美元樹 (DLTR) 2004 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Dollar Tree Stores 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. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded.

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

Mr. Sasser, you may begin your conference.

Good morning.

Welcome everyone, and thank you for joining us this morning.

With me today are Adam Bergman our Director of Investor Relations and Kent Kleeberger, our Chief Financial Officer.

As you noticed we changed the timing of our press release and conference call.

We have historically issued our press release at the end of the day after the close of the market; after a review of what other companies are doing and in response to your suggestions, we will henceforth issue our press release and hold our earnings call in the morning prior to market penning.

Today Kent will lead off with a review of our financial results.

Then I will provide some color on the quarter and talk about merchandise and store initiatives which will benefit fourth-quarter and beyond.

But before I turn the call over to Kent I want to ask Adam to give you the Safe Harbor statement.

Good morning, everyone.

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 provision 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 which are 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.

With that said, I would like to turn the call over to Kent for his financial overview.

At the end of our planned remarks we will open the call to your questions, which we ask you keep to two.

Thanks, Adam.

Good morning everyone.

Sales for the quarter were 724 million, which is an 8.8 percent increase over last year's third quarter and reflect a 0.7 percent comparable store sales increase.

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.

However, new store openings remain behind plan at the end of the third quarter as was square footage growth at 18 percent.

Store slides cost us at least 16 million in sales this quarter by my estimation.

Diluted earnings per share for the quarter were 28 cents, in line with our most recent guidance.

For the quarter gross margin was 35.4 percent below the 36.6 percent in last year's third quarter but nearly in line with our expectations.

As we indicated in our call last quarter, we were expecting some notable changes within the components of margin.

First, fuel prices, which reached an all-time high during the quarter, pressured our inbound and outbound freight costs by about 20 basis points.

In addition, we incurred approximately $1 million of markdowns at cost related to inventory damaged by hurricanes and floods.

You may also remember last year's third-quarter margin had a handful of onetime benefits along with a very favorable and low markdown rate.

And while the 0.7 percent comps were better than the first two quarters of this year, they were not enough to leverage our buying and occupancy costs.

SG&A expenses were 28 percent expressed as a percentage of sales compared to 27.5 percent in the third quarter last year, up about 48 basis points.

A good portion of the increase can be attributed to depreciation.

We have now completed our national DC buildout and we have also substantially completed our point-of-sale rollout to our stores.

As a result, we expect a depreciation pressure on operating margin will start to moderate and then begin to decline as a percentage of sales by fourth quarter next year.

Cash flow continues to be strong.

We ended the quarter with cash and investments of $98 million, up 46 percent versus last year's third quarter.

This business continues to be an exceptionally strong cash generator and I expect will end the year with close to $300 million of cash.

Long-term debt remains at 250 million, which represents borrowings under our variable rate credit facility.

Rates on this debt remain very inexpensive, although we may revisit debt levels if and when interest rates climb appreciably.

We bought back approximately 693,000 shares of stock during the third quarter.

Cumulative repurchases under our 200 million authorizations stand at about 87 million, all purchased in the last year.

Inventory at quarter end is up just shy of 17 percent compared to last year.

Much of this increase represents inventory on hand to support the large number of new stores opened in November, along with two new DCs and a onetime buildup of inventory to support automatic replenishment efforts.

Same-store inventory is flat.

It is a key focus of mine to work with the buying and inventory planning teams to speed up turns in 2005.

Our new supply chain systems are now giving us the SKU level visibility to help make that happen.

On a trailing four quarter basis, inventory turns are up from about 2.9 to just under 3.1.

With enhanced point-of-sale data and auto replenishment capability, we should drive turn improvement in 2005.

Now for future expectations.

As indicated in our press release, we now expect earnings per share for the year to be in the range of $1.65 to $1.67.

For the fourth quarter we are forecasting sales of 990,000,000 to 1,010,000,000 and diluted earnings per share of 80 to 82 cents.

That implies some margin expansion compared to last year's fourth quarter which we believe is reasonable based on several factors.

We are bringing in high margin holiday items closer to the season.

Shrink has improved noticeably year-over-year, and we continue to see improvement in selling payroll and certain SG&A categories.

As for 2005, we are still in the process of finalizing our 2005 budget, but I have some high-level information I can share with you.

Dollar Tree remains a growth company and we expect to grow square footage 15 to 18 percent in 2005.

One of our major focuses for 2005 is opening new stores on time, which not only helps precision of the financial projection, but will also help inventory turns and sales.

Gross margins have been consistently in the 36 percent range for Dollar Tree's public history and I expect that this will be the case again in 2005.

The annualization of depreciation on several projects completed during 2004 such as our Joliet DC will cause depreciation in 2005 to rise as a percent of sales but by much less than it has in 2004 versus 2003.

By fourth-quarter next year I expect the depreciation headwind will be gone.

On a related note with the DC buildout complete, we expect capital expenditures to be lower in 2005, lower for the second year in a row.

I anticipate CapEx to be in $160 to $165 million range next year with virtually all of this attributable to new stores and relocations.

In addition, our focus will be to drive construction costs per square foot lower through value engineering and competitive bidding.

So with improved operating performance and lower CapEx we expect to build our cash balance appreciably which means we remain open to buying back stock.

Before I turn the call over to Bob, let me make a few remarks about some of our priorities.

First as mentioned we have a keen eye on inventory and making share it remains balanced with sales.

And we expect to increase our turns.

Second workers compensation is an area where I believe we can make huge strides and potentially save a significant amount of money through process engineering and other changes.

Third we are committed to analyzing the metrics of any project that has the potential to drive sales, whether it is stores size, investment in technology or improvements in supply chain.

Finally we will be a more visible public company.

We have put together our Investor Relations plan for the next twelve months starting with the NASDAQ conference in London next week.

We are also planning to present at a number of conferences in the early part of 2005 accompanied by many one-on-one sessions.

We hope you will come see us or listen in on the Web.

With that I will turn it over to Bob for his remarks.

Thanks, Kent.

I want to start with just a little color on our sales through the quarter.

As reported in our press release our comp store sales for the quarter increased 0.7 percent and the increase was due to a combination of factors and reflects an equal increase in both our transactions and in our average ticket.

We started off the quarter with a strong back-to-school season; our school supplies which are a staple at Dollar Tree appealed to not only parents and teachers but also to student and the like.

Our customers really appreciate the assortment and we have a great back-to-school.

We ended the quarter with a good sell through of our Halloween merchandise, our markdowns were in line and our stores made a clean transition to their Thanksgiving and Christmas assortment.

There were two obstacles to sales in the quarter.

First of all the gasoline prices hit an all-time high.

This was particularly a problem for our core middle-income customer and it became more of a problem as the quarter progressed and as the fuel prices increased.

Higher fuel prices continue to be a headwind to our sales.

Secondly we opened fewer new stores during the quarter than planned and many of the ones we opened later in the quarter.

I am happy to sell you that as we enter Thanksgiving week this week these stores are now open and ready for the holiday season.

We have now achieved our announced store opening plan for this year with an increase of 20 percent square footage growth.

As you no doubt heard from other retailers the Christmas selling season this year is longer and peak sales are expected to come later.

Our sales expectations are no different.

And while November is off to a slow start the calendar shift gives the consumer 2 extra shopping days between Thanksgiving and Christmas, and an opportunity for more sales later in the quarter especially with Christmas moving from Thursday to Saturday.

Our stores are prepared and our holiday merchandise assortment is really better than it ever has been.

And everything sells better in fourth quarter.

Our new stores, our larger stores especially give us an opportunity to sell more everyday staples, seasonal basics as well as the holiday product.

We no longer have to reduce our basics business to make way for the seasonal merchandise.

We can do both now.

Our stores are focused on increasing the average ticket and their efforts can be summarized around 5 basic initiatives.

First of all, full front (ph) forward seasonal displays.

The holiday merchandise on the floor, front and center and a seasonal fuel for throughout our stores.

Secondly our (indiscernible) peak program; we have identified basic items which peak in the fourth quarter, build our inventory and stack these items out in the stores.

These are items like extension cords and white tissue paper and white gift boxes and basics of crayons and all the basic, everyday things that peak especially in fourth quarter.

Third, related product displays.

We really focused on building displays and using clip strips and side panels and side stacks to merchandise related items together to encourage the customer to buy just one more item when they are shopping.

Fourth, we have improved our in stock on basics, while the customer is shopping we want to offer them our best assortment of basic household supplies and the health and beauty care and all the things they need everyday.

Our replenishment systems are working well, and we place an emphasis on basic in stocks.

And number five, last but not least is our drive items, which is suggested selling by the cashiers at the last point of opportunity.

As the customer is checking out, the stores are picking an item and they are suggesting that item to the cashiers, to the customers as they leave.

An example, for Thanksgiving, we have the turkey platters and the carving knives and the dinnerware and glassware, holiday placement, all the fun seasonal products that you expect from Dollar Tree that you need to set that holiday table even down to the makings of a floral centerpiece.

In addition to that you're going to find peak inventories in our stores of the turkey roasters and the turkey basters and aluminum foil and many of the things that you need to prepare the meal.

And while the customer traffic is at its peak, we continue to offer all the basics including the basics for cleanup afterwards with the dishwashing and cleaning chemicals and paper towels, napkins and such.

As a move into the Christmas season our merchandise focus turns to gift wrapping which we are famous for and stocking stuffers and all the needs associated with gift giving.

In addition to the great style and the unique design and quality of our gift bags and our bows and our wrap we are in stock better than ever on the gift wrapping basics.

And we have peaked our inventories as I said on the white tissue paper and plastic tape and scissors and all the things that you need to wrap a great gift.

Our trim-a-tree assortment this year is highlighted by our themed ornament wall.

And while we still have the basic ornaments, our buyers have really stepped it up and helped our customers decorate the perfect tree by developing and coordinating ornaments into four themes.

This merchandise is available only at Dollar Tree and while you might expect to pay more at department and specialty stores at Dollar Tree it is still just a dollar.

Our holiday assortment throughout the store continues to get better.

Sales have already been strong on this year's Christmas bear (ph).

It's bigger; it's better, and more fun than ever.

We even have a porcelain doll this year that is a well item and is of gift shop quality.

Our Christmas theme dinnerware is an outstanding value and continues to exceed expectations.

And we have an ever-changing assortment of stemware including genuine lead crystal and a new colored stemware that I'm excited about that has just been great.

Customers have been really responding to it.

It has been flying off of our shelves.

In addition to focusing our stores on selling more to existing customers, we are also working hard to drive new customers through our doors.

As many of you know we have resumed some targeted regional advertising with radio and TV spots in November and December.

As a reminder, this is all additional as last year we did none in this time frame.

The campaign is taking place in 14 markets, and we expect that it will be successful; our early indications are good.

Going forward, we plan to continue to use more advertising especially television and radio in support of grand openings, new market entry and in support of our seasonal peaks.

As we look ahead gasoline prices remain higher than a year ago.

Higher fuel prices at the pump and on the home heating bill will likely continue to have a dampening effect on the core middle income customer's ability to buy.

For this reason we remain conservative with our sales guidance and expectations.

On the plus side we are optimistic about a successful fourth quarter for several reasons.

First of all, the calendar and second half is more favorable with two more days between Thanksgiving and Christmas.

Secondly, we are prepared more than ever with terrific new merchandise and more value.

Third, our large stores give us an opportunity to continue selling basics while maximizing our seasonal business.

Fourth, our new stores are now open and ready for business.

And last, our increased spending on advertising will drive awareness and help us increase sales.

So while macro pressures continue to be challenging, we remain confident in our business and we are focused on the factors within our control.

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 2.

(OPERATOR INSTRUCTIONS) Ed Roesch of Banc of America Securities.

Good morning.

Interested in SG&A, which SG&A was about flat on a 70 basis point increase in cops.

Pretty nice performance;

I was wondering how this was achieved particularly with an increase in advertising costs and other things?

I think we've been really focusing as a group especially since we have been in the throes of our 2005 budget process to really take a look at the balance of 2004 and really try to nail down our expenses.

And when I arrived I thought there was some opportunity in the workers compensation area which I alluded to before.

I still believe there is an opportunity there as well.

I think that the field organization has done an outstanding job in managing the store payroll piece, especially (indiscernible) our expectations as we started out the year, it was a little bit higher rate of sales and with the store slides, but the organization has done a very good job in flexing payroll expense so I think it is just really a mindset within the executive team.

Could you follow up a little bit on the construction costs being lower and also you considering your approach to real estate and occupancy costs there?

Yes, the construction cost is an opportunity we think to do some value engineering as we go forward and to buildout our stores for a little less investment.

And I think the opportunity is there with the opportunity to bid out the projects and to get more people in the competitive spirit of obtaining our business.

We do a lot of business building these new stores and a lot of construction and I think there's opportunity to drive down the costs on that.

The second part of your question was about -- could you repeat the second part of your question, please?

Rent and things like that.

I am sorry, I didn't hear.

I was just wondering if you are considering how much you would be paying in rent, so any change in the real estate strategy.

There is not really a change in the real estate strategy.

The real estate is available.

One of the problems and issues that we face as we continue to get bigger is it is not that the real estate is not available.

It is we are looking for the right real estate in the right place and since we are not a build to suit, we don't build our own, we are really subject to finding the opportunity first of all and secondly, where we want it, and thirdly at the economics that we like.

The real estate is there; it has taken a little longer in some of these cases this year in the third quarter and getting some of these larger stores open.

Our occupancy costs, I think we have room to actually continue to drive those down as we continue to drive productivity in our stores, get more sales per square foot as we go forward we are actually going to be driving occupancy costs down as a percent of sales over the near term.

Thank you.

Meredith Adler of Lehman Brothers.

A couple questions.

First, could you just talk a little bit more about what happened in the gross margin in the third quarter of last year?

I am still relatively new to the story and you talked about some onetime items.

And then I would like to understand because you had a negative performance in the growth in the fourth quarter, just explain a little bit about what you see again getting better this year because it's going to be a big change in trend for the fourth quarter.

I am not sure I understand your comment with respect to negative growth in the fourth quarter because if I recall last year's fourth-quarter margin improved over the third quarter.

I think it was about 37 percent, and I think when we look forward to our fourth-quarter projection this year I would expect to see a slight improvement in that partly because of shrink.

Our shrink results have come in very favorably.

I also think that the margin associated with the holiday product has improved as well.

But in the first part of your question I am trying to recall was third quarter onetime items last year.

In last year's third quarter we received vendor rebates, and that was a onetime item in third quarter whereas in this year we have those rebates essentially embedded in lower ongoing costs throughout 2004.

In addition to that, last year the physical inventory results were booked or more or less trued up in third quarter last year which was favorable to the tune of about $1.5 million.

And we booked or trued up our shrink results this year in the second quarter.

And then I think the other biggest factor was that last year's third quarter we had some very favorable selling experience especially with respect to the holiday assortment, and as a result had a much lower markdown rate, and to be perfectly honest from an ongoing basis it's probably not a low rate that I would continue to budget or project on an ongoing basis.

So we had a very good third quarter last year.

That was very helpful and if I could just ask you one more question, you have had very, very outstandingly strong square footage growth even without acquisitions over the last few years.

And close to 20 percent this year, but your guidance for next year is a bit lower, and I was just wondering whether that is conservatism given problems you've had getting stores open on schedule or some change in your thinking or what is driving that?

The guidance for next year first all is preliminary; we are really still working on our budgets for next year.

So we are trying to share with you our thinking, but that is subject to some change.

And the way we are actually when you look at it 15 to 18 percent I think is what we said.

You know, as we get bigger and we have more square footage, a percentage is a whole lot different than it was when we were smaller.

So at some point the law of large numbers will open up continue, we may be continually opening up more and more stores, but as a percent of your square footage growth the percentage does tend to fall and to flatten out.

We are focused next year for a fact on putting together a real estate plan that we will execute on time and that will be good stores, with the economics that we like and in locations where we strive to do business.

So having said all of that, the 15 to 18 is sort of our thinking now.

Whatever plan we put together we are sensitive to absolutely executing that plan and being able to give you the guidance on that.

So there will be a little more as we go forward.

Once more we are just sharing some preliminary budgeting thoughts with you as we go along.

Michael Baker of Deutsche Bank.

On the quarter, the fourth quarter, I was interested you said it started off slow.

You said that the advertising seems to work and I think you said Christmas Bears started off strong, yet the whole quarter started off slow.

So if you could reconcile those two things and when you say slow, if you can put that in comparison to where you ended the third quarter or can you put that in comparison with your plan of flat to slightly positive?

Are you on plan, below plan, etc.?

Michael, the Christmas selling season this year is longer with those two extra days and in my history and experience whenever you have a longer selling season you do have a little better opportunity to increase your sales.

However, it is not all incremental because some of it is just a shift.

And the longer -- you know it is two more days between Thanksgiving and Christmas that we're looking at and really the shift at the end that we're looking at as being the positive, trading the Thursday Christmas for a Saturday Christmas giving us two full days Thursday/Friday.

So as I said starting off slow there we expected it to start off slower and build.

We have had some great results.

Some of the color that I was sharing on the Christmas Bear and really our themes and our seasonal product is really terrific.

We are excited about our merchandise.

I believe our stores are better, ready, more ready than ever for the holiday selling season with better merchandise.

And that is really what I was trying to share with you.

As we move into the quarter, we do a bit more advertising.

We did not do any advertising last year.

I think that's going to drive some more feet into our stores.

The better merchandise, the better in stocks on the basics, the better execution at our stores -- and by the way all the stores that we didn't get open third quarter are now open.

So all that together we're looking for fourth quarter to build as we go through.

So when you say November is slow, can I assume given that you are still thinking to a flat to slightly positive plan that you are in line at least with plan through November or would that not be a safe assumption?

Well, I think slow means to start off a little slow.

That's what I was telling you.

Frankly, it's not something I am going to tell you exactly.

We don't report that way.

I would like to once more characterize the season as being longer and later.

I also think what you have to factor in, too, is that we have not necessarily changed the top line guidance for fourth quarter.

So we have been consistent with where we were at the beginning of the month with our sales release.

Joan Storms of Wedbush Morgan.

I wanted to ask about how you are doing with inventory levels heading into holiday?

And also about where you might be feeling about -- you had talked about Kent, I think about the depreciation numbers starting to head down in Q4 of next year but still being up as a percent of sales.

Can you give us a little more detail on that?

Me share with you how I feel about the inventory and I'll let Kent talk about depreciation, but the inventory is absolutely the right inventory for now.

We opened those stores later than we planned in third; we still have the inventory, it was just in our distribution centers.

A couple of other issues.

We have built our inventory in anticipation of fourth-quarter increase in sales.

We've built our basics very well this year.

And I'm very proud of the basic inventories and in stock positions that we have especially in these larger stores.

With pressure on fuel prices and people making maybe less trips shopping, they really do want to when they are in the store buy all their needs if they can.

So we are ready there for them.

And I would characterize our inventory as in line for all the stores that we have open.

As Kent mentioned, our per store inventory is basically flat from last year.

Our turns are up a bit.

We are ready for the holidays.

And we got all those stores open now.

And I'm feeling really good about where we are in relation to the inventory build.

The comment on depreciation, I wouldn't necessarily say it was down dollars in fourth quarter next year.

It's really down as a percentage of sales.

In other words, the year-over-year comparison.

Mitch Kaiser of Piper Jaffray.

Just a question on the real estate.

I know, Kent, you've alluded to putting some new programs in place in terms of square footage and making sure that that's on track.

Could you just maybe expand a little bit on that if you would?

I think the hardest part for us in the financial projection process has been the ability to count on stores opening on time.

So we've basically revisited how the dealmakers in this business are incented and basically we changed their compensation structure to incent them based upon both stores opening as well as volume.

And that second piece helps us to assure that stores do get open on time.

And I think that is the biggest driver.

And I think the other piece to be perfectly honest I think in years past we've hit our square footage target, but we've hit it very late in the process.

And I think the other piece we want to concentrate on is that we don't necessarily get to our square footage growth targets in the fourth quarter or specifically as a result of January openings.

So that is probably two of the biggest issues that I can see helps drive that.

And to be honest, with the fleet of stores growing such as it is we want these people out chasing new deals.

We also have to worry about renewals as well.

So I think to become better focused and facilitate our appetite for real estate we're going to be hiring some additional people, dealmakers in the real estate area in the next few weeks.

That sounds good.

And then in terms of you gave some color on gross margin, how about G&A for '05?

Should that be flattish or how should we be thinking about that?

You know, if we ignore the depreciation comparison or at least that component that gets absorbed in SG&A, I would like us to try to at least get SG&A expenses as a rate of sales flat to maybe slightly down.

I think there are some opportunities there.

We certainly don't have to make investments in infrastructure which should help us; infrastructure is not just in technology.

It is also in people.

Outside of the real estate area and perhaps in the merchandising ranks to support some buying initiatives which by the way gets classified into the gross income portion of our income statement.

I really don't see us adding a headcount appreciably either.

So we should be able to lever on the investments that we've made over the past couple years.

Patrick McKeever of SunTrust Robinson.

Thanks very much.

Talking about some of the seasonal sales coming later and later, and yet when I was in some of the stores over Halloween, actually the day before Halloween that Saturday and Friday a number of the stores that I visited just didn't seem to have a whole heck of a lot of Halloween products in the stores.

And I mean certainly from a sell through standpoint, but my question is do you think you left some sales on the table given this trend with consumers to buy later and later and closer and closer to need?

And if that is an issue, are there any plans to do anything differently for Christmas?

Patrick, the Halloween phenomenon, we did have a good sell through of our Halloween and those last couple days especially are two of the best days of the whole season.

While we may -- you know all stores aren't created equal and while you may have visited one or two that were sort of flat those last two days, all in all I don't think we left much on the table.

And frankly I'm really happy about a good sell through of Halloween that we had.

It was less markdown and carryover, and that's a good thing for us.

I know what you're talking about, though, with leaving the business on the table.

As we go into Christmas I believe that we have made our buys with more information this year then we've ever had.

We are still rounding the horn on some of the POS sales data and getting store inventories trued up.

But we did when we made the Christmas buy last year and we have a lot of stores with sales from last year's Christmas that we used to buy our product, pluses and minuses and dropped this because it did not sell well and add this because we thought we had an opportunity in buying more of the things that sold better.

The other thing is I believe this year that we've got it into the right distribution centers.

We have 9 points of entry into our system here in the U.S. now.

So you've got to get it in the right distribution center after you buy it and then you got to allocate it to the right store.

I really sincerely believe this is the best year we've ever had on doing that.

I believe we bought the right product based on historical data.

I think we bought the right amount, and I believe we're getting it into the right stores.

And frankly some of the efficiencies and expense savings that we see in our stores is due to flowing the product better to our stores.

Now these small stores still turn into bricks at peak inventory, the small I am talking about the 3, 4, 5000 square foot stores and they do so much business in a few weeks that they really do jam up there for a couple weeks like right now, it's peak inventory.

But these larger stores, we really are flowing that Christmas product as well as basics into them more according to their need and getting it out of the back rooms and more onto the sales floor.

So that is going to equate into better sales and better sell throughs.

And I hope I answered your question.

I know went the long way around, but I don't believe that we're going to leave a whole lot on the table although at the end of the day if we have a great Christmas sell through, I will say that's a good thing.

You need to sell out of Christmas seasonal products.

David Campbell of Thompson.

Good morning, a couple questions, I was wondering if you might update us on the auto replenishment program and which category sets were reached and the results you have seen from that so far.

We're real excited about the potential of that.

We started off in the cleaning chemicals and cleaning supplies.

And went from there to some of our party sub cats.

Where we are doing the automatic replenishment we're having great results; our stores are liking it.

Our sales are trending well.

Our inventories are lower; especially the backroom inventories and that is one of the things that I'm excited about is we are not holding the stuff in the back rooms, its coming off the truck and going on the shelf and we are replenishing it based on the sales.

So the opportunity as we go forward with the automatic replenishment is twofold.

One, it will help us impact our turnover, improve our turnover on those product lines and secondly, it takes our workload something off the stores that they have to do.

And that is the reordering of products.

So it is working real well.

Where we go from here we're going to do more.

Next year we have plans to roll out more categories throughout the chain with automatic replenishment where it makes sense.

I can't tell you there is a finish date on this.

I think it is going to be going on throughout the year next year.

But it is basically, basically is a good word, it is going to be on those basic, predictable categories that we're selling very predictably.

The sales and the onhand data that we have and looking at the forward trends we can replenish these stores better than with the stores making the decisions.

Can you share with us those categories that you would add this to next year?

You know, I'll just give you sort of the color of it.

There may be one before the other one more than the other, but it is going to be those basic predictable categories.

It's going to be things like paper supplies, paper towels, bath tissue.

It is going to be in the health and beauty care categories with the dental and the soaps and deodorants and those kinds of things.

It's going to be more in those categories first; actually we can use it on some of the seasonal products, but we are focusing really on the basics as a priority.

David Cumberland of Robert W. Baird.

On the advertising I believe you plan to stop for a while around Election Day.

If that happened about when did you resume the campaign?

We did exactly as I had shared with you, and I believe we resumed last week.

With the advertising per the plan.

One other question for Kent.

Kent, you mentioned high margin holiday items as helping Q4 partly due to timing of receipt.

Did the later receipts hurt the Q3 comparisons?

Not really.

The deliveries are basically in line with where we thought we would be.

Right, but I think this time a quarter ago you had talked about planning later receipts and that factoring into the guidance of 35.5.

And so wondering if that was as expected.

I am not exactly certain I follow your line of questioning other than to say we did not materially deviate from our delivery plan, especially on the import side of the business which includes the seasonal holiday piece.

Jill Carruthers (ph) of Johnson Rice.

Good morning.

I was in your stores a couple days ago and received a 10 percent off coupon for customer appreciation day.

And just wonder if you'd talk about that, if this is something new that you've implemented this year.

Jill, it's something that we tried in a market or two last year, and we liked it, and we rolled it out again this year.

And basically it's to do two things.

One, I want to get you back as a repeat customer.

And if you'll come back on Saturday, and if you buy $20 or more, which is higher than our average ticket as you all know, if you by $20 or more we'll give you 10 percent off.

So it is to get a repeat visit, and it is also to help raise our average ticket on Saturday.

And if it was tried in two or so markets last year, is it rolled out chainwide this year?

It's not exactly chainwide.

It's in most stores this year.

Kevin Boler (ph) of Merrill Lynch.

Kevin Boler in place for Dan Barry.

I was wondering, can you give us an update on your credit card test and give us some idea as to when you might roll out the credit card acceptance at your stores?

Yes, let me share that.

We really, you know, we take credit debit in about 500 stores.

One of the impediments to taking more credit and debit is the cost of it.

And our Treasury Department has been working real hard with the card providers and interchanges to try to work out the best deal based on our model and our business.

As you know, we have a low average ticket.

So transaction costs per -- cost per transaction is not popular with us because we don't do, we don't get our average ticket up high enough to leverage that.

So we've really been working hard on the expense side.

In the meantime we did roll out a few stores and a few more stores recently.

It is early on to tell you if it is impacting our average ticket and positively improving our sales.

But I believe that it will.

We rolled out debit, I believe and Discover card in some stores in Texas.

So it's kind of early on.

I'll be able to quantify that as we go forward.

If people want to use credit and debit, it is a customer satisfier.

There is a cost of doing that, though, and we are very -- I got to see that the sales improve when we add those kinds of costs.

If it improves our sales, then we are all for it, but I have got to see a sales kick from these costs that we spent.

Ralph Jean.

Bob, you talked about the increase in gas and heating costs impacting your consumer, that's pretty well-documented.

One of the intuitive conclusions you might reach from that is that discretionary purchases are down, and your consumables are up in the mix.

Number one, can you confirm that?

And I have a follow-up.

Yes, the consumable purchases are up in our mix.

The discretionary purchases, it is a little bit of a loaded question there.

But because it is so early we haven't gotten to Thanksgiving yet, we've noticed our holiday, our Christmas items some of them have started off with a real bang, like the Christmas Bear that I mentioned.

But it is too early to say that people really are not decorating their tree until later on this week and next week.

So I can't tell you that discretionary purchases are necessarily down.

We are seeing more.

We sell more basics now in these larger stores.

We are more of a reason for a customer to come to us for the basic needs and we are looking at that as a plus as we go forward, especially with the fuel prices as they are costing them another $50 a month or so.

At the very least probably, and they are probably going to make fewer trips and when they are there I want to be able to sell them all that we can.

Sure and I understand that.

So then my follow-up is Kent gave guidance on the gross margin being up slightly in the fourth quarter and a lot of reasons versus last year and also shrink and other things.

But what I am wondering about is we know that holiday seasonal merchandise is higher gross margin typically, and it is discretionary.

So that gross margin outlook for Q4 is it dependent on a rebound in discretionary sales, or better buying or both?

Our merchandise margin is solid for the fourth quarter.

We know what that is pretty much as we go through, we have already bought the seasonal product, the imports are here, and as Kent said we are delivering it to the stores a little closer to the need trying to be more efficient.

But the product is going into the stores and I feel confident that our mix of product out there we are going to hit the merchandise costs for the quarter.

Now, will thee buy it?

I think so.

I think our product is better.

We have the best stockings and all the things for last-minute, the gift wrap stuff, we are gift wrap headquarters.

We are stocking stuffer headquarters.

And at the end of the day, Ralph, Christmas is going to come and people are going to buy those things that they need, and we have them better than ever.

So I feel very good about our merchandise mix in the quarter.

David Bushbaum (ph) of Stanford Group.

I was wondering if you could address with respect to overseas sourcing how the possible strengthening of the Chinese currency is going to affect your thinking about next year as you try to balance your need to watch your acquisition costs and still provide a good value proposition.

And if there are any regulatory issues thinking about next year that might be on the radar screen.

David, they've been talking about unpegging I guess -- I don't know if that's a word or not the dollar to the Chinese currency for a long time.

And so far the Chinese have been pretty stubborn.

As they are known to be they are probably only going to do it if it is in their own best interests and when it's in their best interests.

Having said that, we do look at that issue.

It is not one that we think if it does change it is not going to be that they are going to let it float.

The Chinese government is not going to let their currency float.

There is possibility that they will at some point change the exchange rate and revalue that.

The estimates that I get from friends in Asia and friends in China and people that really are smart people say they could be anywhere from a percent or two, to maybe 5 percent is what I'm hearing.

If it is that small, I have great confidence that we can manage to it.

As I've always said, as long as our currency -- our 1 dollar is a dollar, and it's a dollar for everybody.

We can create a great value for that dollar better than anyone else.

I really don't see that as a threat to us.

There's a lot of conversation about it.

We can always manage to it as long as we are aware of it.

I am showing no further questions at this time.

Mr. Sasser if you have any closing remarks?

Well, I would like to say thank you for participating in our call and our year end conference call is scheduled for February 23, 2005.

And I will talk to you then.

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

This concludes the program.

You may all disconnect.

Everyone have a great day.