美元樹 (DLTR) 2005 Q1 法說會逐字稿

[OPERATOR INSTRUCTIONS] I would now like to introduce your host for today's program, Mr. Bob Sasser, President and CEO of Dollar Tree Stores.

Good morning everyone and thanks for joining us this morning.

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

Today, Kent will lead off with a review of our financial results for the quarter, followed by guidance for the second quarter and the remainder of the fiscal year, then I will provide some operational details and a progress update on our 2005 initiatives.

Before I turn the call over to Kent, I will ask Shelly to speak to our Safe Harbor statement.

Shelly.

Thank you.

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 the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

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

We have no obligation to update our forward-looking statements and you 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 one question and one follow-up question if necessary.

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

Thanks Shelly, and good morning everyone.

Sales for the first quarter of 2005 were 749.1 million, which is a 5.5% increase over last year's first quarter, and reflects a 3.7% comparable store sales decline.

While the first nine weeks of the quarter were positive, the impact of losing 14 pre-Easter shopping days versus last year was more than we anticipated and difficult to overcome.

Our results were further impacted by a loss of traffic due to severe weather patterns in several parts of the country including heavy snow in the northeast and torrential rain in the west.

Additionally, rising fuel costs negatively impacted our core customer, and we believe this will continue for sometime.

The negative impact of higher gasoline prices on transactions and sales is difficult to quantify.

We do know that substantially all the decline in comparable store sales was attributable to a decline in transactions.

Diluted earnings per share for the quarter was $0.26 in line with our most recent guidance.

For the quarter, gross margin was 33.9% versus 35.6% in last year's first quarter.

The primary driver of the decline in rate was 140-basis- point increase in buying, distribution and occupancy cost.

We did not leverage these expenses due to the decline in comparable store sales.

We also had additional markdowns during the quarter due to lower sell-through of Valentine's Day and Easter candy coupled with various pockets of Easter product.

SG&A expenses were 27.5% expressed as a percent of sales versus 27.4 for the first quarter.

Expense control is a major focus for Dollar Tree and we are pleased with our efforts on expense control during a challenging quarter.

Additionally, we are beginning to see the rewards of our efforts to reduce operating costs, particularly in the area of Workers' Compensation with lower claim dollars year-over-year despite the addition of two new distribution centers and new stores.

The results of our focus on the cost of store construction and supplies through our value engineering and competitive bidding via reverse auctions are providing meaningful savings.

Depreciation expense as a percent of sales was only 10 basis points higher than last year's first quarter.

We expect depreciation as a rate of sales to flatten out and perhaps decrease by the third quarter.

Cash and investments for the quarter were 170 million versus 244 million at the same point one year ago.

Due to our strong balance sheet and specifically our ability to generate significant free cash flow, we were able to take a more aggressive approach towards share repurchase.

During the quarter, the Company bought 4.7 million shares for an approximate cost of 128.3 million.

We are authorized to repurchase up to 227 million representing the balance available under the 300 million authorized by our board in mid-March.

We see share repurchase as a good use of free cash flow while interest rates remain at current levels.

Inventory is up 14%, and as previously mentioned, still higher than we would like.

While we made some inroads into the excess inventory owned at the beginning of the quarter the approximate 30 million sales miss for the quarter worked against us.

Now for guidance.

Regarding sales and earnings guidance for the second quarter of 2005 we are forecasting sales in the range of 755 to 770 million, and diluted earnings per share in the range of $0.25 to $0.27.

For the remainder of the fiscal year 2005 we now estimate sales will be in the range of 3.34 billion to 3.415 billion, based on 14 to 16% square footage growth and comparable store sales in the range of flat to low single-digit range.

Thus, based on these revised sales estimates we are now forecasting diluted earnings per share for the year in the range of $1.61 to $1.72.

With that, I would like to turn the call over to Bob.

Thanks, Kent.

First of all, I just want to make a couple more comments on the sales and our merchandise initiatives in the quarter.

Kent did a good job of describing our first quarter earnings to you and the decline is clearly the result of disappearing sales.

Which was mostly driven by the calendar shift and the loss of 14 selling days prior to Easter.

Just to give you a bit more color on how the sales developed during the quarter we started off the year with a strong Valentine's Day offering and our stores were ready for business and February sales were positive.

March sales grew with the benefit of the early Easter but not enough, and some of the product lines that we would normally expect to see spike up with the benefit of the Easter traffic just didn't spike up.

These are seasonal categories like summer toys that are normally used in Easter baskets and also the everyday basics like the spring cleaning supplies and the lawn and garden decor that typically rise with the tide of increased store traffic and also with the warmer weather.

Peak Easter selling this year began in early to mid-March, and as you know these were some of the worst weather weeks that we had.

And with the cold, wet weather and snow on the ground in many parts of the Company -- country traffic was down affecting both our everyday basics and our spring seasonal basis.

As a result, while February sales were positive and March sales were positive with the benefit of the early Easter we didn't make up enough to offset the loss in April when we were up against Easter sales from last year.

As the quarter ended we took the appropriate mark-downs on our seasonal product and we cleaned it up and we finished the transition to Mother's Day and summer.

Looking forward our merchandise plans are powerful.

We've got great product.

Our stores are in stock better than ever as a matter of fact.

Our back rooms are getting leaner and cleaner and we're really ready for business.

We're currently focused on memorial day selling and what we call the 100 days of summer fun.

Our 100 days of summer fun promotion kicked off last week and runs throughout the summer and it includes an ever changing assortment of high-value merchandise and also a schedule of exciting in-store promotions that will ensure fun and exciting shopping experience for the summer season.

Internally there are contests and competition between our stores aimed at increasing the average ticket.

With customers watching their gas bills and making fewer shopping trips it's more important than ever for us to increase our average ticket.

We expect a great result from the combination of product and promotion and excitement surrounding the 100 days of summer fun and we've seen early success on some of our newest merchandise offerings.

For example, our Luau collection which we just introduced has created a lot of sales excitement.

The collection includes a lot of things you need for a fun time at the beach or around the pool and it includes product like casual dinnerware and kitchen textiles and place mats and drinkware.

All of these items are color and design coordinated including beach bags and flip-flops and matching bucket hats.

This product was designed and developed by our own merchandise and marketing team and is available only at Dollar Tree.

And as I said, early indications are that it is a hit.

Moving now from merchandise I want to take a few minutes to give you an update on some of our key initiatives for this year.

Each of these is in various stages of development and implementation and much of their benefits are still to come beginning with real estate and our new store plan.

As I said at our last conference call, improving our real-estate process is one of our top initiatives this year and we are making progress.

One of our goals was to get ahead on our new store deal count and open our new stores in a timelier fashion, more productively, and to improve our new store ROIC.

Towards that goal we have strengthened and restructured our ranks.

We've increased the number of leasing reps, and while we fell slightly behind it, we were doing this in the first quarter, today we are slightly ahead of plan, and we will meet the second quarter and fiscal year store opening schedule.

Additionally, in our efforts to open more productive stores we've focused on the 12,500-square-foot size, which is on average smaller than we've opened in the last two years.

With experience and now history on the different sizes we found this size to be the most desirable.

It's large enough to efficiently display our full assortment, it offers a good shopping experience to our customers, they tell us they love it, and it stands up nicely in the face of competition.

One of the large store sizes, this size opens with the best productivity while still providing opportunity to grow year-over-year and it costs less to build out.

We're continuing to work and to improve our processes in leasing and construction and property management and we still have work to do but we're getting ahead on our deals, and with the slightly smaller store size and the associated construction cost savings we're making progress on improving new store ROIC.

Another initiative that I spoke about earlier in the year was to expand our tender types, and specifically I want to talk to you about debit card -- the debit card initiative that we have, with the exception of a few hundred stores we have historically only accepted cash and checks for payment.

Underway now we are rolling out beginning this month, we're in the process of rolling out debit card acceptance to an additional 1, 000 stores, and we'll complete this project by mid-year, and at that point we'll be accepting debit cards in over 50% of our stores.

Our studies have indicated that the average debit card transaction is much higher than our average ticket, and while it does replace some check and cash transactions we're looking at this initiative to have a positive impact on average dollar sales in the second half of the year.

Another key initiative this year was the development of and effective use of an advertising program to drive store traffic.

And I can tell you that our results to date have been overall positive in the 20 or so markets where we've launched our TV and radio campaigns.

But not what I would call a runaway success.

This continues to be a new initiative for us, and as I said earlier we're doing a lot of things to find the most effective formula this year and we continue to do so.

We believe in it.

We believe it can help us drive traffic to our stores but we wanted to use it effectively and efficiently.

While we still plan to increase our spending this year over last we're reviewing our results and refocusing this initiative slightly.

Our efforts continue to be aimed at new markets, at grand openings, and at seasonal peaks.

Turning to our inventory flow initiative, a key project that we launched is our automated store replenishment.

This initiative continues, and as we complete each additional SKU-level store inventory our capability gets stronger.

We're currently increasing the number of basic SKUs on ASR from 200 to 500, and we'll get to that level by fall.

ASR continues to provide improved efficiencies in the ordering process including savings in store payroll hours that we will reinvest into customer service.

Advances in this program are improving our ability to get the right product to the right store and will result in better inventory turns and increased customer satisfaction.

Overall we're doing a better job of flowing the product to the store more efficiently and our stores are focused on getting the product to the sales floor faster and reducing the inventory in the back rooms.

We're making progress here and we'll continue to improve as the year goes on, and as our history gets better.

Before we begin the questions I want to make a comment on the forward guidance that Kent gave.

First of all, we continue to be confident in our ability to effectively manage our controllable expenses and our merchandise margins.

Further, we feel confident in hitting our new store opening plans this year both in number and on a more timely basis.

Our greatest opportunity is in sales growth.

And while we have great merchandising, promotional, and marketing plans in place, we continue to face a headwind at a macro level.

Consumer confidence has continued to decline for three consecutive months, and most significantly to our customers, high gasoline prices continue to be a drag on our customers' disposable income, and for these reasons, as we look forward to second quarter and to the balance of the year, we see a reason to be conservative in our estimates.

We're going to continue to review these estimates as we move further into the year and as we know more.

In the meantime, many of our 2005 initiatives have started to take effect in late April and early May and will benefit the second half of 2005 with perhaps a little benefit received in the second quarter.

Our stores are better in stock and they're better managed than ever.

We have plenty of great merchandise, we have a dedicated group of store associates available to make the shopping experience enjoyable, and we remain dedicated to our basic strategy, and when the customer is out shopping we're focused on giving them the best value possible for the dollar.

We're now ready for your questions, which we ask be limited to one question with one follow-up.

[OPERATOR INSTRUCTIONS] Our first question comes from Meredith Adler from Lehman Brothers.

Hi.

This is actually Karen Howland taking the place of Meredith today.

You've obviously done a good job with the SG&A costs but the fixed costs and the costs of goods is having trouble de-leveraging that.

What is the comp that's needed to get leverage over the statistic census?

Well, it's probably somewhere in the vicinity of a one and a half comp.

Then in regards to the cost cutting initiatives you've done throughout the SG&A line is there any concern that it's hurting the store level execution at all?

Because presumably a lot that has been in labor costs.

No, it is not.

Actually, we're getting better at store execution.

As we learn better how to run these larger stores and we get some experience and we get our managers in there for more than a year running them, they're learning how to run the stores better.

We're also implementing a lot of technology and a lot of initiatives, as tools to help our stores manage the freight flow process and all of the processes better, more efficiently, and more effectively.

While we are managing our costs and we do manage our payroll as a percentage of sales we're getting more efficient in running our stores and our store standards are better than they've ever been, frankly.

You may find one from here to there that one day or the next doesn't meet the standards that you set but all in all I can tell you that our store standards are better than they've ever been and pretty darn good as it compares to the competition.

Great.

Thanks so much.

Thank you.

Thank you.

Our next question comes from Mitch Kaiser from Piper Jaffray.

Hi, guys.

I was curious on the guidance.

If you look, gas prices seem to be coming down, and just maybe less impact on the back end, but still you're cautious on the macroeconomic front.

How conservative do you think you're being on the guidance for the back half given it looks like you've taken about $0.10 out of the back half?

Well, we've -- we look at where we've been in our trend, frankly, and gas prices do -- good news, the price at the pump are coming down, but only slightly.

California has still got the highest gas prices in the country, I think.

So they need to come down a little more, and our consumers need to get sort of used to the gas prices, whatever level they are, and work that into their budgets and get their confidence up a bit before they're going to be out and shopping more.

The issue that we face, as Kent said, in the first quarter, is a decrease in our traffic.

We've got a lot of great initiatives in place to drive our average ticket.

We're seeing positive impact on the average ticket as we go forward, but the traffic has been down, and that's the drag from the fuel prices.

So going forward, I do believe fuel prices are going to -- gasoline prices are going to come down.

I think it's prudent, though, at this point to, as we look into the uncertainty of that, to plan our business accordingly.

We're planning our expenses accordingly against those conservative sales numbers, and I think -- if they come down and people get out into a shopping spree and get a little more confidence, then we'll just make more money, but right now we're taking the prudent approach.

So is your assumption, then, to take down kind of the last three-quarters based on the macroeconomic environment and the result of traffic, or is it something other -- is there something internal that caused you to do that on the merchandising front, for example?

I think most of the reduced guidance, Mitch, is really kind of in the near term, really in the second and third quarter.

It's just because while gasoline prices are tweaking down a tad, it's like I also am somewhat of a cynic because I believe oil companies are going to jack it up in the summer months.

In the near term I don't see a significant relief in sight.

The good news is while transactions have gotten better than what they were in the first quarter we still aren't at the level that we're confident that, well, you know what, we're back on track again.

So I think at this juncture I think it pays to be a little bit more conservative.

As we see benefits materialize, particularly on gasoline prices, we might be a little bit more optimistic.

The other thing I'd call your attention to there's an article in the Wall Street Journal yesterday that talked about gasoline prices, and it wasn't so much the availability of crude and the rising price of crude as much it was the lack of capacity to refine the crude into gasoline.

So there's still a big -- I don't know whether I would call a blockage, if you will, in the supply chain, until there's more capacity in processed fuel prices -- processed fuels.

Thank you.

Thank you.

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

Good morning.

Good morning.

Speaking about traffic, I know historically you've had a significant number of stores in the same strip center as a Wal-Mart or another traffic driver.

As Wal-Mart sees its traffic soften in recent months, do you think that you see a discernible difference in those stores that are exposed there?

I think we see a overall decline in softening sort of as the economists say, a soft patch in the traffic out there.

As I speak to other people in other industries, it appears to be broadly based.

So I don't know the Wal-Mart numbers, but I would think that we are subject to the same issues of traffic that they may be suffering.

Thanks.

And just kind of stepping back and looking at growth, you had signaled in the past that '05 was a little bit slower, in the 14, 15% square foot growth range, and that '06 you would leave the option open to maybe ratchet it up.

Is that still kind of the stance or have you re-thought that at all?

There's plenty of room to grow and we still believe that we could double the store count in the country as we model it.

How fast we get there is really going to be determined by how well and how confident we are of the climate to grow in and the ability to grow profitably.

So right now we're not -- I'm not looking at next year and saying we're going to ratchet that up.

I would think right now I'm still thinking in that 14 to 16% range like this year.

But then again, it's all subject to taking a look out there and it's really how fast we want to grow and the opportunity to grow profitably.

So we've entered some new markets this year.

We entered, as a matter of fact, just this week we entered Long Island.

I am very excited about that market.

There's no stores, no Dollar Tree Stores in an Island of several million people, so we just entered there this week with our first four or five stores, and so far we like the results.

There's still plenty of room to grow.

It's a matter of how fast we want to and can manage that grow.

Thanks for the color, Bob.

Looking forward to checking out those stores.

Take a look man.

We're excited about Long Island.

Thank you.

Our next question comes from Reed Anderson from Friedman Billings.

Good morning, Reed.

The inventory, you were a little above where you had hoped to be.

Is there still some meaningful mark-down risk in that excess inventory or has that already been priced through most of the first quarter?

It's already been priced through.

If you looked at our margins where we were down about 170 bips on the growth income rate, 140 was occupancy and distribution, buying costs, the balance is primarily due to markdowns.

We took the markdowns where we had to take them and just clean it up and move on.

And part of the issue, too, embedded in our markdowns, which we should talk about, too, is we have an initiative to clean up the inventory in the back room as part of our initiative to reduce our store-level investment inventory.

I think as they clean up these back rooms we're finding some items that we don't believe are salable, so we're taking markdowns on those as well.

That's probably the biggest issue.

I think the inventory is in better shape than it's ever been from mark-down exposure perspective.

We just happen to have a few more units.

And I would tell you that our buying plan, at least as it relates to purchases for the second quarter, is really going to have a significant impact in terms of reducing inventory levels and beating up the turns.

Other question, the debit card program you talked about, I mean, if you look at stores that have debit card access now, what typically -- what percent of your transactions are coming through cards versus cash or check?

Well, if I take a look at -- we did a test.

I guess the best thing I can tell you at this juncture is the preliminary results of our Texas store tests.

There were 101 stores where we accepted debit, and I believe Discover Card, starting in November of last year, and right now, debit, as a percent of sales, is about 22%, and so we've had some shift from other forms of tender.

The most dramatic of which, of course, is cash and check, but at the end of the day when I take a look at the size of the transaction on a debit card, which is over $16 versus a cash and check transaction which is under 6 bucks, it basically pays for itself.

And then some.

So at the end of the day I think this is going to be a big win for Dollar Tree.

Thanks.

Thank you.

Our next question comes from Patrick McKeever from SunTrust Robinson.

Good morning.

Thanks.

Good morning everyone.

On the same-store sales guidance for the year did you say flat to up low single digits for the full year?

No, I said down very low single digits.

Kent, on advertising, you gave some just basic color in terms -- you said that it wasn't -- or Bob, you said it wasn't a run away success.

Can you give us any numbers or quantify it or describe it in a little bit more detail in terms of the sales results in the 20 markets where you have been running additional ads?

Yes, Patrick, it's, overall if you look at the whole thing it ranges anywhere from a 1% delta better than the non-ad market to about 4% overall.

Now, within that we've tried some different things, and I've got some markets that really are much higher than that, and some that are less than that.

So we -- we're excited about the opportunity there.

I'm just still not -- it's not a panacea.

It's not something that, okay, let's add more markets and our sales -- that's going to be the answer to our sales piece, and, by the way, it is -- it is the costs, it's an expense.

So we are happy with the good results that we are getting.

We're going to spend more in the second half than we spent last year, but we are redialing and retooling a little bit before we declare victory.

I have confidence that we'll find the right combination but I don't feel like it's there yet.

So that's really the color on it.

I've got a few markets that are bringing the total down in there, and I really want to understand why that is, frankly, because usually you wouldn't expect to run more advertising and have a decline.

So it certainly shouldn't hurt our sales.

So we've got to understand the difference between the advertising uptick and what may be another down draft.

Okay.

And then second question is, --.

Our next question comes from John Zolidis from Buckingham Research.

Hi, good morning.

Couple of quick questions for you.

On the store openings and the size of the stores, can you just tell us, what was the size of the stores that were actually opened in the first quarter, and then are you talking gross or selling square feet?

Talking gross and it's right around 12,900.

So it did come down closer to that target range that you're talking about?

Yes, it did.

How do you identify that particular size as the ideal size to use going forward?

I mean, I calculate that the return on investment at that size is still about one-third lower than the stores you were opening about five years ago.

Well, the stores -- yes, they are.

The stores that we were opening five years ago, though, just aren't relevant today because they were 3 to 5,000 square feet, and shopping malls and in strip centers next to the target and the Wal-Mart, and they just -- they just aren't as relevant today.

So as we've grown to serve our customer to these larger stores, we have steadily grown the size of the stores, more opportunity, more product, and as we've done that we've grown some different sizes.

Of the large stores that we have, the 12,000-square-foot, 12.5 store, is the most productive of the large stores in terms of sales per square foot, it's the most productive in terms of four-wall contributions, it gives the ability to still show all of our merchandise and our customers still like the shopping experience.

It's still competitive, and it does cost a little less than the 15's and the 17's that we have opened some up.

That's how we've looked at it.

We now have some history to base some judgment on that says this is the best of everything here.

The option, though, was not to stay at the 4,000-square-foot stores, or 5,000-square-foot stores.

They just became non competitive as larger competitors opened up and they wouldn't hold the merchandise mix that we now offer, and they weren't serving our customers, so that's the reason for the transition, it's all customer driven.

John, what we do as part of the analysis on our real estate, is we do stratification of store groups by store size, and I'm looking at a report right now that really summarizes the last three years in terms of average square foot size, and clearly in that, 10 to 15,000 square foot range, it's -- it shows a significant difference in four-wall contribution.

Okay.

I mean, I guess I wonder if you -- you say that the small stores aren't relevant does that mean that they are comping negatively very strongly, and have you opened up any small stores recently to see how those would do out of the box?

As a group, the smaller stores are our worst performers and are, in fact, negative comping.

It's not to say that in some cases we might be offered a 7,000, 8,000 square foot deal, because that's all that's left.

We can't get a 12,500 square foot deal.

So we have a few of those stores that we do open, but by and large, Bob's right, we seem to be honing in right on the 10 to 15,000 square foot range.

Our next question comes from David Cumberland from Robert Baird.

Good morning.

Good morning.

Bob, can you comment further on the in-store promotions you mentioned as a sales initiative?

What are some of the new things you will be doing in the stores?

It's what we call our 100 days of summer fun, and it's that period of time that bridges the gap between Mother's Day and goes directly into the summer selling and all the way up really through about Labor Day, but it's an internal promotion for us as well as a promotion to our customers.

To our customers what it means is ever changing mix of great new product, like I talked about the Luau collection.

We also have a Palm collection.

We had Stripes, we had different collections that come in at different times, and they're featured up-front and basically it's product that we've developed that is on trend.

By the way, these hot, new bright colors in our Luau collection you're seeing those at department stores and higher-priced gift stores throughout the country now, so our buying group really hit that one on the nose again and the customers are reacting, because they haven't seen it at a Dollar, flip-flops and bucket hats and beach bags with all the same matching print is coming in here right the week before Memorial Day when people are thinking about getting outside.

Hopefully the weather will get better but those are the kinds of things.

The product will come in, we'll feature it up-front, we promote it with signing in the store.

To our customers that's what it means, it's that 100 days of summer fun.

Internally we generate and try to gen up some excitement with our associates on using little contests and they're competing with each other on improving their average ticket in the store, for example, and we've encouraged them to come up with examples of how to create an extra add-on sale, and you would be amazed at the kind of photos that I get everyday from our store associates.

Had one just recently where they had taken a drive item with key items that the store had identified and this one associate had began to wear them flip strips all over the front of their body.

So as they're walking around working in the store, they're suggesting these clip strips.

And if they're not suggesting, the customers are asking.

So they're having a little fun, they're having a little excitement, it creates an exciting atmosphere to the store it gets to the real root of what we're trying to do, and that is drive that average ticket and new merchandise and creating the fun and excitement of summer.

We're blowing up inflatables, we're getting out onto the sidewalk.

There are times when we encourage our associates to wear Luau, or Hawaiian shirts, for example, and shorts and sunglasses, so a little fun, and that's infectious among our troops.

And it also spreads into our customer, we have a lot of fun with it.

Thank you.

Our next question comes from David Mann from Johnson Rice.

Yes, good morning.

Can you comment a little more specifically on the earlier question about the comp performance of small stores versus large stores?

Well, the small stores, what we call small store, is that less than 6,000 square foot store that we were opening up probably five years ago and longer, over time we've started with two and went to three and four and five and six.

So we still got a lot of those.

There's still about 150 or 60 of them that might exist in a mall, which is old real estate, frankly, and we make money in them, but they're certainly not as compelling as they once were, and the malls aren't as good, so we've been moving those out of malls, and when we do we've been opening up a larger footprint that allows us to show our broad, our complete assortment to our customers and better serve the customer.

It also gives us the ability to help our comp store sales as we go forward.

So as you look at the performance of those less than 6,000-square-foot stores, both in strips and malls that is our worst-performing class of stores on comps.

As you look at our best performing class it's our large stores.

So that -- we won't break it down and don't break it down by store size for everyone, but that gives you the color on it, and these are great little stores still.

We have a philosophy of, we do five-year deals, typically, with five-year extensions, and we do that to give ourselves the flexibility to move with the market and where the customer lives.

That has served us well.

But we have a philosophy of keeping stores open through the term because they make money and then relocating at the end of the lease term.

So we'll continue to have small stores over time.

I guess, Bob, my question on the -- more specifically on the large stores, given the recent comp trend, not just this quarter, over the last year, I guess it doesn't appear that the comp trend at the larger stores is that robust.

And I --.

Well, you haven't seen enough of the large stores in the comp yet.

We break it down by store class, and we look at it.

We look at the sales by the comp sales by the store sizes, too, but if you just look at the total comps -- now, I will tell you this.

We have opportunity to improve our sales in our larger stores, but the color is, the small stores have been the drag, and the larger stores have been the plus, and we are, as we continue to add more stores, we add them into our comp base after basically 13 months, I think it is, to the first of the month after 13, as we've always done.

So year-over-year you continue to keep adding more of those into the comp base.

And I think this year and next is when we reach the point where we really have more of our stores in our comp base.

Our average size store becomes that large store size.

Do you have anything to add to that, Kent?

I know people have asked the question, I've tried to offer an explanation in terms of both number of stores and volume and the stores under 10,000 square feet are comprised roughly about two-thirds of comp base and slightly less than half of the sales, so as we work through some of those smaller stores that are a drag, I think it can mean as much as a half a point to a point a year, from a comps perspective.

Thank you.

Our next question comes from Joan Storms from Wedbush Morgan.

Good morning.

Can you maybe just give us an update a little bit more specific on what exactly we're doing with advertising to get customers into the store since traffic seems to be the major issue, and then, Kent, quickly, where you expect inventory levels to be at the end of second quarter?

Joan, I'll handle the advertising, and I'll throw it to Ken on the inventory.

We've never been an ad company until sometime last year or the year before we started doing a little bit around our grand openings, then we tested some.

What we are currently -- our current program is 20-some markets across the country that we have put together a promotional schedule using a combination of radio or radio and television, and the essence of the advertising is focused around the seasons, like right now we're on TV and radio, and these markets, and we're talking about the summer fun, and we're showing bucket hats and we're showing the flip-flops and all the things that support the Memorial Day selling season.

We did the same thing for Easter.

As we go forward we will focus our advertising in these markets, our electronic media, around the seasonal -- the peak seasons.

In addition to that, for new markets and for grand openings, we're doing a combination of print and for electronic and those markets, especially to introduce the customer, if it's a new market for us, on who we are and what we do, everything's a dollar, Dollar Tree value, everything's a dollar, and also in support of the grand opening activities, our print advertising will be special buys, it will be the best deals, it might be a little promotion, a little registration, one-time recently we gave away gas cards, and created some excitement with those.

So that -- it's basically grand opening of new stores and new markets, and approximately 20 -- it's a little over that, 20 markets of electronic media focused on our seasonal -- and when I said I really wasn't happy with it, we're getting some positives out of it, but I think we can do it better, and I think -- it's -- it's not a matter of just going out and dropping in advertising, and all of a sudden sales are going to go up.

We really do have to get the marriage between -- I've always said the store is the ad, and I still believe that.

So the marriage has to be the store and the focus on the story, then the advertising has to support that.

And I think we'll -- I know we'll get better at that but that is our opportunity with it, as we go into the second half.

So basically in those 20 markets you are maybe seeing little change in traffic?

Yes, little change.

Overall, little change.

Some markets are considerably good, positive change.

I've got two or three that are negative.

And it is not because of the advertising.

I realize there are other down drafts probably in those markets, and we're looking at that.

Thank you.

Our next question comes from Michael Friedman from RBC.

Good morning.

Good morning.

I got to tell you I saw the -- I guess it's North Port, Long Island store last week, and I guess it was only the third day it was open, and it was really hopping and the store looked great.

So I compliment you guys on it.

Thank you very much.

Hope that continues and then we need a few hundred more like that.

Amen.

I'm with you, man.

When you were there three days ago we had just opened that as a silent.

It was -- the real promotion starts this weekend, Memorial weekend, but the store was ready, so they just unlocked the doors and started letting customers in, and what you saw was no media, no hype, no anything.

It's just the customers showed up.

So we're really excited about all those markets up there.

I've never seen as many customers actually pushing shopping carts through one of your stores.

God bless you.

Anyhow, just on kind of a different note, for the quarter you guys did a negative 3.7 comp.

Dollar General did a positive 4.9.

They have the same Easter and the same calendar, they had similar weather, you know, their customer was paying the same gas prices and may arguably not even -- may arguably be even lower income.

I mean, what's going on there when the difference is that big?

I understand you guys calling out the calendar and weather, but is there something more structural or something more execution-wise that we need to be looking at when a difference is that big?

It's a fair question, but I think you're going to have to look further into what Dollar General says about their sales and where it's coming from.

I know it's more consumables but --.

Well, that's what I would think.

I think they're a great company, but I think you've got to look at them -- I can only speak to Dollar Tree.

I will tell you that as a comparison to any of the other dollar players we are the most discretionary, and we have been, and although we've moved to more consumable products we still are not the consumable headquarters as some of these other places try to be, in our mix.

Also, if you look at historically our merchandise margins we always have the highest merchandise margin, too.

So we get to an answer sort of a different way.

I would believe that as fuel prices are high, people are spending more of their -- whatever income they have left over after filling up their cars, they're spending it first on things that they need, food and things that they need, and secondly on things that they want.

So that's -- that's what I believe, but I think you're going to have to look harder into the Dollar General to draw those comparisons.

Just along that line, Bob, I mean, does that mean -- should we be flexing our mix even more toward consumables, just given how bad this negative leveraging is hurting us?

I think it is a balance, and that also is a fair question, but, you've got to look at what we do and what we do best.

The other thing is as you go into these consumables and all of these brands, you immediately begin getting into an arena where you're competing with everyone on that product, and all of a sudden price is, frankly, the reason for buying one place over the other.

At Dollar Tree what we do is -- like the Luau collection, we've always been terrific at creating great value and offering great opportunistic buys, things that you're not necessarily going to find somewhere else, but holy cow, look at the value you get for a dollar.

And then moving on from there, one of the things we offer more than Dollar General family, anyone else, or we try to, is that thrill of the hunt, that ever changing assortment of product.

That is our strength, it offers higher margins, we are a higher margin operating company than the others, we typically have higher operating margins at the end of the day, too, but we are a little subject to these cyclical soft patches, as they call them, with traffic, things like fuel, as people aren't -- don't have as much disposable income they are spending it more on the things that they have to have.

We're going to stick with what we do best.

I just don't feel that you leave what you do for a short -- because of short-term set-backs, and that's exactly what I see this as.

I think we're still right.

Thanks for the question, though.

Thank you.

Our next question comes from David Campbell from Thompson and Davis.

Thank you.

Good morning.

Good morning.

I have a question about inventory management and planning.

When I was in the stores after the Easter holiday, I noticed that there was a lot of unsold merchandise that had -- that was either being marked down or sent back to the warehouse.

I'm wondering if you can't do a better job of planning for the Easter season and if you -- if you shipped in too much, how you can correct that in the future.

Thank you.

Yes, we shipped in too much, and we planned Easter to be better than it was this year.

We took into account that it was earlier, and we took out of our sales for Easter millions of dollars, but where we miscalculated, I believe, is the effect that Easter has on traffic and the sales of the rest of the store.

So while we -- we had less than planned Easter, we also had a less than planned traffic throughout the rest of the store.

Early Easter's just sort of tend that way and then if you have bad weather on top of it.

I hate to even bring it up, but we really did -- if you have blizzards and snow storms in your peak Easter season selling then your traffic is going to be down.

Planning going forward, next year Easter is a little later, so next year Easter should be a little more opportunistic for us, but we really do have to get down to so how big is that, how much more is that.

The good news is we now have the sales by SKU and by category and almost all of our stores we're doing to SKU inventories now, so we actually know what we own and know what we're selling and where we sold it.

I believe we can do a better job in that.

But we bought too much for Easter this year.

We thought it was going to be better.

And we did plan it down.

I should also tell you that.

I'm looking at a summary that just takes a look at our average investment in retail over the quarter and we did plan it down.

We just didn't plan it low enough.

Thank you.

Thank you.

We have time for one more question.

Our final question comes from David Buchsbaum from The Stanford Group.

Could you update your guidance on free cash flow for the full year, which I believe was $190 million, and also if we wake up sometime this fall and the Chinese currency has been revalued by -- you could pick a number, 5 or 10%, how should we think that that might affect your guidance at that juncture?

I'll take the currency thing and, frankly, if we wake up this fall and find it, excuse me, there would be no change on this year because we're way up in front of that.

But the -- we keep reading all the articles and all the speculation on the value of the Chinese currency, and it's been going on for frankly several years.

The U.S. and the world basically has pressure on China, as you know to peg their currency to the U.S. dollar and let it float.

The Chinese keep saying we're not going to do it because that's not in our best interest and so far, that's the way it is.

Let's assume that it did, though, just because of the nature of your question, which I'm skeptical that they will, in the near term, do anything, but who knows.

If they were and if it were 5 to 10%, frankly, I doubt if it would be 10%.

The Chinese mentality would not let that thing float in but a very narrow range, very controlled way.

So you're really looking at more probably in the 5% range than the 10% range.

And frankly 5% on our minimal cost of goods is not that much.

It actually may make it up as they're buying better on their raw material side.

What we're seeing out of China really has been over the past year to two years a decline in our cost as we've gotten bigger and as we've sourced better and closer to the factories and built more relationships, not an increase.

So I think there's some room there, and if we had to make some changes in product, and remember, we're always changing our product from season to season, so when we go to market we have a target that we're expecting to buy, at a price that we're willing to pay, and we build this product to that specification.

So we are really in control of how much costs we're going to put into the goods, and the value is always relative because the cost, the value of the dollar is the same for all of us, and retailers and the world.

So we believe we can manage any change that they make because we believe that any change that they might make would be fairly minimal and very controlled.

As far as your question on cash flow, David, obviously we didn't, in our original guidance, didn't take into consideration the level of repurchase that we've done so far, but if you look at all the metrics and all the items that give rise to the cash flow generation, the net income the guidance hasn't changed all that much in terms of the mid-range.

Depreciation, we're on track where we were before.

The CapEx number seems like it's on track.

In fact, coming a little bit better.

And then if we can really execute to our inventory plan, as it stands right now, then that number actually could go up a little bit.

I just wanted to be a little bit conservative, because to be perfectly honest we haven't been doing a good job of controlling our inventories for the last twelve months, and I'd sort of like to see the results move in the right direction before I say it's going to get any better.

I appreciate those answers.

Thanks a lot.

You're welcome.

Thank you.

I'd like to hand the program back to our host for any further remarks.

Thank you very much.

I appreciate your interest and your time and the interest that you've shown in our business.

I'll remind you that our next conference call is scheduled for August the 24th, 2005, and I'll look forward to seeing you then.

Thanks.

Thanks.

Thank you ladies and gentlemen, for your participation in today's conference this does conclude the program.

You may now disconnect.

Good day.