美元樹 (DLTR) 2004 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Dollar Tree 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 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 your conference.

Welcome everyone and thank you for joining us this morning.

With me today are Shelly Gagliano, Investor Relations, and Kent Kleeberger our Chief Financial Officer.

Today Kent will review our financial results for 2004 and give some fiscal guidance for 2005.

Then I will review operations details and talk a little about our focus for 2005.

Before I turn the call over to Kent, I am going to ask Shelly to give you the Safe Harbor statement, Shelly.

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

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

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

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

With that said I will turn the call over to Kent for a financial overview.

Thanks, Shelley.

Good morning, everyone.

As previously reported sales for the quarter were 987.5 million, which is a 10.6 percent increase over last year, and reflects a 0.5 percent comparable store sales increase.

While December was strong, our January results were impeded by snow and ice storms in the last two weekends.

We achieved our annual square footage growth target of 21 percent in the third week of November, which was later than planned.

Diluted EPS for the quarter was $0.79, in line with our most recent guidance and included $0.02 per share for a one-time tax benefit.

For the quarter gross margin was 36.3 percent, below the 37 percent in last year's fourth quarter, while higher fuel costs continued to pressure our inbound and outbound freight in the quarter, we also incurred more markdowns than originally anticipated.

We extended the number of post Christmas clearance days over last year, and took additional permanent markdowns to ensure our carry over inventory was valued at a suitable level for the coming fiscal year.

In light of the economic challenges faced by our Company and core customers alike, we experienced a comp increase of 0.5 percent, however, the comp results were not enough to leverage the occupancy cost component of gross margin.

SG&A expenses were 21.9 percent, expressed as a percent of sales, an improvement of 40 basis points when compared to 22.3 percent fort he fourth quarter last year.

Payroll expressed as a percentage of sales, coupled with lower home office expenses more than offset the increase in depreciation expense and higher advertising expenditures.

The Company continually faced a depreciation head wind throughout 2004, as this expense on an annual basis was up 27 basis points over last year. the completion of new point of sales technology roll-out exacerbated the comparison.

Our balance sheet remained strong and we ended the year with 318 million in cash and investments.

Cumulative repurchases of stock under our 200 million authorization, stand at 87 million, which leaves about 113 million available under the current Board authorization.

Based on current cash levels coupled with our ability to generate significant cash flow from operations, we are more than likely to continue to repurchase shares in 2005.

Inventory is up 17 percent year-over-year, and a little higher than we would like.

Higher levels of in-transit inventory, due to an earlier Easter account for about 6 percent of the year-over-year increase.

The main factor the balance of the rise was store slides.

Accordingly fourth quarter inventory turns were slower than last year.

As to 2005 sales and earnings guidance for the first quarter we are forecasting sales in the range of 770 million to 790 million and diluted EPS in the range of $0.31 to $0.33.

This implies a flatish comparable store sales, and reflects a loss of two weeks leading up to the Easter holiday versus last year.

For the full fiscal year 2005 we estimate sales to be in the range of 3.435 billion to 3.535 billion, based on a 14 to 16 percent square footage growth, and comparable store sales in the low single-digit range.

Thus based on these sales estimates we are forecasting diluted EPS in the range of $1.77 to $1.87 for all of 2005.

As we've increased our focus on the real estate focus for 2005, the timing of store openings should improve.

Couple this with our targeted 8 to 9 percent decline in purchases per store, we should see lower inventory levels per store in the second half of 2005.

For fiscal year 2005, we are planning Capital Expenditures to be in the range of 125 to 140 million.

We plan to build around 225 new stores and 100 remodels.

CapEx will be lower than the previous two years, since we are not building any new DCs, and the point-of-sale roll-out is substantially complete.

Depreciation is estimated to be in the range of 128 to 133 million, and reflects the impact of lower CapEx as previously stated.

We anticipate that depreciation expense as a percentage of sales compared to last year, will decrease starting in the second half of 2005.

From an SG&A standpoint we are committed to holding expenses in line.

Healthcare costs are of particular importance as they continue to rise across all sectors.

To mitigate this increase, we have instituted a benefit plan redesign, which includes coverage changes, and revised employ premium contributions, as well as co-pays.

Workers Compensation has also been a focal point and we expect meaningful cost reductions in 2005.

The good news is we see additional opportunities to drive some of our other costs even lower.

We plan to fund additional advertising for 2005 over 2004 levels with much of these savings.

So stay tuned, with that I would like to turn the call over to Bob

Thanks, Kent.

I am going to begin with just a couple of comments about 2004, then I am going to give insight into our focus for 2005, talk about our growth plans and then we will take some questions. 2004 was a difficult year.

It's like running uphill all year, but in the face of the difficult year and increased competition and some economic head winds, we still ended the year with operating margin amongst highest in retail, and we can do better.

We achieved some very important milestones last year.

We continue to invest in our business, especially in stores, logistics and technology, and as a result we are stronger and better prepared to support our continued profitable growth.

To name a few of the achievements last year we reached our planned 20 percent square footage growth.

We opened 251 new stores, and expanded 129 existing stores.

And we ended the year with 2,735 stores across 48 states.

Last year we also opened two new distributions centers, and we completed our national D.C. build out, on time and under budget.

What this means is that we can efficiently reach all areas of the 48 states and have the capacity to support our business up to about a $4.5 billion sales level without adding a new distribution center.

Last year also, we continued our investment in technology and I'm proud to report that we have essentially completed the roll-out of our POS technology and our new back office systems.

It's done.

This is enabling technology and the backbone for future enhancements.

POS has already improved our customer satisfaction, as our check outs are faster and wait times have decreased.

The largest benefit comes from improved flow of inventory which is still before us.

With the sale of information from POS, we can provide our stores with more of the product we are selling, in the quantity they need when they need it, and we can increase our inventory turnover.

In addition last year we successfully piloted our automatic store replenishment technology, enabled by our POS data, we plan to roll-out more stores and more categories to automatic store replenishment in 2005.

This could reach a level of about 500 plus SKUs that the stores won't have to reorder, won't have to take the time to replenish.

They will reallocating this time to filling shelves and customers service, and selling merchandise.

Our ASR system really does it better, and the benefits again are a better flow of inventory, improved in stock on basics, and improved efficiency at the stores.

Other technology advancements last year include electronic check authorization, which is now savings us on bad check expenses, electronic benefit and transfer acceptance, and our DM dashboard that gives immediate access to our district managers and our field people, on important operational metrics like store payroll.

It was a big year for us in retail technology improvements.

The largest portion of our investment in technology is now behind us.

We look forward to the many benefits to come.

Moving to the current year, we are now focused on 2005 and once again focused on achieving double-digit growth.

As you see in the press release we are planning organic growth to be in the 14 to 16 percent range.

That's a bit lower than last years 21 percent, and also lower than our historical growth.

There's a couple messages that I want to help you understand with that.

First we've historically grown through a combination of organic growth and opportunistic acquisitions.

Looking forward if the opportunity for an acquisition were available in 2005, one that made strategic sense we would consider it.

But I don't see one and we are not planning for one.

Second, I want you to know that we see plenty of growth ahead for us from an available market perspective we have the opportunity to double our size.

Market potential is for 5,000 to 7,000 stores in the U.S.

That being said we are focused on profitable growth.

We have invested heavily in logistics and technology, and larger stores over the past several years, and I think it prudent to step back the growth rate this year, albeit just a bit, and leverage the investments we've made.

There's a learning curve that accompanies change and growth.

We want to improve our execution, better understand our markets and our customers, and better understand the competitive landscape as we continue our growth.

Our focus in '05 begins with real estate along that line, while achieving our planned growth last year, you might remember we opened stores later than planned, which negatively impacted our top line and we are not happy with that.

In that regard we are reorganizing and reshaping our real estate process, analyzing each element from site selection to construction, merchandising and store opening, in our efforts to improve our execution and also to improve our store productivity.

We set several important goals for improving these processes.

First is to better understand our markets and set better targets in store size and markets served.

We have increased and are continuing to increase our staffing in the real estate department, and thus our ability to do more deals in future years.

We plan to get ahead of the need with more deals in the pipeline, and through analysis of our best stores and our best markets, we plan to make better deals and open better stores.

I will point out that we are currently ahead of our opening schedule this year.

In addition to our growth initiatives, our focus in 2005 will be in really four main areas.

First of all increasing our store productivity, secondly, improving our inventory flow, third, improving our focus on expense control.

And, fourth, but not last, strengthening our organizational expertise and depth.

In regard to store productivity it's all about merchandise and merchandising.

And our merchandise really does get better each year, you heard me say that over and over, but it real does.

We continue to improve our ability to develop these high-value products, always exceeding our customer's expectations with surprising value for just a dollar.

We finished Valentine's Day with great sell through.

Our stores an are now set with our Easter products.

One of the hottest items we have right now is a 14-inch Easter plush, hard to believe, it's only a dollar.

As Kent mentioned, Easter is two weeks earlier this year.

As early as it ever gets.

While we can't make up for the loss of traffic in the shorter selling season, we have developed some great promotions to drive non-Easter sales.

Our stars and stripes promotion for example is in our stores now.

It's all new product.

It's dinner wear.

It's coordinated textiles.

It's home decor products, it's high-value, on trend, and it's available only at Dollar Tree.

You can see the look at other retailers, higher priced retailers, but no one has it for just a dollar.

When the solids and stripes are gone, and Easter is over, we have our botanical promotion hitting our stores.

This anniversaries our successful palm promotion from last year, and includes coordinated dinner ware, hand painted stemware, textiles and related home decor products.

These are just a couple of the first half promotions that our buyers have developed, and are available only at our stores at Dollar Tree.

We plan to supplement these efforts with an increased advertising spend.

We learned a lot last year about what works best, and this will serve us well in the future.

Our second key initiative is to improve our inventory flow.

With increased visibility from our POS and back office systems, and an increased use of automatic replenishment of basics, we plan to increase our turns.

Our stores are focused on emptying the back rooms, and moving the product to the sales floor faster.

To improve product allocations, we think we can lower purchases about 8 to 9 percent per store, while achieving a better balance and more efficient inventory.

Our third key initiative is on expense control, and we've already made some good progress in this area.

I really am proud of the direction we've taken, and our continued efforts to lower our baseline of expenses, we have identified our largest opportunity for reducing expenses.

These include as Kent mentioned, initiatives to reduce Workers' Comp, healthcare costs and outbounds logistics, and with your our largest capital investment in logistics and technology behind us resulting in lower level of CapEx, we expect to see a reduction in depreciation as a percentage of sales beginning in the second half of this year.

Our fourth key initiative is focussed on people, that is strengthening the organization and building depth.

It really is all about people, and we have a focus on recruiting and training and retaining the qualified bench, as required to support our continued growth.

We are in the early stages of new technology, and running larger high volume stores, and I believe there is a power in our people.

As we go through the learning curve, we will improve year-over-year.

So that's the message.

While we will continue to grow square footage this year in the mid to high teens.

We see 2005 as a key year of focus.

A year to better understand our markets, our customers, and our competition, a year to review and improve processes, a year to leverage our investments in infrastructure, and to position our Company for future profitable growth.

We are now ready for your questions, so that we can accommodate as many callers at times permits, we ask that you limit your questions to two.

Thank you, Mr. Sasser. [OPERATOR INSTRUCTIONS].

Our first call comes from David Buchsbaum from Stanford Group.

Can you go over what the free cash flow was for the year just completed, what you expect it might be, based on the new CapEx numbers for next year?

Since everyone has a slightly different view of free cash flow, I would like to take a look at in terms of cash flow from operations less CapEx.

I believe that this past year we generated about 84,000 or so in cash flow after CapEx. -- I'm sorry, 1 million.

Rounded numbers.

And I think for next year, we expect to be somewhere in excess of 190 million.

Okay.

Thank you.

And with respect to inventory turnover where did you finish last year on that, and if you are able to reduce the allocations of inventory 8 or 9 percent on a per store basis, where might that go in the current year?

I think we were a tad below three last year, but if I look at what we are planning to do this year, I would like to be at least in the 3.3 range.

Okay.

Thank you.

Yes.

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

Your question, please.

Thanks.

I want to touch base on the square footage growth.

It looks like in '04 you did 20 percent square footage, and it was on 9 percent unit growth, and the rest of the square footage came from expansions, relocations, and the fact that new stores are larger.

If you look at those different components of the square footage growth for '05, and the fact you are moderating, do you expect that the unit growth will be pretty similar in '05 as it was in '04, and then some of those other components are where the moderation is occurring?

The square footage growth in '05 is in that 14 to 16 percent range.

That contemplates our store sides at about 12,500 to 13,000 square feet.

And that also contemplates about 100 expansions.

So that's how you get to the numbers.

The units would be similar to last year.

Okay.

Great.

One other question on the guidance.

Does it include any provision for expensing options?

No, it doesn't.

I think if you were to take a look at our quarterly earnings release in the Safe Harbor it does not reflect the impact of that.

Okay.

I think fell you if you look at our annual report last year I would call the pro forma disclosure, is roughly about $0.10 to last year, and while we haven't yet had the opportunity to review with the comp committee and the Board of Directors we think that the impact of that will be similar to the prior year.

All right.

Thanks very much.

Our next question comes from David Cumberland of Robert Baird.

Your question, please.

Bob, you mentioned being ahead of planned store openings to-date in fiscal '05.

What is the planned quarterly store opening pattern for '05?

Kent is going to take that one.

I mentioned we were ahead of plan, because I wanted you to understand because we are reengineering our real estate processes, and we are building our pipeline, and we are getting ahead of our plan.

As far as the way it breaks down for '05, basically we are going to open more stores earlier in the year, less stores later in the year.

But, Kent, do you have a comment.

I don't want to exactly get granular by quarter at this juncture but I would tell you last year 46 percent of our new stores opened in the first half of the year.

I think a good and reasonable goal is 60 percent, and I can tell you that we are probably slightly in excess of that goal as we speak.

So that's going to be a huge benefit to '05, because it's going to give us a quicker ramp up from a new store perspective.

My other question, Kent, you mentioned likely share repurchases in 2005.

Have you included any stock buybacks in the EPS guidance?

No, we have not.

Thank you.

Our next question comes from Meredith Adler of Lehman Brothers.

Your question, please.

Yeah, my first question is about return on invested capital.

You have a lot of initiatives you are working on, everything from cost cuts, to better inventory turns, and less spending on CapEx.

If you think about all your initiatives, which is likely to have the most improvement on return on invested capital, and would you put the slower square footage growth as another thing that improves return?

I would say the biggest impact on improving our return on invested capital is really the timing of store openings.

Not only did we open stores later in the year which really didn't give a lot of the stores much of an opportunity to ramp up for that all important holiday.

But if I went back in and looked at a lot of the openings on a month-by-month basis, we opened an incredible amount of stores in the latter half of the month.

So if we move more of our stores in the first part of the year and more of our stores toward the first part of the month, we should impact the top line which will therefore improve productivity and [overall] contribution.

My second question is, you have been very successful at managing your labor expenses.

My observation as a shopper is that has had an impact on sort of the neatness of the stores, the in-stock position.

It just doesn't look as good.

Is that anything you have any concerns about and how are you addressing it?

Meredith, we are -- we continue to be concerned about it.

By the way, with over 2700 stores, I'm sorry you had a bad shopping experience, but you might find one from time to time that's recovering.

But overall we aren't seeing that our store standards are deteriorating, and certainly we are not accepting less standards.

We are trying to provide ways for our stores to be more efficient.

As I say that, I don't expect that our store labor is going down this year in '05.

I believe that we did reach a level this past year that I am happy to have as a part of the model.

And as we continue to improve our efficiencies in the stores things like the automatic store replenishment, we are not taking payroll out of the stores.

We are converting that over to customer service and running the front end and stocking the shelves and maintaining the standards.

So as we become more efficient I believe the standards in the stores can at least remain if not improve.

But to answer your question, yeah, we do think about that.

Okay.

Thank you.

Our next question comes from Michael Friedman of RBC.

Your question, please.

Good morning.

Just was hoping you could square for me, it looks like your EPS growth range entails about 10 to 16 percent EPS growth, if you take the $0.02 out of the $1.63.

And you are talking about square footage growth of 14 to 16 percent.

Comparable store sales in the low single-digit range.

And some operating expense leverage, and the depreciation head wind finally being overcome.

I'm just just trying to jibe where the margin slippage is there, why the bottom line growth isn't more robust bust given that backdrop?

Well, I think it is a couple of things.

While we see an opportunity from a merchandise margin perspective to increase the penetration of imports, we are also seeing a shift in business in terms of household and consumables which come at a lower margin rates.

Unlike years past, we don't have a significant improvement in merchandise margins.

And at a very low comp number, we don't get a huge amount of leverage on our buying and occupancy cost.

I think the real answer is imbedded in the SG&A expense.

We have we think a huge opportunity to drive brand awareness, and to drive product awareness for Dollar Tree stores.

We are anxious to ramp up the level of our advertising spend.

We talk about many initiatives in terms of cost savings and opportunities within the business, we would like to reinvest a good part of that in our advertising.

Okay.

Good luck.

I certainly hope you beat those numbers.

Our next question comes from Daniel Barry of Merrill Lynch.

Your question, please.

Good morning.

That 14 to 16 percent number for this year, should we use that annually for the next five years in our five-year model?

Yeah, Dan, I think for right now I would have to say, yeah, that's the best number I can give you.

We've got a lot -- we are undertaking this year to improve our operational excellence.

As we have plenty of room to grow.

There's a lot more geography there to open stores, and a lot more markets that we are not currently serving, at least not serving to their max.

But we are going to take this year and we are going to still grow 14 to 16, which is still a small chain, not like we are not growing, but we are going to take this year to strengthen our organization, strengthen our infrastructure and improve on our execution.

So past this year I think you can use the 14 to 16, but the real opportunity is out there in that 5,000 to 7,000 store potential.

Second question, you mentioned ramping up advertising.

I know you've been doing a lot of testing in that area.

Without giving away any secrets could you highlight a little bit exactly what you are doing with advertising?

We are -- I'll tell you we are going to run about 23 markets plus or minus.

We are going to run radio TV, mostly around the season, is when we think we have the opportunity to drive some more traffic in our stores, drive the average ticket, and where we see that we can do that.

And we are going to spend more on our grand openings.

Those are the, that's the impetus.

We are tying that into our merchandise programs, and it's not just about running an ad.

It's about focusing on our merchandise and on items and stacking them out, signing them up and also that whole in-store promotional effort, which I call merchandising as it ties into our advertising; that's our plan for next year, we are going to increase our spend.

We are still not going nuts with this, Dan, it's still the cost of doing business and are growing it as we see fit.

Good luck with it.

Thanks.

Thank you.

Our next question comes from Tom [Ravoli] of SAC Capital.

Your question please.

Last year had you great success with the Trade winds Bay.

I think you mentioned the Botanicals this year.

Are you increasing the allocation after success you saw last year with the proprietary categories, and is there perhaps some room for merchandising margin expansion there?

When you say increasing the allocation.

You have to a really look at each year based on its own merits.

This year is a little different, the timing of seasons this year is different.

What I mean is right now our focus is on Easter.

But with the earlier Easter, that means we are setting our after-Easter promotion which was the palm promotion last year earlier.

This year happens to be Botanicals, and we are also setting our lawn and garden earlier.

We are anniversarying that successful palm promotion, it's hard to tell you that we're increasing allocations on that, as far as a percentage of import purchases this year to last, it's still going to be about the same.

So I wouldn't expect any margin expansion.

Okay.

Will the timing of consistent throughout the year?

I know last year the imports came a little bit later during the year.

Well, the timing this year in the first half is a little different.

We by the way, have a little more goods on the water right now, than we did this year last year.

We ended the year with a little more.

It was the result of landing Easter a little earlier, and landing lawn and guard a little earlier.

So we adjust the timing to fit the calendar.

We are working on landing our product close to the need, improving our inventory turns, and becoming more efficient on our landing of those promotions.

It's going to be fairly consistent plus or minus a few weeks of each year.

Thanks.

Our next question will come from Reed Anderson of Friedman Billings.

Most of my questions have been answered.

Back to the inventory, beyond taking more out of the back room, is there still opportunities either from a distribution standpoint or transportation or however you want to look at it, to also improve the turn or has that pretty much run its course so far?

It hasn't run it's course.

I think we have opportunity all over, now that we have visibility at the SKU level at the store, we know what to have, we know what they are selling.

We think we can allocate it to them more intelligently, and give them more of what they need, and closer to when they need it.

Things like the automatic replenishment, is what we've done last year with it.

We've seen that we're lowered our back room inventory, and increased our in-stock on the counter.

So we intend to have a good presentation.

We just intend to have less of it in the back rooms.

As far as bringing it into the correct DC, I tell you, I'm so excited about not building a new DC this year, for the first time in I know six years, and we did two last year for many reasons, one of them is the disruption when you open up a new DC and reallocating the service, the store service by that DC you have to get the right product in the right DC first of all, and when you are moving the stores around like that and opening up new DCs, it becomes more complicated.

This year for the first time we don't have a new DC opening up, so our flow into these distribution centers to start with, is going to be better and more effective.

So there's still opportunity, Reed.

We are looking at it year by year.

We want steady improvement in our inventory flow, and steady improvement in our turnover as we get better at buying and allocating and replenishing across the 48 states.

Back to the auto replenish piece, you are obviously going to expand that.

Primarily I believe that's been focused in the household chemicals areas.

What are the categories you are going to role that into?

Give us a little more color on that, please?

Well, anything that has a basic predictable sales trend we think -- that we want to have in stock all the time, we think we can put on to auto replenishment.

Things, for example, there are categories in our health and beauty care area, that our basic, replenishable items and automatic replenishment can do our toothpaste and mouthwash and things that we carry there year-round, can do it just like it can the cleaning supplies.

There's parts of our party business, the basic white tissue papers and boxes and all the basics that surround party, things like our reading glasses, and seasonally some things like wrapping paper and sunglasses.

So if you look through the store and think of what paper goods and things that have a steady predictable trend, that's where we will be going first.

Thank you.

Good luck.

Thank you.

[OPERATOR INSTRUCTIONS].

Our next question comes from Patrick McKeever of SunTrust Robinson.

My question is on your same store sales guidance for 2005 low single digits.

I'm assuming that means 1 to 3 percent.

Which is more aggressive than the guidance that you have given in recent quarters for flat to up slightly comps.

My question is, what do you think will drive that?

Is it the incremental spending and advertising, or are you assuming some kind of improvement in the macro environment for your core customer, how should we think about that?

And if you are planning the first quarter flat, that would seem to imply some acceleration as the year progresses, so maybe you can give us a little more color on that as well?

It's pretty difficult to see out there over the next four quarters, Patrick.

As we put together our guidance we use the best information that we have.

We are going to be doing more advertising this year.

We know that that will drive some sales.

We are going to become more efficient with our promotions and flow of inventory and basics and just the completeness of our assortments in the store.

I think that's growing to drive sales.

And the in-store promotions that we have in place.

So all of that together now, having said that I don't know what's going to happen with the economy.

I don't know what's going to happen competitively.

We have been -- the dollar sector has been under pressure from every other sector it seems for the past couple of years, and I expect that that might continue.

So I don't know what competition is doing, I don't know what the economy is doing.

So we try to take a conservative view, I guess, of where we think the economy is going, and that's where we come up with the guidance.

We are excited about our opportunities with our business.

We are excited about the opportunity to improve the productivity of these large stores.

Part of it is learning how to run these large stores, and we are now beginning to build a cast of management and leadership in our field organization that can improve sales year-over-year.

Then my second question is for Kent.

Kent, if you were to sort of back out the effect of the shift and the timing of Easter for the first quarter, what kind of comp do you think you would be talking about or maybe you can quantify it in terms of total sales dollars lost, so to speak.

I think you, if you backed out the impact of the earlier Easter, I think you are probably in the low single-digit comp range.

And I'm estimating the impact of an earlier Easter is probably in the 15 to $20 million range.

So it's not big, would that be similar to just in terms of from a proportional standpoint to prior years when is you had this kind of a shift in the timing of Easter?

Well, yeah, I mean proportionately obviously with a lot less storage years past, it wouldn't have been this significant.

It's a pretty major, big effect, then?

Yeah, I think so.

Now, it's not to say that we haven't put together promotions post-Easter to help mitigate that, but in some respects it's somewhat new territory.

So I guess the point is we don't stick our heads in the sand, and wait for it to happen, we are trying to mitigate the impact of it, but we will have to see.

If I wanted to extrapolate based upon your guidance and what you are talking about around the Easter shift, could I go as far as to say that comps are running ahead of that flat guidance for the quarter, on a quarter to date basis?

I'm not exactly certain what you are asking, but if you are asking what comps are currently running, we don't have a history of giving out that information.

Okay.

Thanks a lot.

Our next question comes from Joan Storms of Wedbush Morgan.

Your question, please.

Hi, good morning.

Good morning.

Quick question on just to clarify on the replenishment items, can you tell us the number of SKUs you have that on right now, and what categories and what the roll-out plan is to get to your 500, Bob?

I can't do that in two minutes or less.

It's about 500 to 700 SKUs.

It depends on the size of the store, because bigger stores have more products than smaller stores.

But next year, we are planning about five to 700 SKUs across the chain out of every DC, and it's going to be those basic predictable staple categories.

It's health and beauty care.

Not everything in health and beauty care.

We are still going to have things that we buy, that we allocate to the stores because it is new, because it's a close out, because it's a one-time buy.

For any number of reasons.

But it's that basic replenishable categories that we want to have in the store.

Frankly I am trying to take the burden off the store to try to figure out how much to buy, and when to buy, and the time to do it, and they end up with a little too much or a little too little, and a disruption in the supply chain.

Now that we have the sales, our automatic replenishment actually does it better.

We will be rolling that out with 500 to 700 SKUs.

Kent, can you comment on where you guys stand on this whole lease accounting issue?

We are obviously in the process of looking at it.

At the end of the day, we don't believe it has a material impact to our financial statement.

It's more about balance sheet accounting.

It's about grossing up your fixed assets and grossing up your liabilities.

Obviously in the guidance for next year what it does impact is it will inflate your depreciation a little bit.

So we factored that into our guidance, and I think from a cash flow perspective, since you are not netting construction allowances you are grossing up depreciation and the extent that you receive construction allowances from developers and landlords, and basically you are inflating your working capital from operations, but it's not a significant event for us.

So I guess that if I'm understanding it correctly, it means that you it means that it pretty.

Leaves, you've pretty much included that in your guidance already?

Yes.

Thank you.

Our last question comes from David Campbell of Thompson Davis.

Your question, please.

Bob, could you talk about how many of the larger stores you've got in the 19 and 20,000 square foot range, and how many of those you plan to open this year?

We don't plan to open a lot of 19 and 20,000.

Our sweet spot is between 10 and 15, and in our budget and in our plans we contemplate about 13,000, 12,500 to 13,000.

We will take a 19 or 20 -- where it is just very good economics on the location, a place where we want to be, the rent is inexpensive, and we will take the larger store.

We will also take one a little smaller, where it's in a location we want to be, and you know, if I can only get 8,000 or 9,000 square feet and I want to be there, then I can take that, too.

So we have a lot of flexibility in our store range.

Our core, though, that we are opening is going to be in the 12,500 to 13,000 square foot range.

And how do you feel about the availability to improve the productivity this year?

It seems like every year you are -- you do a lot of new things in merchandising, but last year the productivity wasn't particularly great.

So what do you think will be better this year in terms of your ability to do that?

Well, we've learned a lot about the larger stores.

One of the reasons we moved to the larger format was because of A) availability of merchandise.

But, B) because the customers liked it and they shopped there, and it gave us the opportunity to begin at a level and improve year-over-year for a longer period of time.

Now I would have liked to have begun last years class at a little higher rate with room to grow over the next 5 to 10 years, so we have got some work to do there.

I believe the answer a lies in the merchandise, it likes in our merchandise intensity, the values that we offer.

The standards in these stores.

And the merchandising excitement.

That's where we are focused.

Now the tools that we have to help us along that way really start with our POS, and our visibility into what's selling , and the level that it's selling and where it's selling.

If I can get more of the right product into the stores that are selling it, and less in the stores that are not, that's going to raise our productivity.

We are also looking at this whole real estate store opening process.

It's not just the procurement of land and buildings and that.

It's the whole merchandising flow, and how we open up, and how we promote the opening, and how we get our stores set, and the inventory levels and the categories and the space allotted.

Just a myriad of things that we really down into the weeds looking at, so that we can improve our first year opening results in these stores.

And then we do frankly see the opportunity, and we are experiencing the year-over-year improvement from the opening rate to the second, third and fourth years.

So opportunity is there and it's going to be through more information to smart people, and it's going to be merchandise excitement, and it's going to be merchandise and stores that improves that productivity.

Okay.

If I could just ask one more question for Kent about the inventory.

Do you feel like the inventories are in good shape, and what will be the process for reducing those levels?

Yeah, I think we are in better shape than where we were during the fall season, but I still think we have a ways to go.

I think if you recall the remarks, we made we are planning our purchases down per average store, about 8 to 9 percent which should speed up the turn.

We are not happy with the amount of levels that we have in our back room, and that's one of the key focuses from a store operating standpoint.

I'm expecting the inventories to get more in line with where we want them to be around the middle of the year.

Okay.

Thanks very much.

Well, thanks everyone.

I believe that was our last question.

I appreciate your time and your interest in our Company.

Our next conference call is scheduled for May 25, 2005, and I invite to you join us for that one.

Thank you very much.

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

This concludes the program.

You may all disconnect.

Everyone have a great day.