美元樹 (DLTR) 2003 Q3 法說會逐字稿

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

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

If you wish to ask a question at that time, simply press star one on your touch tone phone.

For the sake of time, please limit your questions to two per turn.

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.

Thank you.

Welcome, everyone.

Thank you for joining us this afternoon.

I have, as usual, with me today Bob Sasser, the President and Eric Coble, the CFO.

Eric will lead off with the press release and financials.

Bob will cover operational details and then I'll wrap it up and open things up for questions.

So, we'll just get started.

Eric?

Thank you, Macon.

Before we begin, we'd like to remind everyone that various remarks that we will make about future expectations, plans and prospects for the company constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors included in our most recent press release, most recent current report on form 8-K, quarterly report on form 10-Q and annual report on form 10-K which are on file with the S.E.C.

We have no obligation to update our forward-looking statements and you should not expect us to do so.

Good afternoon, everyone.

Sales for the quarter were $665 million, representing a 19.4% increase over last year on a 1.7% same-store sales increase.

This year's fiscal quarter contains 91 days versus 92 days in the reported quarter we're comparing against.

As a reminder, we're measuring our comp results based on 91 versus 91 day periods.

Pace of business was consistent across all three months of the quarter.

And our core 10,000 to 15,000 square foot stores continue to be our better performers.

As of November 1, 792 stores representing 51% of our total square feet were over 10,000 square feet.

Earnings per share were 31 cents and I'll discuss the material changes in gross margin and SG&A expense.

Year to date earnings per share is 85 cents versus 73 cents last year up 16.4%.

For the quarter, gross margin was 36.6%.

Above plan and compared to the 36.8% in last year's third quarter.

There are several factors to note.

Rates are higher than last year.

Occupancy costs as a percent of sales is higher.

Current year's cost of sales includes approximately $1 million of additional noncash expense from the adoption of FIN 36 whereby we consolidated our distribution centers sinthetic lease.

There is another $1 million of additional expense associated with FIN 46 that is interest.

We had the inclusion of Greenbacks lower margin sales in the quarter.

Offsetting these factors and in order of magnitude, we improved our merchandise margins through better buying and timing and shrink and markdown results have come in better than expected.

The effect of these improvements, part of which could be attributed to first and second quarter results, improved third quarter margins by 55 basis points.

You may have read that import freight rates may rise this coming year.

Based on very preliminary data, although we expect to talk about freight costs throughout next year, we do not, at this time, expect a significant impact on gross margin overall.

Operating expenses were 27.5% of sales.

About 10 basis points better than the same quarter last year.

The improvement continues to be in labor productivity at the stores and our store support center.

Our new supply chain systems now in operations for almost 19 months have led to better freight flow to the stores, greater visibility of incoming merchandise and better truck day schedule.

Store operating costs also improved.

For example, in the area of store supplies, we have, in instituted cost-saving measures to reduce weight and improve accountability.

Depreciation is higher than last year but on plan.

Our new technology assets have short depreciable lives which means we're depreciating these assets relatively quickly.

We continue to believe these noncash expenses will plateau as a percent of sales by 2006.

Operating income margin was 9.1% and above our most recent guidance.

Overall, our cash flow from operations improved more than $30 million flipping from a use of cash last year to a source of cash this year.

And we're very pleased with our working capital management this year.

We continue to have a very strong balance sheet.

Despite $100 -- paying $100 million for Greenbacks, cash and investments at $67 million, down only $33 million versus last year.

Inventory levels at $664 million are on plan.

Total inventory is up 21.5% at quarter end.

An increase that reflects our preparations for the fourth quarter.

For the fourth quarter, our sales guidance is $880 to $905 million.

With the midpoint of the range equating to slightly positive same store sales.

As a reminder, this year's fourth quarter contains 91 days versus 93 days in last year's fourth quarter.

I'm pleased to report that so far, November sales are tracking on plan.

Of course, December is a key month for us.

We will hold our regular mid quarter update call on January 5th and the dial-in information is available in today's press release.

As we indicated in our sales release, we expect fourth quarter operating margins to be 50 to 100 basis points better than last year's 14% based on several factors.

In January, we will be anniversarying the consolidation of our synthetic leases, our incremental cost this fourth quarter will be in the $1.3 million range versus $2 million in each of the prior three quarters.

We experience significant deleverage on costs in last year's fiscal fourth quarter when comps were down almost 2%.

And we expect modest improvement in SG&A percentage through continued productivity improvement and watching costs.

This would cap off another very strong year of financial performance for us.

In our press release this afternoon, we issued some guidance for 2004.

We see another strong year ahead of Dollar Tree with square footage growth of 20% and sales of approximately $3.2 billion and modest operating margin improvements.

Capital expenditures should be similar to 2003.

In the 230 to $250 million range.

We've also provided some quarterly guidance for the first quarter of $700 to $720 million in sales.

Please remember that Easter moves up a week in 2004 and we'll provide additional information in our next conference call scheduled for February 24th.

I'll now turn the call over to Bob with operational details.

Thank you.

As Eric said, we're very pleased to report our third quarter results.

We achieved our plan but sure was an eventful quarter as we lost sales days from a power failure in the northeast in August and a major hurricane in the Mid-Atlantic states in September.

We had the calendar change resulting in one fewer day in the quarter and all of these made for a challenging environment in third quarter.

But our merchandise value came through during the months and following the power outages and the storm, we made up a lot of sales and we sold a tremendous amount of basics.

Batteries and candles and bottled water and canned foods and flashlights and a host of other items people need in the time of natural disaster.

Additionally, our stores were well prepared for back to school.

We had great results from our preloaded back to school displays of paper and pens and pencils, scissors, all of the back to school basics.

These productivity displays as we call them have graphics that highlight the product and they're preloaded so they can go from the truck to the sales floor.

They get the product on the shelf faster and they were a real hit with our customers and also with our stores.

We plan to continue these in future seasons.

We finished the quarter with a good Halloween selling effort this year.

We were conservative with respect to our Halloween assortment and focused more on the basics and this proved to be well justified as our inventory commitment was just about perfect.

We sold a lot of basic candy and basic party items during the period by merchandising these basics alongside the Halloween specific product.

I'm pleased to report that our stores are now fully converted and holiday ready.

Our Christmas assortments are compelling and we have the merchandise that customers want and need for the holidays.

Oven roasters for Thanksgiving week, Christmas turkeys later if you want.

They're huge.

They're a great value for only $1.

If you don't have yours yet, visit your local Dollar Tree and buy an extra for your neighbor.

We've got plenty.

Toys are better than ever this year with holiday dolls for only $1 that you just can't beat.

Our Trim a Tree and Trim a Home selections have shown early evidence that the customer recognizes their style and their value.

This is the third year of Cobblestone Corner as most -- many of you know that's our Christmas village.

And it is available only at Dollar Tree.

I wanted to point out that this year, the assortment is complete with a real working train set.

Our wrapping supplies are complete with the best assortment ever of paper and bags and tissue and bows and ribbons and all of the basic supplies for wrapping perfect gifts.

We're ready for the holidays.

To report on the store operations in the field, I would like to say that I am particularly proud of our 2500 store teams who continue to drive improvement in our retail operations.

It is these people across the country who perform the daily blocking and tackling.

They're responsible for merchandising our stores while controlling expenses.

Improving merchandise shrink, managing payrolls and keeping our stores a fun place to shop for our customers.

While continuing our growth, we have a focus on improving store performance, store by store and this is being accomplished by people who were trained and excited about their opportunity.

Our store teams have done a fantastic job of developing best practices that can be shared and trained around measured across the enterprise and we continue to see positive results from this.

The staffing of our stores with qualified managers has been and will continue to be one of our primary focus.

I'm pleased with both our ability to hire experienced managers from outside our company and also our ability to train, develop and promote associates from within through our dollar tree career path program.

I want to point out this year alone, almost 800 stores managers were trained in our certified trainer program and our internal promotions that is promotions from assistant manager to store manager have more than doubled this year.

In combination, these two programs ensure the ability of qualified management to improve our company and to grow our company.

Our focus on improving store performance through training and best practices and people has been a backdrop while we've gone about adding technology to help in this goal.

We continue to leverage two recent strategic technology investments.

They're point of sales scanning and our wide area network.

We currently have 1,645 stores with point of sales scanning and a wide area network in place.

We expect to complete this project next year with this technology in virtually every store that would benefit from it by the end of 2004.

As I pointed out, this is enabling technology that will allow for additional solutions to help the stores in increasing productivity and just to name a few, these are solutions like labor scheduling, in 2004, we will begin to see the benefit from using a labor management system enabled by the wide area network, the system will use the POS data from each store to help them develop and manage more productive schedules.

Also, we've just completed installation of a financial switch to host our debit and credit transactions.

Using the wide area network, it will reduce the cost per transaction and improve the speed at the checkout.

With less than 400 stores currently accepting debit and credit, we will achieve savings of approximately $300,000 and interchange in banking transaction fees.

The labor benefit is another 5 cents per transaction and most importantly, it is faster and improves our customer satisfaction.

As we are able to furthers reduce transaction costs, we will be able to produce the payment options to many more locations.

Using our wide area network, we will launch a check verification system in 2004.

This system will reduce our check loss by approximately $1 million next year while shortening each transaction by 30 seconds.

Once again, saving money and improving customer satisfaction.

Through the use of our wide area network, we have this year, eliminated the need for nearly 1,000 additional telephone lines in our stores.

Our energy management systems have been attached to the network and FAX machines can be eliminated and replaced by e-mail.

We continue to improve our store ordering efficiency.

Each POS store now uses a hand-held scanning device that gives them instant access to order and sales by skew information and the stores really like it.

It is easy to use and they're able to use this information to create better and more timely reorders.

At the same time, our automatic replenishment system is on target to begin rollout to more categories in more stores in 2004.

In the area of marketing, as many of you know, we conclude a successful advertising test in the second quarter.

We are pleased with the results and we feel confident in being able to impact sales positively through marketing and select markets where the return on investment goals can be met.

Based on the encouraging results from broadcast and print programs tested this year, we're finalizing plans for next year and our goals in 2004 are to continue using broadcast print in four ways.

First of all in support of our grand openings, secondly to build brand awareness, especially in new markets.

Third, to increase customer traffic and fourth, to showcase unique products and highlight seasonal offerings and seasonal time periods.

As we've mentioned previously, we're watching our return on advertising dollars closely.

It is our goal to reduce SG&A percentage next year while spending on marketing.

Our company continues to grow during the third quarter, we opened 50 stores, closed seven and expanded 45.

We ended the quarter with a total of 2,511 stores in 47 states.

We're on track to meet our growth goals for the year and as a reminder, we began this year to grow square footage 22%.

We've exceeded our plans and we'll finish the year with approximately 28% square footage growth.

As a final note on logistics, as you know, we have two new distribution centers under construction.

And next month, we'll begin our initial receiving at our new Richfield Washington distribution center.

We expect to open on time and under budget and we'll begin shipping in first quarter of '04.

The Richfield building will also serve as the west coast transload facility, supporting both our Salt Lake and Chicago area distribution centers.

Our second D.C. project that's currently under way is in Joliet, Illinois and it is expected to open as planned in midyear of 2004.

Richfield and Joliet will satisfy our distribution center needs for a while so we will be able to continue driving efficiencies while spending less on new infrastructure in 2004 and into 2005.

We have no new buildings planned for the new term.

Our next logistics project is scheduled to begin in 2005 with the expansion of our Brier creek, Pennsylvania, distribution center.

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

Thank you, Bob.

Great report.

I just want to add how pleased I am veiwing our new and larger stores.

I've been traveling around lately and really doing some walk around due diligence.

This new sized store give us the room to grow and shows our products in a better way.

Really love the new decor and the layout these units are much stronger and more pleasing to the customers.

People have stopped me and they tell me how much better they like the new stores.

So I'm stoked to see the new direction.

Additionally, in the Christmas selection this year, in traveling the stores, I'm amazed at what the buyers have been able to accomplish because the merchandise out there is the best ever.

I'm excited about the sell throughs we'll have and I'm certain they've done the best job ever so I'm high on the quality of our Christmas offerings this year.

The economic figures are still showing a mixed picture out there.

But they're starting to improve, I think, and I do feel we have a strong finish to what has been a great year so I expect it may be late but a strong holiday rush this year but I'm certain we'll have a strong one.

I really am.

This year, included of course the acquisition of Greenbacks on top of our normal growth which was a bit of a challenge but our team has stepped up and really done a great job of pulling this together.

As we indicated last time, the June closing of this acquisition did not give us enough time to revamp all of the Greenbacks stores.

We still have much work to do in '04 to remodel and remerchandise the remaining 59, I think, it is, that have yet to be done.

So, we'll have plans to have that finished up by the summer of '04.

We're currently working on our budgets for '04.

We'll continue our square footage growth as Eric said around 20% range.

Which will include about 200 stores and another hundred relocated stores.

Our capital budget is shaping up in the period of $250 million range.

Most of that will be focused on new store growth of course.

But we do have two new distribution centers to add capital to and then of course technology investment will continue.

Our balance sheet is strong.

And we're well-positioned to enter '04 with continued optimism for sales and earnings in the 15% to 20% range.

Our return on invested capital and cash position remain the highest.

So, I'm confident in our management team and in this market.

Looking forward, I see new opportunities in merchandise that will keep Dollar Tree in the forefront of discount retail values.

Now, I want to remind everybody that this will be my last earnings conference call because Bob Sasser will become the new CEO in January.

I will remain an active Chairman of the board and will continue to work with management team in the coming years.

I'm fully confident in Bob and in this management team and the steady growth that has characterized this company.

I will remain keenly interested and involved with the company and best practices in today's world calls for the separation of the office of CEO and Chairman.

And I am very pleased to hand things over to Bob next year.

And now, we'll open it up for questions.

If you limit it to two, we'll try to get everybody's questions answered.

Thank you.

Kelly?

Thank you.

At this time, we're ready to begin the question and answer session.

If you would like to ask a question, please press star 1.

You will be announced prior to asking your question.

If you would like to withdraw your question, press star 2.

Once again, to ask a question, please press star 1.

Our first question is from Mark Mandell of Blaylock and Partners.

Thank you and good afternoon, everybody.

How many large stores do you have in the comp base and what have been the same store sales performance of those units?

We have about half of the number that I talked about being large so 300 to 400 I think are in the comp base.

And we have not talked specifically about the different classes of the stores and their comps.

Just indicates the stores that we're focused on, that 10,000 to 15,000 square foot are the better performers we're seeing both compwise and noncomp.

Ok.

My second question, what should we look for in terms of inventory growth next year?

Recognizing you have two distribution centers that are coming on-line?

We're going to grow our inventory really in relation to our sales growth for next year.

So, we expect that there is, as always, when we open up a new distribution center, which one of these is a replacement distribution center.

Joliet replaces one that is already in place in Chicago.

But we always have a little extra inventory that we put in place when we open a new distribution center.

But within a couple months, we're able to work through that and we're planning our inventory growth to be relative to our sales growth.

Ok.

Thanks a lot.

David Cumberland of Robert Baird, you may ask your question.

Yes, good afternoon.

You've done some selected newspaper advertising early this month.

What type of response did you see from that and any other advertising planned in Q4?

I'll only characterize it for you as good.

We were encouraged by the newspaper advertisement we did and just to give you a little color on, that when we acquired the Greenbacks stores, they had, in their history, advertised several times a year using an insert.

And when we acquired them midyear, we wanted to comp their insert for one thing.

We decided to run it in a few more stores to see what kind of result we got.

Overall, result was good.

Some markets it was better than others.

But -- in every market, we could see a lift from it.

So, it is something we'll incorporate that we've learned from our Greenback acquisition and we're going to see -- you'll see a little bit more of that next year.

More targeted to new markets.

More targeted to competitive markets.

More targeted to special events.

Any other advertising planned in Q4?

No.

Well, we always do a little advertising -- we always have.

So right now, in some select markets, I think we have a little bit of newspaper, maybe a little radio running.

We opened up the Denver market this year.

So, that was a new market for us and we always have a little grand opening advertising that we do.

Salt Lake City again with the Greenbacks acquisition and we focused on remerchandising those Salt Lake City stores first and we've done a little advertising there but really nothing of a major scale in Q4.

Follow-up for Eric on the Q4 gross margin.

The sales release through weeks ago mentioned gross margin improvement.

Is this still your expectation?

Yes.

Thank you.

[Meredith Adler] of Lehman Brothers.

You may ask your question.

Hi, guys.

I was wondering if you could just talk a little bit more about the guidance you've given for next year.

I was wondering, first on the sales side, are you -- you know, kind of feel like you're being conservative here in terms of the fact that we don't really know exactly the timing of an economic recovery?

It is like more or less you continuing the guidance of the fourth quarter into all of next year.

You think that's conservative?

Well, I think you're right that we're continuing the guidance basically in the fourth quarter into next year.

The middle of that range is slightly positive comp.

That's the way we're looking at it in light of what we're hearing and reading right now, we feel like that's the most prudent thing to say at this point.

Gross is primarily new to growth.

This has been an organic growth story.

A few acquisitions, none of those on the horizon.

A certain number of stores and remodels is pretty much planned out and we've pretty much done what we set out to do each year.

About guidance, you are saying you expect the operating margin in next year to improve modestly.

What does modest mean to you?

I just want to make sure I understand what you're saying?

Modest, to me, means that it is in the 10 to 20 basis points range.

That's modest.

It could be a little less than that.

Could be a little more than that but that's kind of the indication we give for modest.

Thank you.

Great.

That's helpful.

Thank you very much.

[Michael Novak] of Frontier Capital.

You may ask your question.

Bob, can you talk a little bit about why you think that comp store sales decelerated sequentially?

You mentioned the hurricane and the power outage.

Do you think those were significant factors and if so, can you try to quantify that?

And if you would expect a further deceleration against again using comp into the fourth quarter.

You know, I've mentioned those things really a little bit because around here, I'm always telling people -- they're sitting here smiling at me as I mention it but they were pretty unusual events for us in third quarter and the point I was trying to make that it was pretty challenging quarter and it started off with power outage in the northeast.

We had a lot of stores close for days in the northeast and we got over that and then the hurricane hit and we had hundreds of stores close for several days in the Mid-Atlantic -- our home base, really here.

And then you know, one day less in the quarter.

So, it was a tribute, really, to our merchandising and our people and everything that they did through these times that I was really trying to point out there.

I don't think -- you know, I can't predict the weather.

I'm not -- I don't think we'll have another power outage, I hope.

And hurricanes, we've maybe passed that season but the real true outlook that you are probably asking about is how do we feel about fourth quarter.

I can tell you I feel great about the merchandise mix.

I really do believe that we are in better position merchandisewise and storewise right now than we ever have been since I've been at Dollar Tree.

And if that equates to more sales which I hope it will, then we're going to have a good Christmas, a good fourth quarter.

Some of the economic indicators out there though that I keep looking at are unemployment is still out there.

So, I would like to see unemployment get better and I know, you know, today, I read some brighter news on the economy.

And then I flipped over to the next page and there was some sour news on the economy.

So, we're still sort of in the wait-and-see mode.

We're ready.

Our merchandise is ready.

If people get out and shop, we'll get our share.

My second question is can you comment a little bit on the performance of the Greenbacks stores.

Are they meeting your expectations and you know, how are the inventory levels within those stores, given that vendors are aware that eventually you'll be going through your own distribution centers.

The vendors.

I didn't understand the last part.

Greenbacks current vendors are aware that you'll probably not be using them next year and I was wondering if that was affecting your instock position at all.

Let me tell but how I feel about Greenbacks.

We've got 41 stores remerchandised.

Acquisitions in the middle of the year don't give you as much time to get around where it's time to get into fourth quarter.

So, we did a lot of remerchandising.

The stores where we've remerchandised and relayed and put new fixtures in and everything are improving.

The stores that we haven't are better than they were when we got them.

They're still not where we want them to be.

We'll as Macon pointed out, we'll begin early next year.

We'll put in all of our -- all of the 100 stores remodeled to our Dollar Tree standards with Dollar Tree names on the fronts and most importantly, we'll have our full mix in these stores.

Right now, we were able -- this year, get part of our mix into the stores and we'll be able to get it all in by next year.

That's more of a timing issue.

And we had already bought Christmas and they had already bought Christmas so we're selling the Greenbacks Christmas.

As far as the vendors, we use a lot of the same vendors.

We did use a lot of the same vendors.

There has been some change.

That's not new today over what it was really in June or July.

And that is a -- that's our decision.

It is something that if we've made any changes, it is because we think we have a better option and it is not creating any shortfall in sales at this time.

Thank you.

Mark Miller of William Blair.

You may ask your question.

I was hoping you could elaborate more on your ending inventory position when you talked about it being up more than sales in part due to I guess timing of receipts.

Given the outlook for the fourth quarter sales to be up in the mid teens range, inventory is up a little more than 20%.

Can you just sort of address where you bought ahead of sales and especially given your comment that you expect the season to come up potentially later?

We -- couple of things.

One is we are building -- this is our peak inventory time and of course our peak sales starts kicking off this week, too.

So, you always have to have it in there a little ahead of when the sales are going to come.

That's one thing.

Secondly, we are building a little inventory for our new D.C. as I set, we're going to start receiving next month in Richfield.

And that always builds a little bit of inventory to characterize it, it is basic.

It is merchandise that we keep in stock in all of our D.C.s and as I said, there is always a couple months of a wrinkle when we open up a new D.C.

But we're able to smooth those out and get them in line with sales as time goes by.

My other question is on the operating margin increase expected in the fourth quarter.

Your operating margins year to year had been lower for each of the first three quarters.

I was hoping you could talk about why that changes in the fourth quarter.

And then given the change in the reporting period, I was hoping you could give us some color on what type of margin change you may have had last year given the weak comp.

In other words, do you have a sense of what the January '03 margin would have been versus the January '02 margin.

Thanks.

Patrick McKeever of Suntrust Robinson Humphrey.

You may ask your question.

Kelly, we didn't answer that question.

We have a question to go first.

I'm sorry.

We haven't answered that question.

We had negative comps in the fourth quarter last year and we're in transition of switching to a new fiscal year and basically, SG&A costs as a percent of sales were higher than they would have been had we not deleveraged the costs.

We're looking at slightly positive comps.

We think we'll get some leverage in SG&A but at the same time, we think that our gross margin improving also for the fourth quarter.

So, that's where the margin improvement is in the fourth quarter.

From a sequential basis, every quarter's been down.

Especially the second and third as the Greenbacks have had an impact.

The FIN 46 adjustment every quarter has been a million dollars to cost of sales and a million dollars to interest.

So, that's been kind of an area that hasn't been compared to last year's numbers.

And traditionally, we have seen that the fourth quarter is the better quarter of the year for gross margin and that is kind of the normal trend we would expect going forward.

Patrick McKeever.

Kelly, we're back.

Ready for the next question?

David Campbell of Davenport.

You may ask your question.

Bob, you mentioned you would be expanding the replenish program to roll out more stores and categories.

Can you say how many stores it is on now and which categories and elaborate more on what you're planning to exactly do at the next year?

Yeah, we started -- that was a brand new project this year.

And we started with just a very few stores relative to the size of our company and one basic consumer products category.

One that was very predictable.

One that we thought we could get our systems working properly and find out what else needed to be done in our business to make it work.

And that's what we did this year.

We're at a point now where the system is working fine.

It really is.

And we have been doing a lot of work on our skew integrity trying to get our inventories correct in the store and all of the things that could change the inventory.

And our methodology so that by some time in first quarter next year, we'll be rolling it out to more categories and more stores.

That is still open right now.

That is a -- I don't have the number actually nor the category to tell you but we'll know that by the end of this year.

And we are excited about it.

The system is working just great.

But you know, we're new with POS and we're new with our skew inventories and we've learned a lot of things about how to keep those more accurate and once we can do that, then we can replenish a lot of things into our stores without the stores having to reorder them.

What is the impact that you've seen from the stores and the category that you tested it on this year?

Well, stores really love it.

Like I said, it has been a limited number of stores.

Very limited number of skews but the stores really love it because it reduces the items that they have to reorder.

There is a little skepticism in the beginning but once they saw that it kept their shelves in stock, and not jammed up in their back room, they have less in their back room.

Yet they're still in stock on the shelves and once they saw that and they didn't have to do all of the ordering themselves and helped them reduce their labor, they were on board with it.

So, those are really the paybacks.

Improved sales, being in stock.

Less inventory in the back rooms.

And less payroll in the store.

Actually the payroll savings, we look at it as an opportunity to spend it on getting the product on the shelf faster.

It is easier on the ordering process.

That's right.

Ok.

I'll look forward to hearing more about it.

Thank you.

Great.

Patrick McKeever of Suntrust Robinson Humphrey.

You may ask your question.

Thank you.

When we think about next year operating marginwise, you said modest increase in operating margin and thinking about the drivers there, what might they be in order of magnitude?

POS, labor scheduling, the integration of Greenbacks I'm imagining would be ba big and offset from consumables.

Is that the right way of looking at it?

Well, certainly.

I think those are all factors.

The integration of Greenbacks and continuing to improve sales and margin at that acquisition will have a positive impact for us of the the supply chain and improved labor productivity will also help us on the SG&A side.

But I think that there has been slight depression in gross margin because of the Greenbacks acquisition and the fact that we could not get a lot of our merchandise in.

First quarter this year, will be the first quarter that we really have a predominance of our merchandise going into them.

We basically miss a lot of the holiday season for that.

So, there is a lot of definite improvement there.

We're just constantly looking at costs and ways to improve the business.

And we think that we can with some very modest comps and a good environment, improve our operating margins consistently for the next few years.

When you look at Greenbacks, sales mix at Greenbacks, what are the key differences between your mix as it is and theirs as it was?

Is it yours has a higher percentage of imports?

Consumables?

How should we think about that one?

I have a comment that with anybody that's selling a company, which they were for a year, you tend to be very promotional and buying a lot of lower margin fast-turning things which we, being a higher margin focused company, have eliminated.

So, depresses sales a little bit while you raise the margin.

That was the plan.

That's really the difference in the mix.

As far as influential concern, we import a great deal more than they do because of our size.

More importantly, what we carry is better products, our imports are better than their imports because we've been doing it longer and so on.

What we haven't gotten in there in full tilt is the import selection that we're used to carrying.

Now, their domestic products, candy and chemicals and things like that, we support their lines and it is not a whole big mix.

As a matter of fact, the Greenbacks mix and the Dollar Tree mix are similar as far as the amount of imported goods and the way they look at their business.

They look at them as a variety business.

Something for everybody as opposed to a strictly grocery model.

Very helpful.

Just one quick one.

Eric, you were willing to define what you meant by modestly there for the operating margin next year.

How about slightly positive?

Thank you.

I think slightly positive is somewhere in the 1% range.

For comp.

In the 1% range?

Yes.

You know, half percent, 1.25%?

Ok, thanks.

[David Yamamoto] of W.R. Hambrecht.

You may ask your question.

Good afternoon.

With regard to your store expansion, where have you opened stores this year?

And where do you plan to open stores next year?

Wow, we have opened stores across the country this year.

We have tended to focus new store growth, slightly more toward the west -- western part of the country.

More of our relocation expansion has been focused more toward the east because that's where the existing and older stores are.

We are in 47 of the contiguous 48 states.

We have distribution and logistics across the country now.

So, we really do have the opportunity to grow across the country.

And this year, next year, we're going to continue moving as we have done this past year.

Pacific northwest, we would like a lot.

Texas we like a lot.

West of the Mississippi.

Ok.

And second question, can you talk a little bit about your distribution and transportation costs.

How have the costs trended as a percentage of sales this year and what is your expectation for next year and '05?

If you look at what we're seeing in our distribution cost system gross margin, it has been very consistent from year to year.

So far, year to date versus last year year to date for three quarters.

We have done an excellent job of not only managing the distribution centers but growing our distribution infrastructure while keeping our distribution costs percentage down under 3%.

That is kind of a retail benchmark, 3%.

Wal-Mart does it the best.

I would be happy to report that if we were to stop infrastructure growth, we would be one of the best ones out there for D.C. operations and the cost of D.C.

On transportation costs, every quarter this year, we've talked about freight rates going up.

We have looked at freight costs.

We negotiate with our vendors almost annually and gross margin is a big area.

It is not just freight.

It is also what you're buying.

How you're buying it.

How you negotiate with your vendors.

Your suppliers.

And we try to tell our suppliers that you know, freight is somewhat predictable because it goes in cycles and we know that it is eventually going to come down and it is going to go up and you've got to work with your vendors to keep your gross margin kind of stable and predictable throughout the years and that's what we've been able to do.

Ok.

So, your assumption for next year would be flat year over year?

I would say that we're going to have our distribution costs under 3% as we've always planned it to be and that there is going to be a little bit of money in there for increased freight rates potentially.

Just as a conservative budget issue and then we're going to look for ways to offset that in other areas of gross margin.

That's just the way we manage the business.

Great.

Thank you very much.

Michael Baker of Deutsche Banc.

You may ask your question.

Thank you.

Couple of questions.

One, can you remind us what the sales progression was in the fourth quarter of last year.

What you were up against?

Comp sales?

Yes.

We were down 1.7% for the whole quarter.

Right.

Was that -- better -- I think as I recall, it was better in the beginning of the quarter and then really January was difficult?

It was better at the beginning of the quarter and January was lower.

So, the easiest comparison is still coming up.

Is that the right way to think about it?

December is never easy.

Ok.

All right.

Fair enough.

Although it sounds like January will be a little bit easier.

Second question, the larger stores, sounds like they're comping better.

Are the operating margins in those stores equivalent to the smaller stores at this point still?

Yeah, we talked last quart they're the 2002 class which we have a full year of, is trending on operating margin line better than company average.

So, we're real happy about that.

That continues to be the case into the third quarter.

As I'm seeing it right now, yes.

Ok.

Last question, with making the -- Macon, congratulations on becoming Chairman earlier this quarter and the last conference call.

Should we expect any other management changes going ahead or is this pretty much the senior team set and ready to go forward?

Senior team is in place.

We practice succession planning here as a matter of business principles.

This is one normal step.

Of course, you're going to have changes and management as we add to it, the company is growing. [INAUDIBLE], but no surprises.

You've met the players and welcome to come down here any time.

Visit us and check it out.

We have nothing to hide.

I appreciate the offer.

Congratulations good quarter.

Thank you very much.

[Tom Thompson] of Thompson Siegel.

You may ask your question.

Eric, this is more of a housekeeping nature but your share count has been rising sequentially 800,000 to a million shares a quarter.

Of course your stock price has risen dramatically over the last year.

Assuming a flat stock price, can you give us some guidance as to what the change in your share count might be going forward for the next say five quarters.

Right.

Then it would be mostly be from stock option exercises rather than stock price and historically, it has gone up a couple hundred thousand per quarter.

Historically.

Couple hundred thousand per quarter.

Thank you very much.

Sherrie Eberts of J.P. Morgan.

Actually it is [Nancy Hoke] for Sherrie Eberts.

I have a question about sales guidance for Q1.

Is it sounds like the store open -- the store openings will be weighed for Q2 and Q3.

Is this the right way to be thinking about the quartert?

Historically they've been between the first three quarters.

Pretty much the same as the previous years.

So, we should assume a pretty even distribution between the three quarters for store openings next year?

I would say so.

Ok, thank you.

David Mann of Johnson Rice, you may ask your question.

Yes, good afternoon.

Eric, can you elaborate on the shrink improvement, what drove that and do you expect that to be sustainable?

Basically, the shrink improvement was due to better than expected results would be once we finalized all of our poor shrinkage numbers which was in the third quarter.

So, in the first and second quarter, we still had an estimate of what the shrink for sales that were not subject to a physical inventory was.

And as we finished up all of the stores, we had an adjustment to our shrink reserve which was a positive adjustment due to all of the hard work out in the field.

So, we expect that we're going to continue to focus on shrink.

We're looking for a better year next year.

And throughout the year, we'll be looking and expecting what we're currently seeing in our results which is more favorable than earlier in the year.

Yeah.

Ok, great.

Thank you.

Joan Storms of Wedbush Morgan.

Good afternoon, good quarter.

Two quick questions.

First, on the store openings for next year, is that 200 net new?

And also, will there be a similar number of expansions in '04 as there has been in the past couple of years?

Related to that.

Then finally, can you comment on any impact from in central and southern California from the grocery strike out here?

Let me take that.

I'm the one that just ballparked the 200 stores.

Really I want you to focus on square footage growth which is the way we manage it.

I'm not sure how many stores it will actually be.

It may be 225.

It could be 250.

It could be 190.

It depends on the size of the stores that we're going to do and they will be net.

We do close a few stores.

We'll take those south and we close up a few so that will be a net number.

Then, the expansions.

It is really optimistic.

We really like to do more but sometimes the opportunities aren't there so a ballpark, 100.

I think we did 130.

It could be north of 100.

We are moving from these stores up to the preferred larger size.

So, if we can't get the size we want, we generally don't do it.

You can look for that to be maybe 100 or more.

And the grocery strike, John, you know -- Joan, I could see a benefit or -- I can't see anything from it to tell you the truth.

We're still general merchandise.

We sell a few things that you find in a grocery store.

Actually, they sell a lot of things you find in our store as you look at it.

But I can't see as to how the grocery strike has helped us as it might another competitor with a lot more groceries.

Ok.

Thank you very much.

Kelly Chase of Thomas Weisel and Partners.

Hi, gentlemen.

I just wanted to actually go back based on the guidance you gave.

If you take the sales guidance, the 3.2 to $3.3 billion for next year and your so nice to quantify that modest improvement in operating income, I'm backing into like an estimate EPS estimate of about $1.75 to $1.81.

I wanted to make sure my math was correct there because that's below consensus at this point.

Kelly, we prefer not to talk about specific numbers on the conference call.

I'm real sorry but I'm sure your math might work properly.

I don't know what you mean and I'm not going to calculate it right here.

But I'm sorry that we're not going to be able to answer that right now.

Ok.

Thank you.

[Lisa Esther-Brooks] of CIBC.

You may ask your question.

The one-time -- the shrink, was that a one-time adjustment or ongoing thing?

Part of that is a one-time adjustment to catch up to our actual results from what we've estimated in the first and second quarters of the year, yes.

The other thing is your expenses per square foot, by my calculation, they're down 11% versus last year.

Is that -- is the Greenbacks lower -- I know you're getting leverage from your larger store format.

Is Greenbacks helping there?

What's really driving that this past quarter?

What's driving it is just basically the organic growth from the large store.

I mean Greenbacks did have some very good operating costs as they were a very well-run company.

But you will definitely see as we have opened up the larger store that our cost per square foot will also go down.

There are portions of the cost that are fixed and we're covering those pretty well.

So, can we expect that going forward, I mean, it looks like to get the operating margins that you're talking about it looks like you can expect double digit declines in the next couple of quarters, is that right?

What we'll see is that in about 2006-2007, the sales per square foot will start leveling off and as we continue to improve the operating margins in the stores, your cost per square foot will level off at a slightly later time.

But as we have opened up the larger stores, the economics are such that both the corporate sales per square foot and cost per square foot go on a downward basis because we're basically holding on to about a 22 to 23% for contribution margin even at the large store.

Ok.

Thank you very much.

No further questions at this time.

Ok.

We thank everybody for joining us.

We hope you have a very Happy Thanksgiving and a Merry Christmas.