美元樹 (DLTR) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to your third quarter earnings conference call. [OPERATOR INSTRUCTIONS] I would like to turn the conference to Mr. Tim Reid.

Mr. Reid, you may begin.

Thank you very much.

Good morning to all and welcome to the Dollar Tree conference call for the third quarter of fiscal 2005.

My name is Tim Reid, I am Vice President of Investor Relations for Dollar Tree.

Our call today will be led by Bob Sasser, our President and Chief Executive Officer who will provide some insights on our performance in the third quarter, update you on our 2005 initiatives, and comment on our fourth quarter.

Kent Kleeberger our Chief Financial Officer is not on the call today as he is in Ohio attending to a serious illness in his family.

He will rejoin us next call.

Katie Mallets, Vice President and Controller will provide a more detailed review of our third quarter financial performance and fourth quarter financial guidance.

Following our prepared remarks, Bob, Katie, and I will address your questions.

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 prepared remarks today, we will open the call to your questions, which we will ask that you limit to one question and one follow-up question if necessary.

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

Thanks, Tim, and good morning, everyone.

This morning we announced earnings for the third quarter of $0.29 per share on sales of 796.8 million.

Both sales and earnings are increases over last year and both are at the high end of our most recent guidance.

I'm going to begin by pointing to some of the key elements of the third quarter beginning with expenses.

Selling general and administrative expenses declined 20 basis points in the quarter and that was after offsetting higher utility costs and the charges associated with hurricanes Katrina and Rita.

We continue to demonstrate the ability to effectively manage expenses and I'm pleased with these results.

I'm also very pleased with our improvement in inventory management.

Our new POS data and merchandise systems are working and they're giving us the needed visibility of sales and inventory by SKU and by store which is allowing our replenishment team to improve the flow of inventory to those stores.

In addition, we continue to rollout more SKUs on automatic replenishment which is giving us a better flow of basic product to the stores, reducing back-room quantities, and improving instocks to better serve the customer.

As a result of the initiatives our total inventory was lower than last year, even though we have 225 more stores.

And our inventory per store was down 11%.

While sales were at the high end of our range for the quarter, I'm not pleased with our comp store sales performance and we are committed to turning that around.

Our highest priorities are aimed at driving the top line and we are seeing some positive indications that these initiatives are taking hold.

Our initiatives to increase the average ticket are gaining traction.

In the quarter while our traffic was down, the average ticket increased.

Our customers are making fewer trips but when we get them into our stores, they are responding positively to our merchandise offerings and they are buying more.

Our expansion of tender types has also contributed to a higher average ticket and improved our customer satisfaction.

We recently completed our rollout of debit acceptance to 1400 additional stores just in time for holiday shopping.

We now have -- we now accept debit cards in over two-thirds of our locations.

Along with the debit acceptance we've added the ability to accept EBT cards also in these locates.

Moving to real estate and in our real estate initiatives, re-engineering our processes this year we have had some good results there also.

We've opened stores more productively and earlier than last year.

The productivity in ROIC of our class of 2005 stores is higher than the class of 2004, and we believe this trend will continue.

Last year we opened 40% of our stores in the first half of the year.

This year over 60% of our estimated 225 new stores opened in the first half.

Through the end of the third quarter, we have opened 203 new stores and we believe we are on track to achieve our targeted annual growth.

In our efforts to attract more customers and promote more frequent shopping, we continue to emphasize our ever increasing merchandise value with more wow items than ever.

An improved instock of basics and as always our seasonal excitement for the fourth quarter.

It really is all about the merchandise and the stores and we have great value and we are working hard at providing a great shopping experience for our customers in the fourth quarter.

We continue to focus on offering that unexpected value, that extra wow item that our customers just can't pass up.

For example, for the holidays, we are featuring a ten inch stuffed bear.

They are not only the cutest but probably the biggest and best value you've ever seen for a dollar.

You can pay more but you can't get a better bear for a buck.

Early results indicate this is going to be complete sellout.

Again, this year, we have an updated presentation of themed ornaments with a look and quality that you would expect to find at higher priced stores, but at Dollar Tree they are just a dollar.

One of our flagship categories and one of the things that we are well-known for is our wrap and our wrap supplies and once again we are headquarters for gift bags and wrap and wrapping supplies.

Again, you can pay more but you can't get better quality, design, and value than in our gift bags.

And as always, we were stocking stuffer central with an unbelievable assortment of toys and gifts all for just a buck.

In addition to our seasonal items, our branded closeouts and special buys provide our customers ever changing mix of unexpected value every day.

And in our larger stores, we have expanded our offerings of consumable goods.

These are basic products that our customers need every day and buy more frequently.

This provides the customers a reason to shop with us more frequently and we believe this to be an important element to increase the footsteps into our stores.

While the consumable products are higher turns, they're lower initial markup.

And despite the benefit of increased shopping trips and increased sales, this shift has put some pressure on merchandise margins.

We expect this trend to continue into the fourth quarter but to a lesser degree with the offsetting effect of our higher merchandise on -- our higher margin on our seasonal product.

Our advertising program, though small, continues to gain traction.

Our spending is up for the year with the bulk of the campaign occurring in the second half.

We are using primarily TV and radio to drive traffic around the seasons, and we are focused on geographic markets where we believe we will see the best results.

Now, I'm going to turn it over to Katie, she's prepared to provide a more detailed review of our third quarter results and also guidance for the remainder of the year.

Katie.

Thanks, Bob.

Good morning, everyone.

Sales for the third quarter of 2005 were $796.8 million, which is a 10.1% increase over last year.

These results were within our most recent guidance and reflect a 1% decline in comparable store sales.

The decrease in comparable store sales was attributable to a 3.5% decline in transactions that was partially offset by a 2.6% increase in transaction size.

We believe much of the decline in transactions can be attributed to higher energy costs which continued to pressure our customers in the third quarter.

However, it is apparent that our initiative to expand tender types has helped us to increase average ticket which mitigates a portion of the decline in transactions.

Diluted earnings per share for the quarter were $0.29.

Slightly above the high end of our most recent guidance and includes the impact of the major hurricanes during the quarter.

For the third quarter, gross margin was 34.7%, versus the 35.7% in the same period last year.

The decline in rate was primarily due to sales penetration by lower margin categories such as candy and foodstuff as well as increased transportation costs arising from higher diesel fuel prices.

Additionally the occupancy cost component of gross margin increased due to the deleveraging associated with negative comparable store sales.

SG&A expenses for the quarter were 28.1% of sales versus 28.3% for the same period last year.

The basic tenant of Dollar Tree continues to be expense control and we are pleased with our efforts to date.

Store payroll and home office expenses continue to be effectively managed during periods when sales are especially challenging.

Our cost control efforts succeeded in offsetting the impacts of increased utility costs and charges associated with the aforementioned hurricanes during the third quarter. 14 of our stores sustained heavy damages including inventory losses, leasehold and equipment destruction, and many stores required some form of structural repairs.

As of today, nine of our affected stores remain closed.

We expect to re-open three of these stores in the near future permanently close five and relocate one store.

Moving to depreciation and capital expenditures.

While the bulk of depreciation expenses is reflected in the SG&A line, you should know that the overall rate as a percentage of sales was down slightly to last year.

For the year, we see depreciation expense of just under $140 million.

From a capital expenditure perspective, we still see CapEx in the 132 to $135 million range for 2005, versus $182 million in 2004.

On the balance sheet, cash, cash equivalents, and investment for the quarter were $106 million versus $98 million at the end of the third quarter one year ago and that is after reflecting about $180 million in stock repurchases in the first nine months of 2005.

The Company continues to view share repurchase as accretive as well as a good use of free cash flow and we will continue to repurchase shares under our $300 million authorization as conditions warrant.

As Bob discussed, we are focusing on increasing inventory turns.

We are pleased to report that inventory was down roughly 11% per store at the end of the third quarter, and more than 3% overall despite an 8% increase in our store base.

We still expect inventory per store to be down about 7% by year end, consistent with our earlier projections.

Regarding sales and earnings guidance for the fourth quarter of 2005, we are forecasting sales to be in the range of 1.035 to 1.065 billion and diluted earnings per share in the range of $0.74 to $0.80.

Thus for the full year we believe sales will be in the range of 3.35 billion to 3.38 billion which would result in annual diluted earnings per share in the range of $1.53 to $1.59.

This guidance reflects our caution about the near term economic environment and assumes flat to very low single digit negative comps for the fourth quarter and year.

Now I will turn it back to Bob.

Thanks, Katie.

Before I turn the call over to your questions, I want to quickly summarize.

We continued to demonstrate solid expense control resulting in third quarter earnings at the high end of expectations.

We are focused on driving the top line through increased merchandise value, expansion of our payment types, targeted advertising, and improving the productivity of our new stores.

While we have reduced our inventory levels through the second and third quarters, we are entering the holiday season in very good shape with a great seasonal assortment and we're capturing more consumable business in our larger stores.

We remain committed to share repurchase as we expended $50 million for this initiative during the third quarter while maintaining a very strong balance sheet.

Our main focus on delivering great value remains paramount for our customers and for our shareholders.

Looking ahead, we remain confident that our offer of extreme value for our customers and our initiatives to increase traffic and average ticket will contribute to our long term financial performance including generating significant cash flow.

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

[OPERATOR INSTRUCTIONS] Our first question comes from Mitch Kaiser.

Good morning, everyone.

Good morning, Mitch.

Just in terms of the hurricane expense, which line is that in?

On the P&L?

It actually shows up in both margin and in G&A.

We have got some markdowns that are affecting the margin section and we've got some asset writeoffs and some repairs that are showing up in G&A.

I guess it was $0.03, I guess, just proportionately how would we break that out amongst the two?

It actually was closer to $0.02.

I would say it's about half and half.

And I know it's early, but just looking ahead for new store openings for next year, what should we expect at this point?

We haven't -- it is too early.

We haven't put that together yet.

All right, thank you.

Our next question comes from Meredith Adler.

Your line is open.

Good morning, Meredith.

Hello?

Hello?

Hello?

Hello, this Meredith?

Hello?

Hello?

Hello, can you hear me.

I sure can.

Okay, hi, this is Ivy Jack for Meredith.

Looks like you guys have done a great job on expense control, but like you to comment on at what point do you start to cut into the muscle versus the fat?

Also, what opportunities are left as far as expense control goes?

Well, we think there is always opportunity, but I will tell you that the big pieces are probably gone.

We have over the last couple three years really focused on managing our expenses.

There's always ways to do things more effectively and more efficiently.

We have employed technology to help us in that regard.

And we've had some good success.

We do not intend to cut into the muscle.

We haven't yet and we don't intend to going forward.

At some point the top line growth has to get more generous and I believe that we are on the right track towards that.

Okay.

I have one more question for you.

You commented on you have been doing advertising in certain markets.

Can you let us know if you have seen a difference in the consumer behavior or an increase in traffic in these markets?

Yes, we have.

It's a slow burn as you are aware with these advertising campaigns.

There is 12 to 15 markets, I don't know exactly that, we do change, some in, some out from time to time.

But we have seen positive results in the markets where we have been running our TV and our radio campaigns, mostly around the holidays is when we run these.

As I pointed out, we began small and in a small way with limited numbers of markets and a limited spend, but we were seeing good results.

I think over time you are going to see this build and build some momentum especially in these first markets.

Thank you.

Thank you.

Our next question comes from Michael Baker of Deutsche Bank.

Hi, thanks, can you hear me okay.

Yes, we can.

My question, sounds like you have got the traffic issue -- sorry, the ticket issue well under hand where you do have the ticket up but the traffic remains weak.

What are the initiatives then to drive traffic?

Sounds like a little bit in advertising but that sounds like it's relatively small.

Are there other ways that you guys can think of to drive more traffic to get more people into the store?

Well, as I said, we are working on all the initiatives to provide the average ticket.

When we get them into the store to sell them more and we have been seeing good results from that.

To drive more people into the store, I believe that our initiatives aimed at increasing the consumable portion of our business which we have been doing over the last few years, several years actually, as we build these larger stores and expanded the store size we have begun to expand the consumable portion of our mix.

As times are a little tougher, as our lower income customers are a little strapped, they really need to be able to buy that stuff at a value and I believe as we have increased that mix in our stores, that that will increase our traffic.

It's going to take some time, though.

The things that I'm talking about are the things that people buy more frequently, it's the household supplies, it's the cleaning supplies as well as some of the foodstuffs and all of the basics that people need as we have gone from these small stores to these large stores we have increased that portion of our business.

And in our large stores we are seeing some good effect from that.

Okay.

Well, that makes perfect sense.

As a follow-up, so again, how do you communicate that change mix to your customers?

Is that what you highlight in your advertising or is it in-store signage or is there another way that you communicate the increased consumable to your shoppers?

Well, it's a lot of it is word of mouth, Michael.

As I said, the advertising is still somewhat small.

We're starting small because as you know, every dollar we spend in advertising comes right on to the expense line.

So we want to make sure we're getting the payback from that.

Our advertising is mainly focused around the seasonal time frames.

But word of mouth with our larger stores, our customer experience as well as our street presence, we pay more attention to our real estate and these larger stores and our street presence is very important to track those customers from drive-by as well as down the streets into our stores.

But it's something that I think word of mouth is going to affect greatly.

Great.

Okay.

Thank you very much.

Our next question comes from Reid Anderson from Miller Johnson.

Good morning, can you hear me?

Sure can, Reed.

Hi, Bob.

One question, just wondering given what's going on out there across kind of all retail, are you looking at or are you possibly trying to maybe flex up a little bit the closeout mix this fourth quarter versus last year?

Well, Reed, we are always trying to flex up the closeout mix.

I believe that that's one of the things that sets us apart from other retailers.

It's something we have always aspired to increase the percentage of closeouts in our mix.

And I can't tell you that there is necessarily -- I can't quantify more, but I can tell you there is even more focus on the closeout product right now.

If you go in our stores you are going to find those extra special values as you walk the stores.

Okay.

And then a follow-up on kind of the discussion on advertising, you commented that advertising your spend is more concentrated to the second half versus the first half.

Is that -- if you dialed that in even deeper, is it more concentrated into Q4 versus Q3 as opposed to last year?

Yes, I would say so.

All our advertising is focused around the holidays and of course Christmas being the biggest holiday.

So it may be a few -- it's a few less markets with more spend in the markets, I think would be a better way to characterize it.

Versus last year?

Versus last year.

Okay.

Great.

Thanks.

That's it.

Our next question comes from David Mann from Johnson Rice.

Yes, good morning.

Could you elaborate a little bit on the performance of your large stores versus your small stores in terms of perhaps comps, traffic, and ticket?

Well, I can elaborate only to the degree that we have always shared the information as much as our larger stores do lead our sales and they are the stores that are providing the best customer shopping experience as well as the broadest assortment, more the consumable things.

More the things you need as well as the things that customers want.

They have even the older ones, the first ones that we opened have continued to comp ahead of the rest of the Company.

If you looked at the by class, you would see the largest stores the best, you would see the smaller stores the less, and the mall stores the worst.

We are down to not that many mall stores now.

It's probably less than 200, I guess now.

Would the -- can you just give us a range on the large stores in terms of what magnitude of positive comp they might be doing and--?

I really can't.

We haven't broken that out.

Okay.

And then, Bob, in terms of product acquisition, we've heard from some other retailers talking about some of the inflationary pressures they are seeing.

Can you just talk about where and how much pressure you are seeing in your mix and perhaps what categories?

Yes.

The pressures are out there.

We have been able to overcome a lot of the pressures with our mix and by as much of the product as we do that is our own product development with a great majority of that coming from Asia, we are able to develop the product and at the cost that we are willing to pay and for the value for the dollar.

But there is pressure on that.

And especially on the domestic product more than the import side.

Domestic product, paper, steel, anything that's -- plastics, anything that is driven by fuel cost or utility cost is seeing some pressure.

Now we are able -- as I said, we are able to mitigate some of that because of our nature of not really having to have any one particular item and always being able to change the product or the manufacturer versus the product.

So we worked through that very well but we are seeing more than we have seen in some time.

Thank you, Bob.

Yes, sir.

Our next question comes from Carl Anderson of Stonebrook.

Good morning.

Good morning.

Carl?

His line is open.

Our next question comes from David Cumberland of Robert Baird.

Good morning.

Bob, you mentioned EBT acceptance at the stores that are now accepting debit cards.

Do these stores carry the product category needed for customers to pay with EBT, or is that something you are planning to add to these stores?

Well, both.

As we've added the ability to accept debit cards, we also have added the ability to accept the EBT cards.

There is a lot of legal -- there's a lot of rules that change by geography, but we are rolling that out as we roll out the ability to take.

As far as the product, many of the stores that we have added the debit are the larger stores which do have the product that you can use the EBT cards on.

Some of the smaller stores do not have as much of that.

The larger stores have more.

And of course we do have some stores that have the ability even to take food stamps.

We have probably 200 stores that began with the Dollar Express days when we bought the Dollar Express chain and acquired the frozen and refrigerated and the milk and the bread and the things that you need for food stamps.

Those stores as we rolled out the technology and EBT are even in the process of and/or are already accepting food stamps.

Thanks.

And as a follow-up, on the hurricane costs, those were $0.02 in Q3.

Is the expectation still for cost to be $0.03 for Q3 and Q4 combined?

I don't think so.

We do think that we will probably have some repairs that continue into the fourth quarter, but we believe that the majority of the costs are in the second quarter -- or are in the third quarter.

So $0.02--.

So $0.02 is a good number.

Okay, thank you.

Our next question comes from Stacy Turnof from Merrill Lynch.

Good morning, Stacy.

They just disconnected.

Oops.

[OPERATOR INSTRUCTIONS] I'm not showing any questions.

Okay.

Well, then, thank you all for your participation in the conference call today.

Thank you particularly for your continued interest in Dollar Tree Stores.

The next conference call is scheduled for February 22, 2006.

Thanks very much.

Ladies and gentlemen, this does conclude today's conference.

You may now disconnect and have a wonderful day.