美元樹 (DLTR) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Dollar Tree Stores first quarter fiscal year earnings call.

At this time, all participants in a listen-only mode.

Later, we will conduct a question-and-answer session, and instructions will follow at that time.

If anyone should require assistance during the conference, please press star, then zero on your touch-tone telephone.

As a reminder this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Bob Sasser, President and CEO.

Mr. Sasser, you may begin.

Thank you.

Good afternoon, everyone and welcome to the conference call.

I would like to thank you for joining us this afternoon.

Erik Coble, our Chief Financial Officer will lead off with a review of our press release and financials.

I will then review some operational details and we'll open up the call for your questions which we ask that you limit to two.

Erik.

Thank you, Bob.

Before we begin we would like to remind you that various remarks that we will make about future expectations plans and prospects for the company constitute forward-looking statements for the purpose of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results play 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.

Sales for the quarter were $710.3 million, representing a 15.4% increase over last year's first quarter, on a 0.4% comparable store sales decline.

Comps were tracking at the high end of our published range for the first two months of the quarter, but the loss of one full week of Easter in April was too much to overcome.

We had fully anticipated a tough post Easter week and the Easter shift generated a sales shortfall that was greater than what we anticipated.

Sales picked up back at the end of April and I'm pleased to say that May is on plan.

We continue to open stores in the 10,000 to 15,000 square foot range and stores of this size continue to be our best comp performers.

The in-store productivity was stronger than expected in the first quarter primarily due to timing of new store openings.

We are slightly ahead of our growth plan and opened stores earlier than planned for the quarter with square footage increasing 30% compared to a plan of 28%.

For the first quarter, earnings per share was 31 cents.

Above our most recent guidance.

We continue to see a year in which sales and earnings are more second half weighted than recent years, as a result of a number of factors, including a one-week shorter Easter selling season, a two-day longer Christmas selling season, easier comparisons in the second half of the year, improvement in Greenback margins, the Greenbacks acquisition that we closed in June of 2003 and debt refinancing fees of $727,000 that are exclusive to the first quarter.

For the quarter, gross margin was 35.4%, equal to last year's first quarter.

While gross margin was consistent with last year, there were some significant changes in the components.

Landed merchandise costs increased by 64 basis points primarily due to a shift to a more domestic merchandise mix as we open more large stores, had a shorter Easter selling season, brought in goods closer to the date of sale, and balanced inventory levels by category.

Domestic merchandise comprised more than 60% of this quarter's mix compared to about 50% last year.

This is mostly a timing issue that will net out throughout the year, beginning in the second quarter.

Within both domestic and forward merchandise categories prices actually improved.

Remember that domestic cost of goods is higher than foreign cost of goods.

Also we have experienced rate increases in inbound freight as we expected and disclosed.

We now believe that our inbound freight costs will increase by no more than $5 million due to rate increases.

Rising fuel costs will also impact our inbound freight costs.

Offsetting our increase in land merchandise cost, our shrink and markdowns improved, as a result of continued improvements in SKU level inventory information, the continued rollout of point-of-sale and handheld technology, improved physical inventory processes and our continued improvement in supply chain processes as the systems mature and we use more information better.

We have completed annual inventories for over 55% of our stores, and inventory results are much better than last year.

Annual inventories will be completed by the end of the second quarter at which time we will evaluate shrink again.

Markdowns were lower due to high sell through of Easter merchandise.

Better information used to buy to the Easter selling season and more accurate inventory quantities because of our rollout of handheld technology.

Our overall mix will continue to show a bias towards slightly more domestic merchandise, but we believe we can maintain gross margins at approximately 36% for the year through better buying and a focus on cost areas where we have the most control.

Moving on to SG&A expenses, they were 27.1% of sales compared to 26.5% of sales in the first quarter of last year, up 56 basis points.

SG&A expenses are made up of three main components.

First, payroll and related expenses, such as incentives, insurance and benefits.

Second, non-occupancy operating costs, including overhead, and third depreciation and amortization.

Payroll costs improved because of continued improvements in hourly payroll usage.

We have begun to use technology to help us match hourly payroll to sales volume on a weekly basis.

The continued improvement in this area has been going on now for over two years.

Our operations group has done a tremendous job of continuous improvement in payroll costs as we evaluate the roles of each store management member and our hourly associates.

Health and worker's compensation costs continue to rise.

We are evaluating these costs at least monthly, looking at usage trends and developing preventative measures to mitigate these costs over the longer term.

Operating costs increased 45 basis points, primarily because of loss of leverage on comp.

Most of this deleveraging occurred post-Easter, late in the quarter.

Depreciation is up 25 basis points and as we have discussed in the past, we continue to expect depreciation to increase as a percentage of sales, through 2006, and begin to flatten or decrease as a percent of sales in 2007.

Again, we have made and continue to make significant investments in supply chain infrastructure, point-of-sale conversions and new distribution centers.

Operating income is down 59 basis points, as a result of the items I have just discussed.

We expect the higher depreciation rate to impact our annual operating margin, which remains the highest in our sector.

Interest expense is up $800,000, consisting primarily of $727,000 for refinancing costs of our new revolving credit facility.

The other caption on our income statement represents $610,000 of income from our interest rate swap.

Cash flow for the quarter was very strong.

Our ability to generate solid cash flow starts at the store level.

In addition, our supply chain expertise supported by systems that are just a few years old, is leading to improved inventory management that is conserving working capital.

By better managing inventory levels and making adjustments to our business through buying and store operations on a more timely basis than ever before, we are able to produce high cash flow from operations.

Cash flow from operating activities improved $98 million, through continued and inventory improvement and payables management.

Capital expenditures of 52.5 million for the quarter, was less than last year's first quarter, primarily due to savings in our two distribution center projects.

We bought back approximately 700,000 shares of stock during the first quarter for a total of $21 million.

Cumulative repurchases under our $200 million authorization stand at $59 million, all purchased in the last six months.

Repurchases are strongly accretive at current levels and we will balance that with our other cash needs, as well as our desire to maintain a conservative unleveraged balance sheet.

Moving to the balance sheet, we have a strong one.

Cash and investments stand at $244 million, up 37%, compared to last year.

Inventory of $565 million grew less than 14% compared to last year, even after adding a distribution center and 30% more square footage.

I'm pleased to report we are off to a good start toward our goal of improving annual inventory turns 10 to 20 basis points this year.

Our fixed assets are growing as we open two new distribution centers this year, one already opened in Washington state, and the other in Joliet, Illinois.

Our long-term debt is $250 million, which reflects borrowing under our $450 million credit facility.

This debt finances the $140 million we already had for our last four distribution centers plus another $110 million which approximates the cost for our new distribution center.

This is a five-year facility and provides us with a very attractive borrowing rate, currently under 2%.

As indicated in the press release, we are reaffirming our previous guidance for the second quarter and the full year.

For the quarter we expect sales of $700 million to $715 million on flat to slightly positive comps.

We expect second quarter pretax profit margin to be at least 7%, with depreciation still at the 25 basis point increase.

For the year, we continue to expect sales of $3.2 billion to $3.3 billion and earnings growth of at least 14%.

We'll hold our regular midquarter update call on July 6th, and the dial-in information is available in today's press release.

I now turn the call over to Bob.

Thanks, Erik.

First of all, I want to start off talking about sales and I think to understand sales you have to understand the progression of the sales for the quarter.

Our comp store sales in February, the first period, were positive.

The Valentine's Day holiday assortment was strong and the sell through of Valentine's Day product was significantly higher than last year.

Second period, the comp store sales in March were also positive and as we approached Easter, they were trending towards the high end of our guidance range.

Comp store sales in third period, April, were negative, with virtually all of the loss occurring the week after Easter this year which was against the week of Easter last year.

In other words, our business early in the quarter through Easter was strong.

Our seasonal sell through was very good, resulting in less seasonal markdowns than planned and it also allowed our stores to make a quick transition to Mother's Day features and our proprietary Tradewind Bay home decor promotion that's been so successful.

Both before and after the calendar shift, our sales responded positively.

We just couldn't make up the loss of a full week of preEaster selling in the first quarter.

Our stores are now set for Memorial Day and what we call the '100 days of summer fun.'

We're in stock in all the things that you need for business and the warm summer months and the holidays.

We have all the water and the soft drinks for these hot days that are here and ahead of us.

We have the paper plates and the cups and the napkins and all the picnic supplies that you will need for your summer fun.

Sunscreen for a buck, pool and beach toys for the kids, and we have the red, white and blue party supplies for holiday celebrations, Memorial Day and the 4th of July and all of our inventories are fresh and clean and they are right for the season.

When customers go out shopping, we have the merchandise they need and we've got the merchandise that they want for this season.

Along those lines I just want to take a moment and talk about rising gasoline prices, and how we see that affecting the consumer.

And we are concerned about that effect.

Rising gasoline prices are having a dampening effect.

A tank of gasoline, as you all mostly know, now costs $9 to $10 more than it did this time last year, about 50 cents a gallon more.

That's $9 to $10 less that consumers have to spend each week and an incentive for them to plan and make fewer shopping trips.

As I look forward, I see the increased gasoline prices as a reason to be conservative in our sales guidance.

At the same time I'm highly confident in our ability to manage our inventory, our margin and our expenses.

All of these things are within our control, and I believe strongly that we are on top of them, that we can manage them.

We offer a whole lot of value for a dollar, and bright and convenient stores and we believe that especially now, our value equation gives the customer good reason to come to us when they make that shopping trip.

And our stores, especially our large stores, I would like to point out now offer more basic consumer products than ever before, the things that people need every day.

Our new large stores continue to be our best performers, leading the company in comp store sales increases.

We remain enthusiastic about their ability to better serve our customers, with more of the things customers need, in addition to the things that they want.

These larger stores have a longer maturity curve and they give us the ability to improve productivity year-over-year with less additional investment and we still see a lot of opportunity to make them better.

We have a keen focus on that and a focus on improving our merchandise assortment and our sales productivity in these stores, and that follows more or less the line of more variety and assortment, expanding the mix of what's available in the product lines that we offer and now with the POS technology, we can see what's selling so we can have more of that product in the stores.

We continue to offer more value through the product development expertise, creating desirable high-value product that's available only at Dollar Tree.

We offer more brands than ever.

We are working and we'll continue to work with national manufacturers to develop more product for our price point.

And as always, we're searching markets and we're out there being really proactive on finding closeouts and opportunistic buys.

We want to be easy for these manufacturers to do business with us, and we continue to use our strong financial position to remain open to buy when the deals are available.

So when the merchandise is there, we have the cash.

We are using our technology, as I said to help identify best sellers, fastest sellers and replenishing accordingly.

There's still a lot of room to improve and as we build our sales history by store, we will get better.

We currently have almost 2200 stores with point-of-sale scanning technology on our wide area network and we're on track to complete the POS rollout to virtually all of our stores this year.

The sales data that we're getting continues to be invaluable and improving our business and it is a key to improving our sales productivity.

Turning to logistics, as most of you know we opened our new Ridgefield Washington distribution center on February the 2nd and I'm proud to report that it's running smoothly and efficiently supporting our stores in the Pacific northwest.

We have now completed construction on our Joliet, Illinois distribution center, which is a much larger, fully automated DC that replaces our small manual facility in nearby Woodridge.

Joliet will open ahead of schedule and begin shipping on June the 7th.

By way of comparison, we are currently serving 268 stores out of Woodridge and that facility is at peak capacity, can't add any more stores to it.

When we open Joliet, we'll open with about 400 stores, some of which are now being serviced out of Olive Branch, Mississippi and Briar Creek, Pennsylvania.

We are excited about the stem mile and efficiency savings this will help us achieve.

I expect the savings from reduced stem mileage from the addition of Ridgefield and Joliet to more than offset the higher fuel costs we were experiencing this year.

Additionally, I'm pleased to say with the opening of our Joliet DC, we will have a national network capable of efficiently serving all 48 contiguous states, and the capacity to support over $4.5 billion in sales.

I believe that we're the first in our sector to have a true national presence and capability.

We now have the opportunity to add new stores anywhere in the country.

Without having to add a new distribution center for at least the next two years.

Our next DC projects will be the expansion or automation of existing DCs, which can be done at a much lower cost than building an entirely new facility.

Before opening up the call to questions, I want to share with you my priorities for the rest of the year.

And there are three.

And they begin with sales.

Sales and improving our store productivity.

We're working really hard improving our assortments, more of the best sellers, and the expansion of the best categories in the stores.

We continue to increase our product value through product development, more brands, more special buys, and we continue to improve and work on improving our customer's shopping experience.

A convenient, bright, fun and friendly environment.

Secondly we're working on increasing our inventory productivity.

We got off to a good start in first quarter, as Erik described earlier.

We're working on improving our turns through a smoother flow of product, by better planning, landing product closer to our need.

We're working on improving our allocations and getting the right product to the right store in the first place, and then efficiently replenishing the stores based on sales using the store sales information.

When the customer is out shopping, especially when they're being very efficient on their shopping habits we want to have what they need when they're in our stores.

And third, expense management.

We have a focus on cost containment, cost avoidance, and cost reduction.

We are continually improving our processes to make sure that we sustain our industry leading operating margins.

We are using our technology in this case to become more efficient.

We are now ready for your questions.

So that we can accommodate as many callers as time permits, we ask that you limit your questions to two.

Thank you.

Ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone.

If your question has been answered, or you wish to remove yourself from the queue, please press the pound key.

Once again, if you have a question, please press the one key, on your touch-tone telephone.

Our first question comes from Meredith Adler of Lehman Brothers.

Good morning.

I have one really dumb question.

When you -- you talk about a shorter selling season for Easter, I'm not sure I understand that.

I can understand Christmas being shorter, because you start measuring from Thanksgiving.

But how do you get a shorter Easter season?

Shorter since when?

Last year, it was April the 20th, I believe, so we had through April 20th to have Easter selling season and this year it was April 11th.

So it was nine days shorter selling season for Easter.

Short of, starting from what date, though.

I don't really understand.

Third quarter.

I mean, basically for the quarter.

From the time that we actually land the goods, Meredith and put them on their shelves for the customer to start shopping.

They are shopping for Christmas up through December and then in January they are shopping for basics and those types of things, maybe cleaning supplies and then somewhere between that January/February timeframe, you are putting out your Valentine's and your Easter product.

So you can't start it earlier.

But sometimes, based on the calendar, it ends earlier.

It was basically one week earlier this year than last year.

And it's not so much just the Easter product that you miss a week of selling on, but it's the rise in traffic through that Easter selling season.

What you basically are trading is a week of an Easter volume for a week of after-Easter volume.

So that's the shift.

There was one fewer week of selling preEaster this year between the first of the year and Easter.

Between the first of the year.

Okay.

All right.

Another question I have is just -- if I could -- I think you were adding more consumables to your stores.

Do you view that you will ever become a destination?

Or do you always see yourself as a company that will want to be in highly trafficked areas, kind of living off of the traffic of somebody like a Wal-Mart?

Or do you see yourself as becoming a destination?

You know, Meredith I say yes and I say also yes we want to locate our stores where middle America lives and shops, and, you know, Wal-Mart is pretty much in the cross hairs of that.

That so we're always going to be near, I think, a Wal-Mart or Target or whoever the key discount store or key retailer, big box retailer is in the market, because of the real estate we aspire and the customer that we choose to attract.

We are building more of a destination mix in our stores as we expand on our cleaning supplies, for example, and our health and beauty care, and some of the snacks and foods that with we now have in our -- especially in our larger stores.

We do become a reason to put us on your shopping list first.

We think that is very important to our customers, as they go through, especially times like now, that they can come to us for great values on the things they need, and the same time, Meredith, we'll continue to focus on the things we have done so well over the years and that is our party and our toys and variety merchandise that we have.

So we're not -- when you say destination we have no plans and no strategy to become a grocery store, for example.

We're going to stay true to our variety store roots, but we're going to have more of the things that people need every day, the things they shop more frequently for, that's things like HBC, health and beauty care, cleaning and household supplies, and maybe candy, food and snacks.

Thank you.

Our next question comes from David Mann of Johnson Rice.

Yes.

Bob, can you talk a little bit about the advertising that you did in the quarter, what kind of results you had and how you see that going this year?

David, we had good results with our advertising, and, again, our goal in the beginning of the year, as I said on the last conference call, was to be targeted -- use targeted advertising very strategic with our advertising in support of holidays, in support of events, and in support of new and grand openings of our stores.

So that's what we did.

We had more advertising as we went through Valentine's Day, leading up to the Valentine's Day, we did a little marketing and advertising.

We then came back and we had some days leading up into the Easter holiday, and then after that, into Mother's Day.

As we go through the rest of the first half, we're really looking at the next big opportunities in the fourth quarter, in support of our fourth quarter business.

Now, that doesn't mean we won't do some advertising between now and then, but it will be targeted and it will be focused around between now and fourth quarter, it will be focused around grand openings, new stores opening up or remaking markets or special events in our stores.

Does that mean in the second quarter you will be doing less advertising than you did last year.

Well, we didn't do a whole lot last year.

Last year was first year we did what we called a test and we basically ran our test through sometime in June.

So we're almost to that date now.

But if you look at the first half, there's more advertising than last year.

But second quarter is -- it's not time when you have great holidays to support, and we are very focused on where we spend it.

We look also at the ROI and the ability to spend it and get back a return on it.

We think there's more of an ROI in fourth quarter, for example, and more of an opportunity to spend and get customers into the store, and more or less strike when the ducks are flying in the fourth quarter.

Right now, we're looking at special markets, opportunities for special celebrations, new stores, grand openings and like and that's what you will see.

If you see a Dollar Tree advertising in the second quarter, that's what you are going to see.

Thank you.

Our next question comes from David Cumberland of Robert W Baird.

Erik, can you comment on the reason for the difference between the margin reported today, and the margin that was indicated on May 6th and was shrink improvement a factor in that?

Yes, shrink improvement was a factor.

We didn't have all the inventory results reconciled and done.

You know, three weeks ago when we gave the guidance.

We also were a little bit conservative in the guidance as we were looking at the improvement in shrink.

Merchandise margin also came in better.

Even though the sales were a little bit lower after post Easter, the margin did come in better than expected.

And then the other thing that we don't put in to our guidance was what the swap income was, and that was over $600,000 this time.

So those were the main factors that changed from the previous guidance of 7.7% pretax margin.

Thanks.

And then for Bob, can you comment further on the buying environment?

And that would be across the board, reorderable items, seasonal, and closeouts, and any impact from inflation that you've seen or expect to see?

Well, you know, the inflation is out there.

We hear about it and we see the fuel prices and the increases, but while those forces are at work, we are not experiencing, higher merchandise costs.

And I attribute it to a few things.

First of all, we continue to leverage our buying power, especially in Asia.

We continue to lower our costs and increase our value on the goods that we billed available only at Dollar Tree.

We do have a good ability to develop high-value product for a price that fits our plan and has helped -- and kept our merchandise margins consistent.

We've got the ability to react to higher price pressures by changing the product.

We have always said that.

And we've got flexibility in terms of what we carry.

You know we can change the pack size.

We can change the items themselves.

We have a philosophy that we don't have to have anything and what we're about is creating value at the $1 price point.

It's not just stuff for a dollar.

It's got to be worth more than a dollar.

So our goal is to have things worth more than a dollar and as long as dollar is a unit of value, I think we can achieve it with the expertise that we have.

And I would also like to point to our track record, as -- we've got a pretty good track record of gross margin consistency.

But, frankly, we're not seeing high prices on our product right now.

Thank you.

Our next question comes from John Zolidis of Buckingham Research.

Hi, good afternoon.

Two questions, first I was wondering if you could comment on Target's announcement today, to roll out their dollar store concept and how you feel it will possibly impact your business, if at all.

And the Tradewinds Bay product, how often do you plan to refresh those goods, that is, to change the actual content of the product that's in the stores so that the customer doesn't get bored of it.

Thank you.

John, the Target announcement, first of all, is -- you know they have been "testing" that for a while and I guess they have had some good results, but the article I saw actually had the answer there at the bottom that I would give, and it's -- it's just not -- you know, it is not the same as at a Dollar Tree where everything is a dollar.

We're focused on delivering value at the $1 price point.

Everything in our store is $1.

Everything we do is centered around that dollar.

And Target is, you know, a big store with a lot of merchandise and dollar products is just one part of their selection.

Dollar -- the dollar price point has been around a long time, but very few people do it the way we do and as much as that surprising value when you exceed a customer's expectations that everything in the store is $1 and they just can't believe it.

As long as we stay focused on the value equation and offering the best value for the dollar, then we've got a business.

Now having said that, there is a lot more competition out there.

We look at Target and we also look at all the other dollar players and the mom and pops and everyone, and everyone wants a piece of our business.

We have to keep getting better in order to maintain our lead and our market share and we are committed to doing that.

Your next question was, oh, refreshing the Tradewinds Bay promotion.

That's a seasonal promotion.

We planned that last year to come in right after or about the same time as Easter, for after-Easter selling, and we had a couple of waves of that.

We had some product that came in early and that we replenished into our stores, based on our sales.

Then we got more of that after a week or two.

And then we had another wave that came in a little later.

I believe all of that product is now in, and it's either in the stores or in the final remnants of it probably on the way to the stores and following Tradewinds Bay, there's another promotion but it won't be Tradewinds Bay.

Now as we go forward into next year, we'll always have after Easter promotion, sort of that after Easter but presummer timeframe, that we have, that we fill.

And it may or may not be Tradewinds Bay, it may be something better next year.

We always will have the product that we create.

Our buying group spent a lot of time on Tradewinds Bay, looking at trends, looking at colors. looking at products that we do well with.

And that's really where Tradewinds Bay come from.

Darned if they didn't hit it right on the nose.

I have been out looking at higher-end retailers all season, and I see the same look in gift stores and in department stores and in higher priced stores for much more than our product.

And so I was real proud of our guys for hitting the trend and hitting the colors and really hitting that one square on the head.

So we hope to do that again next year.

Thank you.

Our next question comes from David Yamamoto of WR Hambrecht.

Good afternoon.

Can you discuss your expected returns on investment in this year's class of larger stores versus last year's class of stores.

Yes, we expect a similar return on investment.

These stores this year will be slightly larger than last year.

But we're still expecting the same level of returns related to sales and basically the same cost per square foot to construct it, and inventory per square foot to stock them.

Great.

And my second question is, what are some of the merchandising opportunities you see from opening your larger store concept, versus the smaller format?

David, the opportunities that we see were not -- they are more so in the categories that we are currently merchandising in our smaller stores, but by understanding what we're selling now, and looking at the actual sales of this product, we're able to put more of the product that we sell faster into these larger stores, and we're also opening up the opportunity to sell categories that we had not sold in the past.

For example, we've always been in housewares, but our stoneware, our dinnerware and our glassware in these larger stores is becoming a much larger business now, because we have the room to display them.

We can use our dinnerware displays and show the different prints and patterns on this dinnerware.

We can get it out and we can show it as opposed to the smaller stores where we just didn't have the room plus the fixtures in those smaller stores, those bins, it doesn't show dinnerware and you can't stack glassware up in them.

Those are categories that we have always been in, but the larger stores are giving us an opportunity to take it to even higher sales in our stores.

Our party department continues to grow and we continue to offer more of the things that you need for parties.

We think we can be the best at partying, no matter what the price point, and that's a pretty brackadocious statement.

But that's the way we look at that business.

Our design is great, our gift bags, our wrap, all of the things we do in support of party.

And we've got a lot of ways, a lot of opportunity to improve that too.

So that is more of what we do, and expanding on what we do best.

New categories, you know, we have got more HBC in these larger stores.

More of the things that people buy on a more frequent basis and we have a few more brands and a little bit more assortment, but we can also show it better and replenish it better in our stores, and replenishment there is very important.

With the new systems we know who is selling what, and we're using that information to be better in stock.

Really setting an expectation that was never in the small stores.

If you remember the small stores, the expectation was that you're going to have stuff for a dollar, basically it was going to be great and exciting and great value but when it was gone, it's gone.

And the large stores we're now setting an expectation that we'll always have certain categories.

So those are really the difference is, it is a place that you can put on your shopping list, as a destination, becoming more of a destination.

We still got a ways to go.

We can improve.

We can improve our mix.

We can improve the flow of the product into the stores and we can improve the shopability of these stores.

But we're all about that.

Does that answer your question?

Yes.

Thank you.

Our next question comes from Mark Piccard of Millennium.

Hi.

Thank you.

This question I think was asked and answered so I don't want to spend too much time on it.

But I want to go back on it one more time.

With respect to inflation, things like paper products and such, you said you are just not seeing it.

Is it because you have been able to switch vendors or you are doing more of some of these other types of commodity price pressures through imports and the price is coming down?

Could I have some further info on that, please.

Yeah, yeah, it's really all of the above.

It depends on the commodity.

If you look at -- if you look at our household supplies overall, our prices are not going up, because we're getting price decreases on many products.

If you look at paper specifically, there's been pressure on -- upward pressure on paper but, again, we don't have -- there's nothing that we have to have and we have that philosophy and our price is a dollar and our vendors work with us because they know it's not $1.19.

What our vendors have been doing -- really a marvelous job of -- is working with us, on how to take cost out of delivering that product in inflationary times.

At the end of the day I may not have brand x.

I may have brand y, but it's within our control to manage to our margins and pick the product and pick the pack.

You know we can have less sheets on a roll of paper towels too.

We haven't done that yet, but that's all together possible.

So all of the above.

We feel that our margin is absolutely -- our merchandise margin is one of the things that is in our control and that we manage very well.

We have a history of doing that.

A quick second part to that.

Let's say that you are importing from a certain country, I don't know, mainland China or one of the provinces and there's some change in the currency.

Are you guys flexible enough to kind of manage that process and be able to import from other places and still focus on the margin in your opinion.

You know we do business all over Asia.

We move to where the product is the most advantageous to us, either from quality, and/or for price.

Right now it has been China and it will probably continue to be China.

We're doing a few more things from Vietnam, but that's just beginning, it's an emerging place.

China is still the place.

What you are finding in China, is that it is moving from the south to the north and moving province to province.

Yes, we have the flexibility.

We build our product to meet our value equation.

And that is what we're willing to pay and what the value is that we're looking to offer to the customer.

And as long as I'm always on the same playing field in America --

Right.

With other retailers and a dollar is still a dollar, to me, it's a dollar to them, I believe that we can manage our business to deliver the margins that we desire and offer that great value to our customer, as well, if not better than anyone else.

Right.

And are you seeing more or less of those opportunities than you were this time last year?

Just, you know on balance.

Our prices from our imports have gone down this year versus last year.

Not because there hasn't been pressure on raw materials to the makers.

But because of the way we go to market and we're going more direct to factories and we're moving from factory to factory, and our pencil is bigger, and we're using that leverage and we're using our understanding of the Orient and of Asia, and China in particular, to better make the deals.

And our prices have been going down.

Still.

Thank you.

Our next question comes from David Campbell of Davenport.

Thank you.

Good afternoon.

I was wondering if Erik might address where you are in the cycle of the payroll cost savings, and what work do you see there?

Yes, we are currently using more and more point-of-sale information to really look at the timing of when our sales occur in our stores.

And it's still a manual process.

We've got systems that are going to be in place, we're hoping sometime this year, that will get rid of the manual part, and make it so that the timing of the information going back to the stores is more timely than we have now.

And that will continue to help us refine the hourly payroll usage, as well as where we have our store management focus.

But, David, I think there's -- you know two years running we have improved it more by the will to improve it, and putting in new processes than anything else and I think the technology is going to just refine it for an ongoing automatic-type thing.

I mean one thing that retailers always deal with is turnover, and when you have a manual system and you're talking by word of mouth, sometimes you don't get everything communicated properly.

So as we move a system out there, it will definitely help us with the turnover situation and making sure that we can still be efficient even if we have turnover at the store.

Okay.

And can either Erik or Bob discuss the impact of the advertising that you have done this year and what the measure of return on that was?

You know, I can briefly give you sort of the color of it.

You know, we did more this year in the first half than last year.

Last year was a test that I believe we started in February and ended sometime in June and it was different levels and different markets.

We actually advertised in probably twice as many markets as it ended up this year than last year.

And we used a mix of electronic, mostly TV/electronic, and print.

And, again, we focused it on Easter.

First of all Valentine's Day, Easter, Mother's Day, and -- and Mother's Day.

That was the real focus.

And then around new market openings and new store openings, and grand openings and events within large markets that we have.

So -- and we're continuing to do that in the second quarter.

Our return has been what we anticipated.

The print advertising is more focused on an event for a short period of time.

The electronic more on the brand and overall traffic and brand identities that we're doing.

That's a little bit of a slower burn, but we have had good success and it's to the point that we feel like we've done some good.

We're still learning about it.

I will tell you about that.

We don't -- we aren't declaring victory that this is some panacea to spend more advertising dollars to get more sales.

We think we can do it better.

We certainly are going to do it efficiently.

Because there is a cost to it, and we have to be ensured to ourselves that we are spending and we are going to get that return.

But so far, so good.

As we go into the second half, we will continue with our plan, more in the fourth quarter.

We have very little advertising in the second half last year.

So as compared to last year, it will be probably much different.

But mostly around our fourth quarter time, when the ducks are flying and people are shopping, that's what we want to be out there, inviting them into Dollar Tree.

Thank you.

Our next question comes from Michael Baker of Deutsche Bank.

You talk about the gross margin where is it impacted by, I guess you took in some lower margin inventory earlier and then you said that will level out as you go forward.

Does that mean -- is that going to be a gross margin opportunity over the next few quarters?

Is that going to help the gross margin?

Michael, let me -- this is Bob.

I will let Erik maybe answer the last part of that.

The first part of that is really as it related to last year, we are flowing because we now have better information and better systems and better inventory control.

We are flowing our imports in on a more timely basis, smoother, bringing them in closer to our need.

And this year, we were pretty darn good at that, as compared to last year.

Last year, in first quarter, we had a lot of import goods hitting, that frankly, had more hitting than we needed.

What that did was it raised our inventory levels on goods, good goods are fine, we sold them, but we got them a lot earlier than we needed them and it increased the import in our mix last year, so the markup was higher in the first quarter.

This year we've taken our buying plan and we've smoothed that out.

So that we have landed the goods in the first quarter that we needed for first quarter and we're landing more goods in second quarter.

So the color of that is you're going to see more import goods landing throughout the second quarter this year than you saw last year.

Because by the second quarter we had stopped the big flow of imports coming in and we sort of reversed that trend.

Now if you look at a gross margin opportunity, for second quarter, I will let Erik answer but I think we have to stick with the guidance we've given for second quarter because there are other things in gross margin than just the merchandise part.

I think that's a fair statement.

Definitely from a merchandise cost standpoint, we would see that there's an improvement compared to last year's second quarter and that's taking into account when we gave our guidance today of the 7% pretax margin.

But there are other components in there and we are seeing freight increases, fuel costs, that we still think that it will be favorable outside of, you know, for example, the shrink and markdowns improvement.

It was a shift from quarter one to quarter two.

Okay.

Thanks.

And then I guess the follow-up to that very point, so you are looking for pretax margins to be down this year versus last year, so a couple of the impacts there, are the freight, as you just talked about fuel costs.

I would also -- correct me if I'm wrong -- is as a result of deleverage and that you're looking for a lower comp than 5% last year.

Can you tell us which is the bigger negative impacts of those

I think it's the conservative sales number and the comp number would have a bigger impact on pretax margins and the shift in the merchandise margin or the costs that are going to be offsetting that.

Thank you.

Our next question comes from Ed Roesch of Bank of America Securities.

Hi, how are you doing?

Great.

Bob, you talked about in-stock, can you talk a little bit about where those are running, and you mentioned that technology is helping you there.

Yeah, first of all we are planning to be in-stock in more things now.

That may sound odd but, you know in our smaller stores we had no plan to be in stock in anything.

It was something -- it was a small store, we were landing product all the time.

When we had more housewares, we sold more housewares and when that was gone if we had more toys we sold more toys.

So it was really a treasure hunt in those smaller stores.

In our larger stores we have begun setting expectations that we will have certain categories of product on a consistent basis.

We're running in the 85 to 90% range in our DCs which is just about where we planned to run on those things that we plan to be in-stock on right now.

And there's more of them.

They really are centered more around the key items throughout the store.

And also some of the faster turning consumer products.

And that would be in our household supplies, cleaning supplies, health and beauty care and that.

But we also have in-stock expectations that we set in our party department, for instance, on gift wrap and bows.

So it's a combination of mix and it's a combination of types of product.

Thank you.

And one follow-up, can you talk a little bit about the possible trends in traffic counts and then transaction size?

Well, you know, the Easter shift sort of threw a fly in our analysis,

Yeah.

As far as we're concerned.

But, frankly, I believe that post Easter, compared to last year, our traffic and our average ticket was down.

That's what we saw.

Now as we go forward and as things more normalize and as we get through the holidays I can give a better answer for year-to-date, but it's certainly a -- there's a trend with fuel prices being at the levels that they are, that people shop less often, and the lower income customer, especially may have less money in their pocket.

Thank you.

Our next question comes from Patrick McKeever of SunTrust.

Thank you.

Bob, you talked about the monthly progression of same-store sales in the first quarter.

I was just wondering if you might just discuss the monthly comparisons as we look into the second quarter, and just even if you could tell us which month you have the most difficult comparison and that sort of thing.

The -- I believe we're up against, what, 5% comp, Patrick, last year in second quarter.

Which is probably our highest comparison for the year.

I'm doing this from memory.

And I think it was fairly consistent throughout the quarter, frankly.

I don't think one pales over the other.

But that's -- it's fairly consistent and the second quarter is our largest comp that we're going against.

Okay.

And then just a question for Erik on margin guidance.

So the -- it's pretax margin not operating margin, you're saying pretax margin of 7% or better.

Yes.

How about for the year, Erik, you've talked -- you did talk before on prior calls about a -- I think you said it will be -- it would be challenging for for you to see any operating margin guidance for the full year.

Is that still your expectation?

In other words kind of a flatish operating margin for the full year?

Yeah, I mean, I didn't say we wouldn't see any operating margin guidance, I think we said that operating margin was going to come under a little bit of pressure for the year, and, you know, we are still forecasting earnings growth of over 14%, of 14%, and, you know, the operating margin is going to fall in line with that guidance.

So it's EPS growth off $1.54 last year?

Yes.

Thanks Erik.

Yes, thank you, Pat.

Thank you.

Our next question comes from Tom Raboulli of Narragansett.

Can you give us more color on the progress to the margins at Greenback stores and also should we expect the share count from the repo offsetting option dilutions to continue?

Tom, I will take the first part, the Greenbacks integration is going very well.

They are ahead of plan for the year.

We've got most of them under the Dollar Tree banner now.

We'll finish up everything by the middle of June and their metrics are looking more like Dollar Tree Stores now, with their margin improving and all the metrics as time goes by, which is by the way is consistent with other acquisitions that we have done, as far as the time frame.

That's about 4% or 5% of the store base.

It was 100 stores on 2500 stores.

Okay.

Yep.

On the share repurchase, I mean, offsetting the options that we grant to our associates, is not --,you know, the primary reason that we're in the share repurchase.

The share repurchase is basically given a quarterly authorization by our board of directors and that's what we execute to.

You know, beyond the 200 million that we have authorized, I think through next November, there isn't anything else in play.

Okay.

Thanks.

Thank you.

I'm not showing any further questions at this time.

Would you like to continue with any closing remarks?

Well, I would just like to say thank you to everyone for your participation.

Our next conference call is scheduled for August 25th.

And I will talk to you then.

Thanks.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program.

You may all disconnect.

Everyone have a great day!