美元樹 (DLTR) 2004 Q2 法說會逐字稿

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

At this time, all participants are 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 turn the conference over to your host, the CEO of Dollar Tree Stores, Mr. Bob Sasser.

Mr. Sasser you may begin, sir.

Welcome and thank you for joining us this afternoon.

With me today are Eric Coble and Kent Kleeberger.

Eric will lead off with a review of our press release and financials, I will review operations details, and then we will open up the call for your questions, which we ask that you limit to two.

But before we begin with that, I want to take a couple of minutes to talk about our CFO change that is in process.

As we previously announced, Eric is in the process of making the transition from CFO to Corporate Secretary, and this will be his last earnings conference call.

He has been working very hard on the hand-off of his duties to Kent, and on a personal note, I want to thank Eric for his sincere efforts towards making this a smooth transition.

I have great respect and admiration for Eric and the role that he has played in the success and growth of Dollar Tree and I appreciate his many contributions, his dedication to the business, and in particular, his partnership and support in the development and execution of the strategy that will allow for continued growth and success.

We are well positioned for the future with a solid balance sheet.

After a successful national search, we have found and hired Kent Kleeberger who brings to us more than 16 years of experience with the Limited Inc. and related organizations.

In his most recent assignment, Kent held a CFO and COO positions with Too Incorporated, which was a spinoff from the Limited.

Kent has a solid accounting background, keen business acumen and he will be a great cultural fit.

I am excited to have found someone of his experience and ability to fill the role of Chief Financial Officer.

Kent, would you like to say a few words?

Sure, I would.

Thanks, Bob.

First I would like everyone to know I am delighted to be a part of the Dollar Tree family.

This is an opportunity I could not pass up.

As part of my due diligence I came to appreciate the tremendous growth Dollar Tree has enjoyed and I look forward to participating in the continued financial growth in the organization in the years ahead.

I also believe Macon Brock and Bob Sasser have assembled a great management team to help spearhead that growth.

Now I would like to turn it over to Eric for his review of the financials.

Thanks, Bob and Kent.

It has been my pleasure serving as CFO and Secretary and I look forward to my new role.

Welcome, everyone.

I would like to remind that you 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 releases, 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.

Moving to the press release, sales for the quarter were $704.2 million, representing a 12.5% increase over last year's second quarter on a 0.2% comparable store sales decline.

August sales are off to a good start and Bob will talk further about our efforts to continue to grow our top line.

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 count performers.

While new store openings are behind plan at the end of the second quarter, we are on track to meet our 20% square footage growth target for the year.

For the second quarter, earnings per share were 26 cents, in line with our most recent guidance.

For the quarter, gross margin was 35.3%, equal to last year's second quarter.

There are some notable changes within the components of cost of goods sold.

Merchandise costs again showed improvement as a result of improved buying.

Offset by increases in freight costs, which we expect to continue with fuel prices close to all-time highs.

Category mix was basically the same as last year.

Also, we completed our store physical inventories and adjusted our shrink accrual to reflect the improved shrink rate we are seeing compared to last year.

And finally, occupancy costs were deleveraged because of our below plan comps.

Moving to SG&A, these expenses were 28.3% of sales, compared to 27.7% in the second quarter of last year, up 60 basis points. 17 basis points of this increase is represented by $1.1 million of lease loss expense, associated with exiting our Woodridge distribution center near Chicago, as we transitioned to our new Joliet, Illinois, facility.

Most of the remaining increase is attributed to depreciation.

As we have discussed over the last several quarters, depreciation dollars will continue to rise faster than sales, because of our significant investment in supply chain infrastructure, point of sale conversion, and new distribution center.

Our point of sale conversions will be complete this year, and we do not plan a new distribution center in the near future.

As a result, the increase in depreciation as a percent of sales should continue to diminish.

We are looking for depreciation to be about $125 million this fiscal year, and we continue to expect depreciation to increase as a percent of sales through 2006, and begin to flatten or even decrease as a percent of sales in 2007.

Operating income of 7% compares to 7.6% in last year's second quarter, as a result of items I've just discussed.

Cash flow continues to be strong for the year.

We bought back approximately 417,000 shares of stock during the second quarter.

Cumulative repurchases under our $200 million authorization stand at $70 million, all purchased in the last nine months.

It is very attractive and strongly accretive for us to buy back at current levels.

As we've said before, we will balance that with our other cash needs, as well as our desire to maintain a conservative balance sheet.

On the balance sheet, cash and investments stand at $182 million, up 81% versus last year.

Inventory at quarter end is up 26% compared to last year, due to timing of receipts of fresh new merchandise needed for the second half of the year.

Over $40 million of the increase is due to early deliveries which arrived late in the quarter.

During most of the quarter, inventory was up only 17%, in line with our plan.

We expect our inventory and sales to be more balanced as the year progresses.

The increase at our fixed access reflects our two new distribution centers this year and long term debt is $250 million which reflects borrowings under our $450 million credit facility.

As indicated in our press release, we now expect earnings per share for the year to be in the range of $1.65 to $1.73.

For third quarter, our sales guidance is $730 million to $750 million.

And reflects flat to slightly positive comps.

We will hold our regular mid quarter update call on October 6, and the dial-in information is available in today's press release.

We continue to need at least 2% comps to leverage our fixed costs and gross margin in SG&A.

For third quarter, we plan gross margin to be approximately 35.5%, compared to 36.6% in the same quarter last year for the following reasons.

First, fuel costs continue to pressure inbound and outbound freight and our shipping volumes peak in the third quarter.

Second, it will be a challenge to leverage buying and occupancy costs which are substantially fixed in nature.

These costs are in our cost of goods sold.

And third, shrink is well controlled but we don't expect a significant benefit in the second half as we saw in the first half.

And also markdowns were very favorable last year third quarter.

Fourth, we continue to improve our inventory flow into the stores which affects timing and merchandise margins at the end of each period.

For the year, we continue to expect sales of 3.15 to 3.2 billion dollars.

Which implies over $1 billion of sales in the fourth quarter.

We anticipate flat to slightly higher gross margin for the fourth quarter, compared to the 37.0% achieved in last year's fourth quarter.

And we expect annual gross margin to be approximately 36%.

I will now turn the call over to Bob Sasser.

Thanks, Eric.

To begin with, sales and second quarter were challenging.

It is no secret that the retail environment has been tough in general.

And at Dollar Tree we were going against our toughest comparable store sales comparison of the year in the second quarter.

Our customer transactions were just slightly higher and average ticket was only slightly lower, with the result being basically flat comps for the quarter and that was consistent each of the three months.

Our highest comps continue to be in the northeast and in the west, and our large stores continue to comp higher than the company average.

The customers still love these larger stores, they stay longer and they spend more.

The average ticket is 20% higher in our large stores.

These large stores begin at a lower sales per square foot than our small stores, but they have a longer maturity curve and the ability to comp year over year without additional investment .

And consistent with that result, virtually all of our new stores will be in the 10,000 to 15,000 square foot range, which is our most productive range of large stores.

By next year, large stores will represent about half our store base.

The large stores do require a bit longer to acquire, lease, and build out, and this year, our second quarter openings fell short of our plan, we're going to make up the short fall in the second half, and we expect to end the year on a square footage growth plan of 20%.

Our merchandise continues to get better each year, and this is no exception.

Contrary to what you hear from other retailers, our back to school offering this year has been widely accepted, and our sell-through is on plan.

We continue to exceed the customer's expectations of what they can get for one dollar.

Our stores have been well stocked with the pens and pencils and paper and calculators, and this year even backpacks for back to school.

Really it is just amazing what you can offer for a buck.

We are now selling a wide variety of popular TV and movie DVD titles for example.

They're not all the latest releases but they're not $20, either.

They are only a dollar.

And who could imagine that you could buy a DVD of a vintage movie for only one dollar.

Our HBC continues to grow and we had great success in the second quarter of our travel assortment which was just in time for vacation.

Health and beauty care continues to be a focus department for us and our assortment has improved and expanded season over season.

Of special note this summer we launched a co branded AT&T prepaid phone card which has been very successful.

Early results are just outstanding.

Our customers have really responded to the branded card at a dollar, and we're selling thousands each day.

We continue to get questions about our sourcing and the potential of merchandise cost increases.

We are not experiencing higher merchandise cost, especially not on our imported goods which represent about 40% of our mix.

Our buyers here develop much of the merchandise at Dollar Tree, so we control the size and the quantity and the quality and the packaging and the cost.

This is one of the ways that we create value and this is part of what makes us unique.

If we need to react to commodity inflation, we change the product, not the price of the item, to maintain both our margin and our relative value compared to other retailers.

And second quarter, true merchandise costs improved overall.

Our store operations also continue to improve.

I recently spent a week out on the West Coast visiting stores and I can tell you with confidence that our stores just look great, the best I've seen.

We're ready for additional business.

These were mostly the large stores, the back rooms were well organized, the merchandise attractively displayed, and management enthusiasm was high.

As we continue to learn more about how to operate these larger stores, and improve our processes and flow of inventory, we are improving our sales per employee hour, which is a major metric for us.

And we continue to find opportunities to become more efficient as evidenced by our improvements in both inventory shrinkage and our hourly payroll this year.

Some of this comes from focus by our operators, some through more experience in running the larger stores, and some through better information and technology support.

Speaking of technology, I'm proud to announce a major milestone, we have recently completed the retrofit of our stores, to point of sale scanning, and installed a wide area network to our store base.

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

In addition the wide area network gives us the ability to do many things at store level that we could never do before.

We've discussed a number of these initiatives in the past, including electronic check authorization, EBT card acceptance, automated time and attendance, automated labor scheduling, and others that enable us to reduce or to avoid costs.

Additionally using the wide area network, we have enhanced our store ordering efficiency and capability with the use of hand-held scanners, and more recently, we have begun using POS data to help us auto-replenish key categories that are relatively predictable demand.

Our stores really love the auto replenishment, because they can spend more time on customer service and less time ordering manually.

In addition, the system ensures that our stores are in stock on the key items, while reducing the back stock.

We will continue rolling out auto replenishment to additional distribution centers and categories throughout the coming year.

We have reached a couple of other milestones worthy of mention in the second quarter with the opening of our Ridgefield Washington, and Joliet Illinois distribution centers in the first half, both of which are running smoothly and efficiently.

We now have a national logistics network capable of serving all 48 contiguous states.

And speaking of national, in July, we opened a store in Grand Forks, North Dakota.

We now have retail operations in all 48 contiguous states.

And most importantly, we have people, logistics, and infrastructure in place that will allow us to add a significant number of new stores anywhere in the country.

As we look into the second half of the year, the news and expectations of many retailers appears mixed.

From a macro standpoint, unemployment has improved only marginally.

We are in a challenging election year.

Safety and security are still top of mind.

And most importantly, to our customers, gasoline prices remain high.

Our middle income customers have especially felt the pressure from higher gasoline prices, and we believe they are reacting to that by making fewer trips to the stores, and buying closer to their needs.

The news today that oil prices have declined is positive, but they still haven't seen that at the pump.

With little or no relief from high fuel prices in sight, we remain conservative with our sales guidance and expectations.

That being said, we are past our most difficult comp comparisons of the year, and I will tell that you August is off to a good start.

The calendar in the second half is more favorable with two more days between Thanksgiving and Christmas, and we are better prepared than ever with terrific new merchandise and more value than ever.

So while the macro pressures are not positive, we remain focused on our business at Dollar Tree, and on the things that we can control, and those are improving our store productivity with better assortment, higher value, and a compelling shopping environment.

Inventory productivity improvements, getting the right product to the stores that need it, and expense management, we're continuing to improve processes, and use technology to help us be more efficient.

We have a concept that customers love, a talented organization, and a solid balance sheet.

We have made the necessary investments in our business, to support profitable expansion and our infrastructure is solid and scalable.

I especially have great confidence in our management team, they are focused, experienced, and second to none.

We are now ready for your questions.

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

Thank you, sir.

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 question queue, please press the pound key.

Again if you would like to ask a question at this time, press the one key on your touch-tone telephone.

Our first question comes from Daniel Barry of Merrill Lynch.

Good afternoon.

Good afternoon, Dan.

Bob, you said yourself that you have easier comparisons on comp in the third quarter, but you have basically the same guidance.

I'm curious to know why.

The macro environment, Dan, with fuel prices still stubbornly high, and the prices at the pump are putting pressure on our middle income consumers, and for that reason, we are -- we are looking at that as a depressing element.

Our comparisons are easier in the second half than they were in the first half, and we have started off August well, but we really haven't seen any relief to our middle income customers at the fuel pumps, and that is really a big deal to them, so we're being conservative, realistic and conservative.

Okay.

And then following up on that, if you could X out the macro environment, are you going to benefit in the third quarter more than the second from your advertising program, or some of these technology changes you made?

Yes, there is a little more advertising in the third quarter than in the second quarter.

And yes, as we continue to roll out this infrastructure to our stores, you know, on my visit to the West Coast last week, I didn't mention this, but it was very exciting to walk the stores with our store managers as they were talking about their top-selling departments, and they were talking about the top 10 items and the top 100 items and what was coming on the truck, and their visibility of the inventory that their customers were buying, and that they were needing, and that is going to equate as we continue to get more of that kind of information out there, that is going to equate to quarter over quarter, it is going to continue to leverage into more sales.

Our next question comes from Dan Wewer of CIBC.

Hi.

Good evening.

Eric, good luck in your new position.

Thanks, Dan.

The question I have is regarding the inventories, when I saw the figures come out earlier, I would have guessed the increase would have reflected the below plan sales volumes in the quarter.

And I was curious as to why you would actually be taking receipt of product earlier, you know, given the sales trends of late and your cautious outlook?

Well, we've adjusted our plan and we are very flexible in adjusting the plan mid quarter, towards the end of the quarter, and for the year, and a lot of it did fall on exactly what the timing was going to be of those items, like I said during most of the quarter we were up only 17% and we did have early deliveries, mostly timing issues, that will be made up over the third and fourth quarter.

And then on the revised gross margin outlook for the third quarter, with the, you know, the reduced outlook, is that taking into account the prospects of some extra clearance markdowns from a year ago?

No, we really don't have -- we have no clearance markdowns.

Opportunities, frankly, of a year ago.

Merchandise is very clean.

Our next question comes from Reed Anderson of Friedman Billings Ramsey.

Good afternoon.

A question on -- back in the third quarter, about the SG&A side, I know, you know, if you look at the trend year over year, in the first and the second quarter, you -- even though with the comps you've delevered the delta has gotten smaller, and if you strip out the -- you know, the million-plus dollars for the distribution, the one-timer is only about 20 or 30 basis points a square.

Do you think in the third quarter you can kind of maintain that level of deleveraging or do you think it could get a little bit worse?

Well, one of the main reasons that we're able to show that the deleveraging isn't that bad is that hourly payroll control continues to get better and better period over period, and frankly, I as as a CFO, am pretty -- or Kent as the CFO, I'm very surprised at how well the operations team has continued to do that.

We are rolling out more of the automated labor scheduling and time and attendance.

My feeling is, is that they're going to set goals for themselves, that they are going to be able to achieve, and we are going to continue to see some improvement in hourly payroll as we go forward and have more technology in the stores.

It is not a guarantee, Reed, but it definitely has been one of the areas that has continued to improve quarter over quarter.

Also, we have, you know, some -- and we have exercised some flexibility in some of the discretionary expense items that we have.

Again, looking at sales trends from mid quarter on.

Okay.

And then in terms of the auto replenishment, Bob, you commented about -- are you benefiting from that, has that been expanded beyond household chemicals extensively or is it still within that, are you going to more stores?

Can you just give us a qualitative update on your comment, please?

Yeah, Reed, we're doing both actually.

We're expanding into some more categories in the party department, the basics in party, not seasonal, and we are expanding the household to more stores.

So we're doing both, and we are somewhat measured in our approach to that, and I think we will continue over the next year, really, to add to that.

But where we're doing -- the stores are really jazzed about it and it is resulting in less product in the back room, and a better in-stock on the sales floor.

So that is something that we see an opportunity to improve over the next year.

Our next question comes from Ralph Jean of Wachovia Securities.

Great, Thanks, guys.

Just a quick question, you know, with your cash up 80% year over year, do you anticipate being more aggressive on your stock repurchase plan?

Well, you know, we have the facility in place, Ralph, and you know, we've always said that the stock was accretive at the current levels to buy back, we do have different uses of cash, one is our expansion plans, and our growth and the funding of our business, first and foremost, and then that's always an option to buy back stock.

We still have part of our facility approved left.

Okay.

And then just my other question would be, how much did shrink help out in the quarter on the gross margin?

Well, it helped out fairly substantially.

We had an accrual that was over 2% and our actual shrinks are coming in under 2%.

So I would say that it was a pretty significant factor in looking at gross margin overall.

Our next question comes from Meredith Adler of Lehman Brothers.

Yeah, first, I was wondering if you could just clarify a little bit about the size of the stores you're opening.

You emphasized the 10 to 15, and I'm assuming that means that you're de-emphasizing bigger stores or you're de-emphasizing smaller stores?

I'm not sure about that.

We zeroed in, Meredith, on the 10 to 15 size.

We categorize stores over 10,000 square feet as large stores.

And as we have opened up more -- with large stores, the one in the 10,000 to 15,000 square foot range have been the most productive on a sales per square foot and also on our contribution and investment.

So we have some stores larger than 15,000 square feet.

We really look at those as opportunities -- economic deals, or really opportunities at locations that have huge or large population densities.

So if we get an opportunity at a store in the right place, and the economics are good, and it happens to be 18,000 square feet, or 20,000 square feet, we have been taking those, because we have a prototype that fits that, and we can make a lot of money there.

What we are searching for is in the 10,000 to 15,000 range.

What we are subject to, is what is available sometimes.

Okay.

And then I just have another question about distribution.

I think Eric said that you don't need any more distribution for the near future.

I was wondering what your definition of near future is.

I mean when do you think you need to add distribution capacity next?

The next, very next expansion of capacity will begin sometime next year.

And that doesn't mean we will necessarily add it next year, but we will begin sometime in '05, expansion of our Briar Creek facility.

And that's the next addition that we have.

We just added a lot in the middle of the country with Joliet and also up in the Pacific Northwest this year.

Our next question comes from Michael Baker of Deutsche Bank.

Thanks.

On the EPS guidance, in the past, you hadn't provided numeric guidance like that, so related to that, in the third quarter, I'm now calculating 31 cents seeing as it looks like you are now giving specific guidance.

Can you tell me if that is wildly off?

And then I guess would that would imply 77 to 85 cents for the fourth quarter.

Is that directionally about right?

You know, I don't know what your assumptions are for everything else, but --

Well, gross margin in line with what you said.

-- in the range.

I think it is within the range of the guidance that we gave.

Okay.

So you're not giving more clarity on the quarters?

Not as far as EPS, no.

Okay.

Going forward, do you anticipate this being sort of the new IR policy where you do give some of -- you know, I guess annual EPS numbers but not necessarily quarterly or -- because this is a change I think from how you've communicated it in the past.

Right.

I think it is a change in the right direction in terms of really kind of honing in on the EPS line which I think will increase the level of the visibility to the bottom line for you folks.

Right.

And so is this outlook now that you're giving today; this the same outlook that you would have said three weeks ago when you had your sales and you said at the high end 14%, or has something changed in the last two or three weeks to make you incrementally less positive?

Before, you weren't really quantifying it, it was just sort of, you know, by feel and now you're actually quantifying it.

It I am just trying to figure out if something changed.

You know, we're we try to give -- one of the things that we have heard in the past is that the desire to hear more quantitative range of EPS, and guidance, and this is the first time that we've done that, and we've done it in response to talking to people in the market, and perception studies that we've done, and frankly with Kent coming in as the new CFO, and taking a look at the way he wants to run the shop, so to speak, it was an opportune time to do that, and I think that is what you should read into the fact that we have given guidance for the year now, and clarity to the rest of this year.

So I wouldn't read any more into it than that, frankly.

We've given you a range on the year, and I think that's consistent with what we have been saying, that range.

Our next question comes from David Yamamoto from WR Hambrecht.

Good afternoon.

First, can you tell us how the integration of Greenbacks is proceeding?

Yeah, it is pretty much done.

And they actually will have begun -- they're in our comps now as of,what is it, August?

And they have been integrated.

They have our management, our systems, our merchandise, they're being shipped out of a combination of distribution centers, whether it be Salt Lake City or Ridgefield or -- maybe even some out of our Oklahoma DC.

They are Dollar Tree stores that have been renamed and resigned and remerchandised.

We're having good success.

We're seeing the same kind of trend that we've seen with the last couple of acquisitions, we continue to improve the margin of the stores, and as we've gotten our merchandise in, we are seeing positive sales results.

From the stores.

Okay.

And just a follow-up question regarding the DCs and so forth, I assume that since you are just going to be doing an expansion in 2005, I assume directionally you would expect a boost in free cash flow in 2005?

Is that correct?

Yeah, I think the savings from -- or the costs of doing the POS conversion, plus the two DCs finishing off this year, you know, will lead to a lower CapEx as a percent of total sales in the future.

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

Good afternoon, how are you doing?

Good, Ed, thanks.

Thanks for taking the questions.

First, the mix was consistent I think you said year over year, and I was interested in that, because normally, you'd think as the larger stores are coming on and as you are expanding stores, you'd mix more towards consumables so did you kind of see the discretionary categories a little bit stronger during the quarter?

I think part of it is, you know, a lot of what we did receive was for seasonal buildup, ahead of seasonal buildup, and I think we've had a great back to school season.

I think it was a better season than last year and a bigger season and there was more focus on it, so yeah, there is a season in there that would have some imported goods in there, too.

And that was stronger than last year's seasonal?

Yeah, I would say so.

Okay.

Thanks.

And I understand that occupancy costs deleveraged because of the top line, but I was wondering on a per foot basis are you seeing rent trend up a little bit?

You know, it is not really on a per foot basis.

It is really a little more hard to put your finger on it than that, to tell you the truth, and the markets that we're going into, they're somewhat diverse, and of course in the larger metropolitan markets you see different rent rates than in the suburban markets, but all in all, the rents per foot in the larger stores are -- I don't really see them trending up, some markets are getting more expensive --

Our next question comes from Greg Margolis of Boliosny Asset Management.

Hi, thank you.

Can you quantify more specifically the -- what the adjustment to the shrink reserve meant in terms of saved cost of goods sold dollars, and what -- so I can figure out what it meant to the bottom line?

Yeah, I mean I think it is fair to say the difference was about 40 basis points.

Okay.

So --

And similar to the number that I talked about last quarter.

Okay.

So the shrink reserve is now what percent of sales versus what before on a go-forward basis?

Under 2%, which has been our historical shrink experience.

Okay, so so you took it from roughly 2.4 down to 2%?

Well, you can -- I'm not going to get into specifics on the phone, but it is -- you know, we were above 2% because our last year's experience was above 2%, so we changed the accruals, and now, we're back basically to historical levels, which are under 2%.

Ladies and gentlemen, again, if you would like to ask a question at this time, please press the one key on your touch-tone telephone.

Please stand by.

Our next question comes from Patrick McKeever of SunTrust Robinson.

Thanks.

Just back to the gross margin guidance for the third quarter.

So you're saying down a little bit more than 100 basis points year over year, and Eric, you cited a few different factors.

Can we assume that the order of magnitude as far as the impact on gross margin in the quarter is the order that you laid it out, fuel being the biggest?

And peak shipping volumes?

No, I mean I don't have as much clarity to say that that's at the end of the day going to be the number one item.

I mean it is certainly the one that we're focused on the most, because we can't control it as much as the other ones, but the deleveraging really depends on where we are on the sales spectrum that we said.

I'm pretty comfortable aware of the mark downs that shrink are going to be, and the inventory flow.

That could change right at the end of the quarter.

I could be going with a predictable number for first and second period of each quarter, of the quarter, but then at the end of the quarter, that could change.

So they're not necessarily in the order that they will appear at the end of the quarter.

It just seems like -- I mean held gross margins steady in the second quarter.

I would imagine you're already starting to see some pressure on fuel costs and that sort of thing.

And you mentioned that you actually did have some -- I know this was sort of inbound receipts, but your inventories were high.

Yes.

I mean it seemed to have been a period in which your shipping costs would have been relatively high, I guess, anyway, so it just seems like a dramatic departure from the current trend line.

And then leading into the fourth quarter, I mean to get to your full year guidance, assuming that -- I mean as one question, one of my competitors, I guess, was suggesting that maybe 31 cents or so is the right number for the quarter, and then get to the full-year guidance, that would assume a pretty big ramp-up in earnings growth in the fourth quarter of the year, so the long and short of it is, I mean I guess what changes in the fourth quarter that would lead you to think that earnings are going to accelerate as much as would seem to be implied by your guidance?

Well, it all depends on what part of the range you take for the third quarter guidance and for the year, and, you know, I'm not sure -- if you take that we're going to do 3.2 billion but we're going to take the low end of the third quarter for sales, then I think it might be an unreasonable number that we have for the fourth quarter.

If do you that.

I think 730 million is consistent with 3.15 billion at the end of the year, and, you know, I'm fairly confident that we're going to approach 36% in gross margin overall for the year, which is consistent with the guidance we gave at the beginning of the year of 36 to 36.5.

So that really hasn't changed.

What has changed is the timing of where the gross margin is by quarter.

And it will be a little bit higher in the fourth quarter, which is driven by higher volume and a little bit less in the third quarter as a result of that.

Our next question comes from Michael Freedman of RBC.

Good afternoon, gentlemen.

I just had kind of two questions on a different track.

The more kind of due diligence I do on the company, the more it seems that both your customers and investors, as you've discussed before, don't necessarily distinguish between you guys as they -- everything in the store, one dollar price point, and your competitors that are kind of mini Wal-Marts.

I was just wondering if you could kind of answer two things.

First of all, are you making any progress on the advertising front?

And second, have you done like focus groups to, you know, just try to see if, you know, your identity is correct?

I mean particularly in these times when gas is impinging on potential customers, you know, maybe some new guys should be finding their way to our doors.

Let me see if I can start with the first part.

The advertising, yes, we've done focus groups, and yes, we have seen that there is some lack of clarity between Dollar Tree and the other guys with dollar in their name that aren't everything is a dollar.

And there is an opportunity for us to clarify that, and we believe to attract more customers as we do that.

The cost of marketing is first of all, it is something that is to be done over a longer period of time.

It takes time to get that message across, and it takes a lot of money to get that message across.

And we're taking a measured approach on, that because we really want to get a return on our advertising.

We're really focusing our advertising right now in two ways.

One entry into new markets and grand openings, and two, and to our efficient markets where we have a lot of stores, and trying to draw this distinction between us and the others.

Now, having said that, you know, there's other guys out there with dollar in their name, and they have a strategy and a plan and a customer base if they choose to attract, I think they do a great job of that, but we're different, and we don't think the world needs another -- of those.

There is enough of those.

What we do is we offer outstanding value, product worth more than a dollar, at a dollar.

And we offer it to the customer in a shopping environment that is maybe a step above what you would expect from a dollar store.

We look for good safe locations.

We spend money on our store buildout.

We build bright stores.

We build stores, we put in fixtures that -- new fixtures, and we spend money on the buildout to attract a middle income customer that we think requires that.

And when we get them in the door, we want to wow them and woo them with our merchandise value, they just can't believe that is a dollar.

And with our shopping experience.

So we think that's what we do.

We know that's what we do.

And we know that's our reason for being.

We will continue in that direction.

We are a variety merchant.

Attracting families and middle income households, and selling them things that they need in their everyday life.

We're not a grocery store.

As some of the other dollar players have gone in that direction.

We are not urban stores, although we have urban locations.

We are -- we are middle America.

And we think we do very well what we do, and we don't think we would do as well given what they do.

So that is sort of our strategy.

That is what has gotten us to this year, over $3 billion and that we think will take us to the next $3 billion.

Economic issues considered when the middle income customer is under pressure, then I believe all of us are a little under pressure.

As a matter of fact, I think I saw comments from Wal-Mart earlier this week saying much the same thing, that fuel prices were really pressuring that middle income customer.

So we're subject to the same things and we will stay true to our strategy, and we will do our -- run our business as effectively as we can, and we believe that's why our customers come to us.

I think from the marketing standpoint, what I've seen is I will take one market that I've run across and visited, and that's the Louisville, Kentucky, market and I ran across a few people, a few months ago, before we started some intense advertising there, and they didn't even know that we had that many stores around Louisville.

And after we started advertising, we actually started getting more articles in the newspaper about us, and what we are in the Louisville area, and I've just heard more and more about the Louisville store, just in the general media.

So I think the awareness is coming and growing, and the customer is new and learning the difference, and some of our best markets, you know, there is a brand awareness of 40% in the general public of what Dollar Tree is, and it is a lot less than that in some of our other markets where we're targeting some advertising so we can get that awareness up.

In the financial community, there is only us and 99 cent that are single price point retailers and it is difficult just to have a sector of two, so there is a sector of five or six with financial characteristics that might look the same, but we're very different retailers from a customer standpoint and a pricing standpoint.

I appreciate the thoughts.

You know, Bob, you're preaching to the choir here.

I just want to make sure the message gets out to customers and potential customers.

You're exactly right, and I will tell you thank you for giving me the opportunity.

Sorry for the long answer but it is something we are very passionate about at Dollar Tree, and we do believe there is an upside to getting that message out to more customers and attracting more customers.

It is just that the cost to do that is going to take us over time, and you know, it is very expensive, as you start going out and buying advertising.

We are also a low cost provider.

I don't attract a lot of co-op funds from vendors.

We try to keep our business simple.

Vye for the best cost, take possession as early in the supply chain as possible and pass those values on to our customer, so anything we spend on marketing, be sure that we have looked at it as far as there is an attractive return that we're getting for that, and that's how we view our marketing plan.

Thank you for asking, though.

Great.

Good luck in the second half.

Thank you.

Thank you.

Our next question comes from Mark Gordon of Goldman Sachs.

Hi, guys.

I'm just wondering, when should we expect inventories to grow slower than sales?

I'm look hoping third quarter.

You got to make up for it sometime.

We've got a big purchasing month, a couple of purchasing months coming up, you know, and we've got a big season as well.

Third quarter, we might be able to see it, certainly in fourth quarter, as we get to the biggest part of our year, and we're going to be better stocked, better inventory flow than ever before, it continues to improve, you know, so certainly in the fourth quarter, but I'm hoping third quarter we start seeing it, too.

Okay.

And then on gross margin, sort of following up with what Patrick McKeever was saying, I'm not quite sure I understand why in the fourth quarter you should be able to hold gross margin flat, especially if the shrink comparisons become more difficult in the fourth quarter and especially if fuel costs are going up.

I mean I think part of -- part of the equation that we're missing is -- I don't think the shrink is that comparable -- shrink was higher last year and it is lower this year.

I think we're estimating shrink to be lower in the fourth quarter this year than last year so that is part of why we expect margins to be flat or maybe slightly improved.

Thank you.

Our next question comes from Jeffrey Johnson of Catamount Capital.

Thank you.

My question has been addressed.

Thank you.

Our next question comes from David Campbell of Davenport.

Thank you very much.

Wondering if I could ask Eric and Bob a couple of questions, first of all, Eric, I didn't understand your third quarter gross margin explanation as to why you can't leverage buying costs in the third quarter.

And can you also say what the cost of the shares was that you purchased?

And then I have a follow-up question for Bob.

Basically, the fixed costs in our buying organization and our occupancy, it is just -- it is very difficult to lever those costs with salary increases, for example, that is just one example, at flat to slightly positive comps.

So that's where we were coming from on those -- on those items, we just basically need to have some comps that overcome general inflation.

Okay.

And then your second question?

Oh, the share price was just over $26 I think.

And that's on average.

And what is your comp assumption in the fourth quarter then, given that you do have two extra shopping days after Thanksgiving?

We still have a slight -- a flat to slightly positive comp comparison.

Thank you.

Our final question comes from Sheri Eberts of J.P. Morgan.

Oh, hi, everybody.

Just wanted to understand the impact from Greenbacks on the comps, potentially, as they enter the base in August.

You know, Sheri, I can only -- because I haven't -- I don't have it in front of me, but they were positive on our comps so they have been positive to our comps -- consistent, I guess.

They are the larger stores and the larger stores in general have performed better.

Right.

And they are right in there with the rest of the group.

So is that part of what is driving your comments in terms of the August getting off to a good start?

Is it really just different math or is it the underlying trend of the business?

You know, the underlying trend in August has started off very good, Sheri.

It has only been three weeks but August has started off well, and of course, Greenbacks is part of that, but it is not all of it, that was only 100 stores, so I think the underlying trend in August is what I was trying to portray.

Okay.

My second question is just back to the inventory, I know, Eric, you mentioned that it was up 17% during most of the quarter, but I guess I was just trying to figure out, and then why would you be planning your inventory up 17% given that your sales are planned up closer to 13?

Right.

The difference is really what we stock our stores with on a square footage basis.

Our square foot is up higher than our sales.

And even though with the larger stores, our inventory per square foot is down, it works out that inventory is slightly ahead of sales, especially in the building quarter.

So even without the $40 million of early receipts, we would have been up probably about 18.5%, which is pretty close to plan, and the plan is based on store class, and it basically works out to slightly higher than sales.

Thank you.

This concludes our Q&A session.

I would like to turn the conference back to Mr. Sasser.

Mr. Sasser?

Well, thank you very much, and I would like to thank everyone for participating in our call.

Our next conference call is scheduled for November the 24th.

The day before Thanksgiving.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation.

And have a wonderful day.

You may disconnect your lines.