with POS, we continue to roll out our wide area network, which allows us to improve our back office efficiencies also.

Our new labor scheduling software will be piloted beginning this month, which will use POS sales data by store to help in determining the most efficient staffing needs and use of payroll hours.

We continue to roll out our new store level inventory control, which uses a handheld computing device to make the store ordering process more efficient.

It gives the store immediate access to all of the sales and inventory information that's required to write a better reorder.

Our analysis shows that the device can cut the store ordering process from eight hours a week to four hours a week, which will allow our associates to spend more time stocking shelves, building displays and helping customers.

We've also been working on a project to shorten our order cycle, that is the time between store placement of an order and the day it receives delivery of the goods.

Turnaround time has now been reduced to three to five days, allowing the stores to maintain higher in-stock levels while reducing the amount of inventory in the back rooms, which has been one of our big goals this year.

We're in the early stages of a test of automatic replenishment on a few select items.

This pilot has performed just as we hoped it would so far.

Automating store re-ordering tasks that previously were performed manually by our store managers.

We're in the process of evaluating the sequence and the timing for continued rollout of this.

Also as previously announced, we have two new D.C.'s under construction.

Ridgeway, Washington is well underway and anticipated to open as planned in the first quarter of 2004.

Ridgeway is a brand new facility that will allow us to grow more efficiently in the northwest.

Joliet, Illinois, though plagued by record rainfall, is expected to open as planned mid year 2004.

Joliet is a replacement for our small manual Chicago D.C. and will increase our efficiency, reduce stem mileage and better serve those stores in the middle of the country as well as provide a platform for our continued growth in the middle of the country.

As you can see, we've continued to invest aggressively in our business to improve efficiency, to lower costs and to better serve our customers.

As the economy improves, we are well positioned to take advantage of rising customer confidence in the extreme value channel.

The technology and logistics infrastructure that we've invested in will allow us to serve our cuss customers better than ever.

I'll now turn the call over to Macon for some further comments.

Thank thanks, Bob.

As many of you know, our acquisition of Greenbacks closed on time on June 29th.

As a result, the results for the last five weeks of the quarter were folded into our financials.

Our expectation that merchandise margin can be improved looks very realistic, and our buyers are working to improve the Salt Lake City D.C. mix.

But due to lead times on imports and the timing of the fourth quarter, we will have to wait until 2004 for the full effect of the margin improvement.

Earlier this month, we began operating almost all the Greenbacks stores, 99 out of 100 on Sunday.

Operations of these stores seven days a week is significant, but there is a gradual ramp-up for these markets since it's the first time these stores have ever been opened on Sundays.

We're pleased that Sunday openings have gone well, and we expect business volume to build over time as word gets out that our stores are indeed open.

We expect the additional sales that we get from Greenbacks on Sunday to generate incremental profitability as we leverage fixed costs like rent and corporate overhead, and we are working to fill in missing basics to bring these stores up to a more complete merchandise assortment.

We also have begun a process of converting the Greenbacks stores to our signage and fixtures.

We project 40 of these conversions will take place during this year with the balance targeted for mid 2004.

We will add POS, some new fixtures, a new internal sign package, while improving the store appearance and merchandising.

While most of the merchandise mix at Greenbacks was similar to Dollar Tree's, I can tell you that their customers will see significant improvement in the quality of merchandise available for a dollar in these stores.

We have integrated the Greenbacks organization into our own, and our David Hensley, the VP of West Coast operations, is overseeing this effort.

Meanwhile, we have all but closed the Greenbacks headquarters building, and all the accounting, purchasing and other corporate functions will be handled centrally here in Chesapeake.

I'm pleased to report this process has gone very smoothly.

We have just concluded our annual field management meeting where the focus was on training and preparation for the fourth quarter.

By staying connected to our field organization and stores and cultivating the entrepreneurial spirit of our people, we are well positioned to continue to grow across the USA.

At this year's meeting, we welcomed the Greenbacks field management to the Dollar Tree family, and I have an especially strong conviction that we have made significant improvement in field management positions this year.

Our people have the right skills, the right merchandising passion, and an aggressive spirit.

I am optimistic about the fourth quarter, not only for the economy generally, but for Dollar Tree in particular.

We enter the second half of this year with fresh merchandise and outstanding holiday assortment that was truly amazing.

We feature Christmas (inaudible) and it's just amazing what our buyers have been able to put together.

I believe we are in an excellent position to take advantage of the improving economy and consumer confidence.

So now we're ready for questions.

If you limit them to two, we'll try to get everybody in.

Thank you, sir.

Our first question comes from Mark Mandel of Blaylock and Partners.

Thanks.

Good afternoon and congratulations.

If you could give us some quantification as to the one-time expenses that were associated with the Greenbacks acquisition in the quarter and where you see expense leverage going forward in terms of same-store sales growth?

Actually the expenses related to Greenbacks was something under or around $300,000 for the quarter.

And as far as leverage going forward, we continue to see leverage in our payroll, you know, and we did that again this quarter, had leverage in payroll, and we just have improvements in a lot of the expense areas compared to last year.

So they're just going to be -- like we said, slight improvement in SG&A for the second half, so overall, it's just a little bit everywhere where we're focusing on basically expenses that are growing faster than what we budget them to do.

The slight leverage assuming slight increases in same-store sales?

I'm sorry, Mark, you need to speak up because you're breaking up when you're asking your question.

I'm sorry.

I'm sorry.

Thanks, Mark.

Slight leverage assuming slight increases in same-store sales?

For the second half of the year, slight positive increase in sales and, yes, slight leverage because of that.

Given your sales momentum in the last quarter and the momentum being exhibited by Target, Wal-Mart, et cetera, wouldn't a three to five percent range be more reasonable -- I know you want to be conservative, but it would seem that momentum is on your side and merchandising, et cetera, should drive some pretty decent top line growth?

Well, remember -- I'll take that one.

We plan our sales conservatively, and we do cannibalize our own sales because we're growing and remodeling larger stores, so everything we do is not always a plus to the comp.

So we're very content to have moderate comps in our plans.

That's the way we plan our business, and we are, of course, encouraged that other retailers forecast better sales because it should lift us too, but we're not going to forecast it for you.

Thanks a lot.

David Yamamoto of WR Hambrecht.

Good afternoon and congratulations.

Thank you.

One question.

If you take into consideration FIN 46 as well as the additional merger-related expenses, it appears that your operating margin would have been flat versus last year.

Is that correct?

Wait a minute.

We've got to study that one.

A million of it is in interest expense, David.

Ok.

Maybe just backtrack.

Pre-tax margins?

Yes, that's about right.

Thank you.

And if I recall correctly, your capital expenditure estimate this year takes into consideration the new D.C.'s in Illinois and Washington, is that correct?

The portion that will be spent this year, yes.

Okay.

There's more to be spent next year, those, because these D.C.'s are not going to come on line and some of the expenses that hit the capital budget do occur in 2004.

So is a bulk of those investments going to be made in 2003 or 2004?

I think Joliet, the bulk is going to be made in 2004.

I don't have the construction schedule in front of me for Ridgefield, frankly.

Great.

Thank you very much.

Daniel Barry, Merrill Lynch.

Good afternoon.

My congratulations as well.

Two-part question on the brand marketing.

I know you don't give away these secrets, but can you give us a little flavor of what you did discover in your test that you can share with us?

And secondly, when you think you might actually start this program?

Well, Dan, you know, what we discovered was that we did see a lift when we began the marketing.

Our campaign was really built to find out could we get a lift, could we drive traffic, and if we drove traffic, could we increase sales, first of all.

And then we were also testing the different types of media because -- and also the weights of media.

So we're trying to find out if we could, and then how much it would require, and then was TV or radio or print better than the other.

And what we found was that the electronic media markets was where we got the most lift, and the most efficient lift was in the electronic markets.

Now, we saw good results in radio markets and we saw some good results in TV markets, so what we think and what we're working on right now is putting together, so what does that mean as you go forward?

There's some markets that might work better with radio, some with TV and some with print.

So that's where we're putting it together.

The point that I wanted to make was that I think there's an opportunity there for us to prudently do a little more marketing, especially around grand openings, especially in new markets.

And that we can raise our brand awareness, clarifying that we are the place where everything is a dollar because the customers are confused about that, that's one point.

But the other point is, we're going to be very prudent with the spend, because we're not a co-op company, and we're still a low cost producer.

We want the best price, so every dollar I spend on advertising comes right out of our SG&A -- goes right into our SG&A.

And what we want to do is raise the sales enough so that our SG&A percent to sales still continues to go down over the next few years while we do spend some money to market the concept.

So that's the color on it.

And then do when do you think you might launch something?

It will be next year, although we're still doing a little bit of advertising this year around grand openings and into fourth quarter, we've still got a few arrows in the quiver for fourth quarter too, so not a lot, but a little bit.

So it's really like first quarter of next year, we might see something?

Sometime next year, Dan.

I don't have the final plan yet.

That's the truth.

Good luck with it.

Thanks.

Well, thank you.

David Cumberland, Robert W. Baird.

Good afternoon.

A couple of questions for Eric.

For the shipping of imports, do you expect to see a surcharge in the second half?

If it's the same estimate that we disclosed in our last 10-Q, $1million to $2 million, basically that's all in the second half, and the components are fuel, seasonal surcharge, and then other contract type increases in that order of magnitude.

And then in 2004, as you add two distribution centers and POS to the rest of the store base, do you expect depreciation as a percent of sales to increase further compared to 2003 levels?

Yeah, there may be a slight increase in percent of sales.

We haven't done all the work yet to get there, and of course comparative store sales increases will help us keep that level next year.

Great.

Thank you.

Michael Barry, Deutsche Bank.

Hi, thanks.

It's Michael Baker actually.

Two questions.

One, on the comps, this might be a subtle point, but on the press release after the second quarter sales, you said third quarter flat to slightly positive.

Now you're saying slightly positive, so can we conclude that things have gotten a little bit better over the past few weeks and related to that, is there anything specific in the third quarter that would lead to the comps potentially not being as good as they were in the second quarter or is it just trying to plan somewhat conservatively?

That's the first question.

Second question I would want to ask about the larger stores.

You said the sales are going large well in the larger stores.

I'd want to ask about the store contribution margin in the larger stores versus the smaller stores and any update on the racetrack format.

Thanks a lot.

Michael, the sales trend appearance are changing or getting more bullish is not really that as much as it is we've had a chance to finish -- get sales, take a look at the business and look forward and put the numbers together a little better, but we are -- there is still uncertainty out there, and while we are excited about our business and we think we're well positioned, there's uncertainty.

And we're not prepared to raise guidance to higher numbers than we just recently raised them to for that reason.

When you look at as we've gone into August here, just to characterize it, everything is looking ok.

And then the lights went out.

So we lost a couple hundred stores to a couple, three days there on that.

So we have a little bit of that going on.

And I don't know as we go forward in the future if there's going to be any more lights going out or what the political climate is going to be.

So we're staying with the guidance that we've given and we feel good about it, and I want you to know that we're planning our business around those kinds of sales so that we can make a lot of money when we put the dollars out there for you.

The other thing, on the large store is they are performing very well and contributing to our business as we have hoped.

The contribution and the large store is virtually that of the small store.

It may be a few sheckles (ph) percentage wise less but the volumes are much higher and the contribution dollars are much higher.

The racetrack format, that's something you're still testing?

It's not so much a test.

We're sold on it.

We like it where we have the population density because it does require a store size that's more in the 17,000 square foot range, requires street presence and store width somewhere in the 110 to 115-foot wide store in order to get that in.

So where the population is there and where the opportunity exist for the real estate, that's what we're putting in, and also where the economics exist, we're still very sensitive to the cost of real estate.

But, you know, we're very excited about our 12,500 square foot store too, and it's not a racetrack, but it gets a lot of the good merchandise out there and there's a lot of markets where that's the right store to drop in.

So we have flexibility on our store sizes.

Michael Novak (ph), Frontier Capital.

My question is on the gross margin.

Historically you said it should range between 36 and 37%.

It looks like you're going to be at the bottom end for this year.

Given the opportunities you have at Greenbacks, do you have any thoughts on where you should be able to take it in 2004?

Well, we're going to -- we believe that Greenbacks will slightly depress our gross margin towards the low end of that range.

You know, there definitely is opportunity as we go into next year with gross margin, but we're also going to have pressure as we continue to refine our mix and open larger stores and really meet what the customer wants us to sell.

Our goal long term is to maintain close to a 36% gross margin, and I think we've tried to communicate that.

It would be great if it was 37 and there might be buying opportunities where you can do that, but really we've improved the merchandise every single year.

This year is no exception.

The fourth quarter merchandise is much better and much improved over last year, continues to, and we believe that we can operate the business very well close to a 36% gross margin.

Just a follow-up on that, if I may.

Would you expect the opportunities that you have with Greenbacks to offset the mix shift to the consumables next year?

There's only 100 stores.

So, I think as a base it's not that many stores. (inaudible) on 100 stores.

You wouldn't expect a 10 basis point corporate impact if historically the mix shift impact has been 10 basis points?

I don't do the modeling so I can't answer that.

I think that we are committed to maintain as close to 36% as possible for the coming year.

Ok.

Thank you.

Patrick McKeever, SunTrust Robinson Humphrey.

Thanks.

Just a quick follow-up on the larger racetrack style store, and that is -- the question is, how many of those could do you plan on opening this year, and what is the average store size for those much larger stores?

The ones I've seen have been kind of in the 25,000-plus range.

Is that going to be the case or is that the case with the others that are out there?

Patrick, 25 is sort of on the outside -- large, and again, economics drive that.

Right now to answer your question on how many we're going to open, I'm going to give you a range because I don't have it in front of me and some of these things are moving pieces, but in the 50 to 70 store range for this year that will be racetracks.

And racetracks run, like I said, the smallest is about a 17,000, and really I think about 20 is going to be where the find the center point and the majority of them, and you'll find an outliar (ph) that's more like 25 or 27, but when you find those outliars, think cheap rent, because that's why we did them, and there's opportunity to make a lot of money in those without putting up the walls.

So that 50 to 70 number, would that be anywhere from 25 to 30% of your new square footage in 2003?

Is that close?

Well, new square footage, we'll have to do the math, in 2003 is somewhere around 4,000,000 and change, and if you did --

It's a fact that we haven't calculated.

Over 25%, anyway?

It's not a different store.

Don't get focused on another concept here.

This is just another store, is the way to do it. (unidentified) So it's not any different.

We just open stores

It makes a different impression.

Hopefully it makes a better impression, and we're quite happy to have better sales.

That's why we're doing it, because -- as a matter of fact, what we're really doing is taking the concept of that, the look, the graphics and so on, and adopting that to all the stores as we my great away from one sort of color scheme and go to another one.

That's really a goal across all the stores because we think it's a better look.

Well, I like it.

I like the stores.

The other question is more of a broad question and it's on sales mix.

The question is, where do you see the greatest opportunity when you look across your merchandise mix going forward to boost productivity, square footage productivity?

It depends on what you call productivity, but I'll just give you a little-- bit of an answer.

Our four corners of our largest stores and our season mix that Macon described for Christmas keeps getting better and better, and we can be absolutely the best for Christmas at $1 price-point and there's a lot of growth there for us.

The next corner is our party.

And you just keep adding, when you think we can't do anything better, we do.

Our buyers do a fabulous job in party.

On the other side, health and beauty care, it's more often purchased, more frequent shopping.

We have more brands than ever before available to us, and I believe that that is a growth area for us.

And then back in the back corner there with the snacks and the beverage and the food stuffs that I think there's big opportunity for us there in some markets.

In some markets, maybe it's not as much, but basically that's the four corners of our large store.

The racetrack that you were talking about that you'd liked, and as we continue to grow our business, we're going to stay true to the variety format, Patrick.

It's not going to be a grocery store and it's not going to be a party store and it's not -- it's going to be variety stores.

General merchandise just as it has been since it was 3,000 square feet, but honest to goodness, there is just more and more product available.

I talked about our hardware business being the leader of the pack, for Gosh sakes, in second quarter.

So opportunities in hardware too as well as all the general merchandise categories

Great.

Thanks.

Brent Rystrom, Piper Jaffray.

Good morning or afternoon.

I noticed since Bob got a fast car, things are going better.

Is Macon going to buy a faster car?

I already got one.

Plus a motorcycle.

Two quick questions if I could follow on on the previous question there.

One of the things I think that is particularly oppressive to people with the large stores is the fixturing and the signage in the stores, and I know you can't bring the racetrack out of the stores and you may not be able to do some of the signage because of the ceiling heights, but are you able to take some of those aspects that are so appealing and put them in the mid size and smaller stores?

Yes, Brent, and that's why Macon was mentioning a little earlier, is that as much as I like the racetrack, and Patrick, thank you for liking our racetrack stores, bigger power is the ability to take that look and the best components and the colors and the signing and the directional and the merchandise flow even though you don't have a racetrack and take it into those 10, 12, 15,000 square foot stores, which we are doing, Brent.

And we're going back and retrofitting some, and then all the stores that we open up now have the new yellow and green and off white, I guess tan maybe is a better world than yellow, color schemes and all the things that you saw in that racetrack store.

So you'll go on a 10 or 12,000 square foot Dollar Tree store going forward, and that's the coloration you're going to see.

You're going to see vinyl tile, brighter, different lighting, and our customers are really responding to it, and I think they're giving us credit for it and shopping with us more frequently and buying more.

That's our hope.

Quick second question would be, you know, Eric hinted at, you know, targeting the 36% gross margin and with some of the stuff in the second half of the year kind of implying expansion in the operating margin in the second half of the year.

What are your expectations for the operating margin next year?

Well, I think our opportunity next year is improving the mix in the Greenbacks stores and hopefully impacting gross margin, and also continuing to focus on expenses and lowering our SG&A percentage.

That's going to be our focus for next year, and again, our whole goal is to grow our earnings faster than our sales and the way we do that is to expand operating margin.

Brent, I would add a comment too as far as controlling all the systems work that we're underway rolling out that Bob described is all focused at an inventory flow that we work for.

I think that's really the opportunity for the future.

These stores tack a lot of boxing in a little place.

The more we can improve that, I think that will turn around into sales and better inventory numbers.

Thanks, guys.

Great job.

David Mann, Johnson Rice.

Yes, good afternoon.

Macon, can you give us a historical perspective given that Halloween is on a Friday on how that might affect your business positively?

Well, in the toy base (ph), Halloween on Friday night was the mother load.

That's when you got the most of it, Friday and Saturday night, because of the party aspect of it.

So it is a good calendar for that.

I have to say, though, that our Halloween business, because of perceptions, we see as a market trend in America, that Halloween has changed somewhat from a ghoulish holiday that it once was to a friendly party soft fall festival.

So we've taken our merchandise strategies and aimed it towards that type of merchandise, and then another concern I have is the obesity of the American children and everybody, and we're stuffing candy in our face.

We're still buying it, but I don't know if that's going to have an effect on it or not, but at some point, everybody's got to quit eating this stuff.

But you're not necessarily making any bigger bet on Halloween because of it being on Friday?

No, we didn't.

What we did do is have fall merchandise, and we upped our commitment to Christmas because we believe that's got a broader season.

As a matter of fact, that's starting to hit the shelves along with the Halloween stuff now too.

So we really didn't take a great big stand in Halloween just because it's Friday night seasonal.

Rather, in the basics that would be around it, so we'll have the products there, and we're still carrying a lot of candy.

That's most of it, but all of the accessory pieces that we used to deal more into, some of the figure figurines and decorations around a house, I think we've come to learn that the decoration part of it is really more popular for the fall festival period rather than just Halloween itself.

It's got a seasonal aspect to it that it goes dead on the 31st of October, so we try to change our mix a little bit, but I do believe it will be a great selling season.

I mean, I'm optimistic Friday night is the best night for it, so I'm still bullish on Halloween, don't make mistake of it, but I'm just giving you the philosophy about how we bought it.

Ok.

And then Eric, can you clarify the EPS guidance?

Did I hear you say that EPS growth was going to be 19% on $1.27 from last year?

At least 19% on the $1.27, yes.

Given that that equates to a few cents below the current consensus, what would be the comp implicit in that 19% growth number?

Slightly positive.

Slightly positive.

Ok, great.

Thank you.

David Campbell, Davenport.

Thank you very much.

Congratulations on a nice quarter.

I was wondering if you might be able to break out the inventories excluding Greenbacks for the quarter, and also what's your thinking on square footage growth and store growth for 2004?

What do you want to know about inventories?

I didn't understand.

I was wondering what the inventories were excluding the acquisition of Greenbacks.

Oh, okay.

Sure.

Included in our inventory number of $513,000,000 is approximately $25.5 million from Greenbacks.

Okay.

What was the second part of your question?

The second part of the question was your thinking on the square footage and store growth in 2004.

We haven't finished that yet, and it's something that we're working on currently.

As far as forecasting next year, that's later in the year when we put that out.

We're working feverishly on the budget.

Ok.

If I could go back to the inventories then, how do you feel your inventories have made the transition from the summer into the fall, and are there any issues there that you might be concerned about?

I think we're positioned right where we wanted to be.

We've made the transition well.

Right now it's sort of a goofy time, really, because we got a little bit of summer, we're still selling summer, we've got back to school featured up front with our yellow display boxes with pens and pencils and paper, and now some of our Christmas and Halloween is starting to show up in the larger stores.

So it's a little schizophrenic in the fronts right now, but I think we're positioned very well.

We've had good sell-through on our seasonal products, and our plans going into the second half are just spectacular.

As Macon said, we just did sort of a merchandise and a people show here last week, and the seasonal product is better than ever.

I know we say that every year, but it really is.

Great.

I'll get out there and get some sales.

Our next question comes from Tom Thompson (ph) out of T. Thompson Siegel.

Great quarter.

I want to make sure I under understand what your guidance about square footage means for the balance of the year, opening schedule.

You said you expect Q3 square footage to be up the same as Q2, which is about 36%, and that Q4 should end up up about 28%.

If you run those percentage increases against last year's third and fourth quarter square footage numbers, it implies no change in square footage in the fourth quarter.

Is that correct?

Well, it implies very little change in the fourth quarter.

You know, our goal is to open stores earlier in the year, and with the acquisition of Greenbacks, 100 stores opened on June 29th, all on one day.

Right.

So that got us kind of ahead of our expansion plans, and the 28% -- we start off the year with a 22% square footage growth, so we've announced now that we're going to exceed that, and with the acquisition of Greenbacks, go to 28.

Also, we have a different quarter this time too, you know.

We've got -- January is in the fourth quarter.

Right.

I have no problem, I just wanted to make sure I understood what it meant about your openings in the third quarter versus the fourth quarter, and it sounds like you'll get the bulk of your openings done before the fourth quarter rolls around.

Yeah, it was a good thing.

They also slip into November.

The rain had been the wild card this year.

We have had a very wet delay-ridden real estate world, so I'm certain that some of them, although the goal is not to have any in November, but we got twice the rain you normally get, and that delays projects.

Right.

Okay.

And Eric, back to that $1.27 number off of what you're basing your guidance this year, remind me, was that the old earnings for the fiscal December last year, and if so, why do you use that -- ?

No, it's not.

It's February 1st.

Fiscal year-end.

With the adjustment for FIN 46.

Ok.

That's what I wanted to know.

Thank you.

Sure, Tom.

At this time, I show no further questions, sir.

Thank you, everyone.

We'll be back on with fourth quarter after while.

Thanks for your attention today, and goodbye.

This concludes today's conference.