美元樹 (DLTR) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter earnings 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 you need Operator assistance, please press star then zero on your touch-tone telephone.

I would now like to introduce your host for today's conference, Mr. Tim Reid.

Mr. Reid, you may begin.

Thank you very much, and welcome all to the Dollar Tree conference call for the fourth quarter of fiscal 2005.

My name is Tim Reid.

I'm Vice President of Investor Relations.

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 fourth quarter and full year 2005 and comment on our strategies for the future.

Kent Kleeberger, our Chief Financial Officer, will provide a more detailed review of our financial performance and our 2006 financial guidance.

Following our prepared remarks, Bob and Kent 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 Provision under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors 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.

And with that said, I'd like to turn the call over to Bob Sasser.

Bob?

Thanks, Tim, and good morning to everyone.

This morning we announced our earnings for the fourth quarter of $0.81per diluted share, which was an increase of 9.5% over last year's $0.74 per diluted share.

This was achieved on total sales for the quarter of $1.079 billion, which was an increase of 9.3% over the same period last year, comp store sales increased 1% for the quarter.

This was a nice end to what was a very difficult year, but I'll begin by pointing to some progress that we made this year on our key initiatives which resulted in improved performance for the fourth quarter.

We expect these to continue to provide positive momentum.

And I'll begin with our merchandising initiatives.

For the fourth quarter, in addition to the seasonal excitement that we always create by our trim a tree and our seasonal decor departments and all the stocking stuffer-type items that our customers have grown accustomed to, and by the way, I'll just say they were better this year than ever before, but in addition to that this year, we placed an increased focus on the development of key items and wow items for the season, and these produced strong sales throughout the quarter.

An example is our Christmas Bear that I talked about, just landed at our last conference call.

Well, it was a complete sellout, our Christmas dinnerware and holiday stemware was the best ever.

The values were great and we stacked out these key items and our customers responded during the fourth quarter.

Secondly, we placed an increased focus on basic seasonal product.

Our wrapping supplies, including gift boxes and gift bags and tags and tape and tissue and bows were in stock through the week of Christmas and all the way up through Christmas Eve, producing strong last-minute sales.

We also increased our supplies of basic non-seasonal product, or what we call our violent peak items.

As you might guess, sales in all categories rise in the fourth quarter, and using our POS sales history this year, we were able to identify and place special attention on being in stock on not only the seasonal product, but on basic products as well.

We increased our inventory for the season on items like turkey roasters and foil and wrap and bags, things like scissors and extension cords and light bulbs were all beefed up in the stores with good success.

We were very successful with our assortments of cough and cold remedies, which were maintained based on sales history.

Our continued focus on basic products provides customers a reason to shop with us more frequently, and we believe this will be an important element to increase the foot traffic into our stores.

While providing a higher turn, it is a lower initial markup.

The slight shift in mix has put some pressure on merchandise margins, as Kent will discuss, and this will likely continue into the first half of 2006.

I want to point out, however, that these are incremental sales, and we believe the increase in shopping frequency and average ticket will provide an offset to the lower initial markup in the long-term.

Turning to our non-merchandise initiatives, we are pleased with the result from our efforts to expand our debit card acceptance.

We added debit card acceptance to 1470 more stores just in time for fourth quarter, and we now accept debit cards and EBT at over 70% of our locations.

We will finalize that this year, the rest of the chains this year.

The initiative clearly contributed to our improved average ticket particularly in the second half of the year, and we expect this to continue.

Investments made in our information systems infrastructure over the past several years are providing tremendous benefits, and I'm particularly proud of the progress made in managing our inventories.

While the number of stores increased and our retail square footage grew by 13%, at year-end our total inventory was down 39 million from last year, and we ended the year with 12% less inventory per store and 6% less total inventory.

The result is that our back rooms have less product, our stores are able to operate more efficiently, and our inventory turns increased.

Store level inventory turns improved from 4.0 to 4.2, and total company turn, including our DC inventory, increased from 2.9 to 3.1.

Turning to real estate stores and productivity initiatives, you may remember that our goal was to open the right size stores in a more timely fashion with improved locations and better productivity and to improve our new store ROICs.

And we progress in each of these areas.

First of all, we exceeded our new store goal of 225 stores in 2005, and they were opened earlier in the year with over 60% of our 232 stores open in the first half of the year.

Our new stores this year, last year averaged 12,400 square feet, which is within our targeted size range of 12,500.

The productivity and ROIC of the 2005 stores is about 10% higher than the class of 2004 and we believe will continue to improve.

To give you more detail on the fourth quarter and guidance for 2006, at this time I'll turn the call over to Kent Kleeberger, our CFO.

Thanks, Bob.

Good morning, everyone.

As Bob stated, sales for the fourth quarter of 2005 were $1.079 billion, our first billion dollar sales quarter.

These results reflect a 1% increase in comparable store sales.

The increase in comparable store sales was attributable to a 2.5% increase in transaction size that more than offset a 1.4% decline in traffic, which is a smaller decline than we saw in previous quarters this year.

We believe that milder weather, especially in January, was a major factor in our improvement in sales trend.

Our increase in average ticket was the result of compelling merchandise at great value, better in stock inventory position and our initiative to expand tender type.

Diluted earnings per share for the quarter were $0.81, which is at the high end of our most recent guidance provided in early February.

For the fourth quarter, gross margin was 35.3% versus 35.5% in the same period last year.

The slight decline in rate was primarily due to increased sales penetration by lower margin categories, such as household consumables and foodstuffs, as well as increased transportation costs attributable to higher fuel prices.

SG&A expenses for the quarter were 22.6% of sales versus 22.1% for the same period last year.

The increase was driven by higher expenses for incentive compensation, employee benefits other than health care, and increased utility expenses.

For the year, depreciation and amortization was 140.7 million.

The overall rate as a percent of sales was nearly flat with the prior year.

Capital expenditures were 139.2 million for 2005 versus 181.8 million in 2004.

The majority of our Cap Ex was for new stores and remodels.

Looking at the balance sheet, our balance sheet continues to strengthen.

Cash, cash equivalents, and investments at year-end approximated 340 million versus 318 million one year ago, and that's after expending about 180 million for stock repurchase in fiscal 2005 and earmarking 30 million of pledged investments for our insurance programs, which are reflected as long-term assets.

The Company continues to view share repurchases 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.

We presently have 173 million open to buy against this authorization.

As Bob discussed, our focus on increasing inventory turns resulted in a $39 million decrease in our investment inventory, which was down 6.3% for total company.

Inventory per store was down 12%, which is a larger decline than our original target of down 7 to 8%.

Now for 2006 guidance.

As the 2006 sales and earnings guidance for the first quarter, we are forecasting sales in the range of 845 to 870 million and diluted earnings per share in the range of $0.29 to $0.31.

This implies flattish to low single-digit positive comparable store sales results and takes into account the potentially favorable impact of a later Easter.

In 2005, Easter fell on March 27th versus April 16th of 2006.

For the full fiscal year of 2006, we estimate sales will be in the range of 3.845 billion to 3.940 billion based on a 12 to 14% square footage growth, which includes the acquisition of 138 Deal$ stores previously announced this morning.

Bob will provide more color on this transaction later in the call.

Comparable store sales for this range of guidance are projected to be nearly flat to low single-digit positive for the year.

Thus, based on these sales estimates, we are forecasting diluted earnings per share in the range of $1.68 to $1.80 exclusive of any impact from share repurchase in 2006.

From the gross income rate perspective, we expect the gross margin rate will be down slightly in 2006 based on a continued modest shift to consumables in our merchandise mix, coupled with the impact of the rollout of frozen refrigerated product to about 250 stores, and the impact of the Deal$ stores, which presently experience a lower gross margin rate.

Further, we expect higher fuel prices to impact all aspects of our transportation and freight cost, but not as dramatically as we experienced in 2005 versus 2004.

From an SG&A standpoint, we are anticipating a slight increase in rate over last year, around 15 basis points, due primarily to rising utility and health care costs, which we believe will overshadow savings and leverage in other savings of our expense structure contemplated for 2006.

It is important to note that our health care costs were down 2.5% in 2005 versus 2004, which was well below expectations.

We believe it is unrealistic to expect that trend to continue.

For capital expenditures in 2006, we're planning to be in the range of 145 to 155 million.

Capital expenditures will again be focused on new stores and remodels.

We plan to build around 210 new stores and remodel and/or expand another 100 stores.

In addition, the stores that we are acquiring through the Deal$ transaction will also require some improvement, including new point-of-sale equipment.

Depreciation and amortization is estimated to be in the range of 150 to 155 million for 2006, reflecting the increase in our store base.

We anticipate that depreciation expense as a percent of sales compared to the prior year will decrease in 2006.

As for inventory, we did a good job reducing inventory per store last year, and we believe we can make further reductions this year in our back rooms.

However, as we see the opportunity to expand frozen refrigerated product over 250 stores and begin to test multi-price points in some of the acquired Deal$ stores, we expect to see inventory up from 2% to 3% per average store by the end of 2006.

With that, I'll turn it back over to Bob for some exciting news.

Thanks, Kent.

And as Kent mentioned and you probably saw, that in addition to fourth quarter earnings this morning, we also reported that we signed a letter of intent to acquire the Deal$ chain, which is currently owned by Supervalu Incorporated.

The acquisition is for 138 stores, including related store assets, lease rights and certain intellectual property and the purchase price is $30.5 million, plus a yet to be determined but appropriate amount of store and DC inventory.

We anticipate that the transaction will be completed by the end of March.

We're excited about this acquisition for many, many reasons.

First of all, it's an acquisition of great real estate with 138 stores across 16 states.

This is an opportunity to expand and solidify our presence in the Midwest and in the Southeast regions.

Second, the Deal$ organization, they have a strong field organization.

They're experienced, they're good merchants, they're good operators.

Our teams at Dollar Tree look forward to working with them, and we're happy to be welcoming them aboard soon.

With this experienced store and field management team, we will be able to integrate efficiently and really hit the ground running.

We have existing logistics capacity to efficiently serve these stores with no additional capital expenditure.

Deal$ is a strong and recognized brand in its market.

We intend to keep the name on the stores, leverage the best of what they're currently doing while leveraging the Dollar Tree infrastructure for improved efficiency.

Furthermore, the Deal$ acquisition includes a number of combo stores that offer an expanded assortment of merchandise, including items selling for more than a dollar.

We plan to continue what's been started there using the Deal$ stores to test new assortments and price points without disrupting our focus on Dollar Tree stores.

Now I want to just step back a minute here to say that our focus at Dollar Tree Stores is to offer extreme value to our customers at the one dollar price point, and we're going to stay focused on this, but the real driver for the customer is value, and our real competency at Dollar Tree is delivering value.

Over the years, we've developed core competencies and efficient infrastructure that by lifting the restriction of the $1 price point could be leveraged to bring even more value to the customer.

We have worldwide sourcing competencies that can be used to develop product at any price point.

Lifting the price point restriction gives us access to more product, more trend-relevant product and more opportunistic buys, buys that we currently decline because we couldn't sell them for $1, but even though they're a great value.

We have a strong field management, and as we've increased our store size over the past several years, we've demonstrated an ability to run larger stores and higher volume stores across broad geography.

Our back office systems are solid, we've built a network of efficient and scalable retail technology throughout the enterprise that can be leveraged to support additional stores, additional merchandise, and additional price points, and we've built a logistics network that is extremely efficient.

It is a competitive advantage for us, and we can reach all areas of the country.

By using the Deal$ stores, and under the Deal$ banner, we can test and prove and perfect strategies to provide even more value to the customer at higher price points while not disrupting the "everything's a dollar" strategy at Dollar Tree.

Here's how we're thinking about it as we lift the one dollar restriction at the price point in Deal$ stores.

First of all, we talk about completing the assortment.

There are items within many categories that we sell that we will likely never be able to sell for a dollar, or at least not consistently.

For example, we sell a lot of household plastics for a dollar, but we can't sell the large trash cans.

It just doesn't fit the price point, but we know where and how to buy the item and we could give the customer a great value at $2 or maybe $3, but because of our $1 restriction, we don't carry the item.

We sell wash cloths, but we can't consistently offer a great value on a bath towel.

By lifting the price point restriction, we can complete the assortment, leverage our competencies to offer value and drive incremental sales.

Our customers are buying this product somewhere, and why not from Dollar Tree?

Secondly, our strategy for our customers is to offer more value is to stock up and save.

There are some categories where we offer a great value for the dollar, but it may not be the preferred size by the customer.

For example, we sell a lot of laundry detergent because the value is outstanding, but our customers with large families have to buy numerous containers when they might refer to just buy a larger size.

I see it all the time, they're filling up their shopping carts with our size for $1.

They'd really, I think, prefer to buy a larger size, and we might be able to offer a better value on a larger size or larger pack at a higher price point.

So our message to the customer could be, stock up and save, bigger sizes, bigger values, more convenience.

Next is what I call "now or never" items.

We currently pass up a lot of closeout opportunities that would offer tremendous values to our customers, but they don't fit the $1 price point.

They're limited in quantity and you have to buy them when they're available.

Lifting the price point restriction gives us access to more of this product.

So our message to the customer here is, I know it's not a dollar, but this deal was just too good to pass up, but buy it now because it won't be here long.

It's now or never.

As you can see, we believe that lifting the restriction of the price point could enable us to offer even more value, and the acquired stores, the Deal$ stores, provide a good platform for the development of that strategy.

By expanding the price point under the Deal$ banner, we'll avoid confusion to the Dollar Tree customer.

The Deal$ store base is large enough to provide meaningful trial, but not so large as to adversely affect the enterprise.

We've set up a separate buying team to source the more than a dollar product and to eliminate any distraction on the Dollar Tree merchants who will remain focused at the $1 price point.

This is an exciting opportunity whose time has come.

Our strategy is clearly aligned with our key competency, which is providing extreme value to the customers.

We have the competency and infrastructure to make it successful and we believe it will provide a vehicle to grow the Company to even greater market share.

Before I turn the call over to you for questions, I want to just say that one year ago, we told you that our goals for 2005 centered on improving our business processes, leveraging our assets and positioning ourselves for the future.

We made good progress in each of these areas.

There's still work to do.

This is going to be an exciting year for Dollar Tree as we focus on growing the top line through organic growth and by testing a multi-price point strategy through the Deal$ acquisition.

Building on the progress we made last year and re-engineering our real estate processes, and setting the stage for higher operating margins in the long-term through improved store productivity and leveraging our investments and infrastructure and expense control.

We're now ready for your questions.

I'll remind you that so that we can accommodate as many callers as time permits, we ask that you limit your questions to two questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Stacy Tarnof.

Your question, please?

Good morning, Stacy.

Do you have a question?

I'll move to the next line.

Our next question comes from Mitch Kaiser.

Your question, please?

Good morning, guys.

I was curious if you could elaborate maybe a little bit on what you're seeing with the frozen foods department and what gives you excitement about that?

Mitch, the frozen foods is a category of product that is more frequently bought by customers, and the opportunity that we have at Dollar Tree really lies in increasing the footsteps into our stores.

As we have put the frozen and refrigerated product, as well as some more of the consumer products, it's not just that, it's other consumer products too, it could be called HBC for example, as we expanded that in our larger stores, we've seen a rise in the frequency of our shoppers, we've seen more footsteps, and we've seen overall a lift in all-- across all categories, and I say all, that's generally store by store.

It may vary from one to the next, but in the categories where we've installed the frozen refrigerated and expanded the consumer products, we're selling that, but we're also selling more toys and we're selling more stationery and we're selling more party goods and all the things that we've always stood for, so our excitement about the frozen and refrigerated is, yes, it's more sales directly, but it's also providing foot traffic that we need in order to sell more of the variety of goods that we do so well.

Okay.

And then I guess my follow-up question would be on the multi-price points.

It sounds like you're going to test that with Deal$.

How quickly do you think you could roll that out to the other-- to the existing store base, and what kind of, well, first of all, what kind of timeframe and how much SKUs do you think we would be talking about, et cetera?

You know, there's a lot of that being worked on right now, Mitch.

You know, we haven't closed the deal yet.

We won't until the end of March, but just to give you the color on your questions there is we're going to start with the Deal$ stores.

We haven't got that in place yet.

If we find, and when we find, if we find things that we like, assuming making that next leap of faith, then obviously, we would roll out as our plan could permit.

It would take some time.

I can't-- that's way out there on the horizon right now before we finish the acquisition of the Deal$ stores.

Number of SKUs.

You know, what I've shared with you is our current vision on how we think about the assortments.

For example, as when we talk about completing the assortment, throughout the store there's going to be several opportunities to complete assortment throughout the store.

The stock up and save I see as a vision of mostly in the household supplies and health and beauty care and all those basic things that people buy, offering more value, bigger sizes, and more value.

I think there's an opportunity for us to do that, stock up and save with several categories and SKUs, and then the closeout is going to be subject to how well we can find those great closeouts, but I'll tell you, we pass on a lot of them every week.

We don't even get served up a lot of them now because people know that our price point is a dollar and some of the things they know just can't ever get to a dollar, so I believe we'll actually end up buying more, finding more dollar closeouts, too, as we open ourselves up to seeing all of the closeouts instead of just the ones that people show us.

So let's start with the Deal$ stores.

Mitch, we're going to do this like we always do at Dollar Tree.

It's a very thoughtful approach.

We're going to put it into a hundred chain and Deal$ stores.

It's enough to provide good trial, and yet it's not so big that it's going to make big mistakes here, and if we find and when we find things, then we're always ready to take the whip to it, roll it out.

Okay.

So I guess it's-- you're leaving a lot of money on the table by not providing multi-price points, that's really what's kind of driving your thinking, where in the past you didn't do that before, I guess, right?

Well you know, we believe there is just a lot of opportunity that people are buying these things somewhere.

They're buying-- they're coming to Dollar Tree and we sell, like example I used in plastics, we sell an awful lot of small plastics.

Great value for a dollar, but then they have to go somewhere else to buy their trash can, because I rarely get an item that big that you can sell for a dollar, not that we can't, sometimes, but not very often.

So they're buying the stuff anyway.

We have the sourcing competency, we've got the logistics competency, we've got all the stores and the ability and the people to sell this product more efficiently than probably most people, but yet, we've chosen to not offer it because of the price point.

I think by what we're going to find is as we lift the price point restriction, our customers are going to continue to respond to what we really do, the essence of what we do, and that is to deliver value, and if they come in and they find a great item and it happens to be $3 instead of $1 but the value is exciting, then I think they'll just be fine with that.

Okay.

Thank you.

Thank you.

Thank you.

Our next question is with Dan Wewer.

Your question, please?

Good morning.

Congratulations on the acquisition, Bob.

What I was looking at, the Greenbacks acquisition.

As I recall, you were paying roughly a million dollars per store, and if my math is correct, you're paying a little over $200,000 per store on this acquisition, yet the real estate looks comparable.

I was curious as to why the significant difference in the acquisition price?

Well, there's a couple of reasons.

This one really is an asset purchase by Dollar Tree.

The Greenbacks acquisition was a totally new market area, complete with distribution center and stores and it was very strategic.

By the way, the amount we paid there included the inventory at Greenbacks.

We still are determining how much inventory we're going to buy along with the Deal$ stores, so the 30.5 will go up by the amount of inventory that we purchase.

It's just that we're working through this and we're not buying the whole Supervalu enterprise, we're only buying this subset of it, so it's a little bit different than the Greenbacks acquisition was, but frankly, I think we've got a great opportunity.

We saw real estate that we liked.

Supervalu is making the decision, not speaking for them, but I believe they're making the decision to focus on what they do best, which is run grocery, and we're buying their variety stores, which is what we do best, which is run general merchandise stores.

So I think that may have factored into their pricing decision, too.

Bob, one other question.

When you look at the Dollar Tree Stores that are adjacent to the Deal$ locations, how do your stores perform against that format?

You know, they've been there a long time and we do very well in the same markets, and one of the things, by leaving the Deal$ banner up, I think that's one thing that will allow us to continue to operate very well there, and by changing the format and increasing the offering and the multi-price point, I think that's another differentiating factor.

So there's great opportunity here to really solidify these markets that we share and really provide the customer with the best of both worlds, a great Dollar Tree store and then the Deal$ store, which offers a few more items.

Just a follow-up question I had.

You had highlighted the gross margin rate in the acquisition stores is lower than the Company average.

What about their SG&A rate?

Their SG&A rate is higher.

Certainly in the field payroll piece, but there's other parts of their cost structure that we think we have an opportunity to impact.

And Kent in the forecast of a 15-bip increase in SG&A this year, was that including the higher expense rate in Deal$?

Are you assuming that you'd get that down quickly?

Well it not only included a higher expense rate but it also included some modest improvement in the second half of the year with their expense structure.

Great.

And good luck with it.

Thank you.

Our next question comes from Reed Anderson.

Your question, please?

Good morning.

Bob, could you just contrast kind of the key mix differences between your core store and the Deal$ store, if you would, please?

The Deal$ stores not, first of all, not talking about the combo stores, but the basic Deal$ store is very similar to the mix of our core Dollar Tree Stores.

It's variety merchandise, all the same categories that we sell at Dollar Tree.

So I think you'll find, if you go into one then go into one of theirs and one of ours, then you'll find a similar type of assortment.

The combo stores and their larger stores, they've introduced more of the consumer product.

They took some of the things that they're doing in their Sav-A-Lot, or grocery chain stores, Supervalu owns a lot of [inaudible], and they introduced a lot of frozen and refrigerated and grocery and consumer products into these larger stores as well as began experimenting with some things over a dollar price point.

So those stores are, to compare them to our largest stores, the combo stores have even more consumer products in them than our larger stores, and especially in the frozen refrigerated side.

And how many combo stores do they have and how long have they been evolving that combo piece?

You know, they started it months ago, but then they came to a point where they made the decision that they really were going to put their focus on their grocery business and began talking about selling these stores, so they really didn't push it further than just I'd say a handful of stores.

Now, the results that they're getting from those have been pretty solid, you know?

And especially for a chain that is up for sale and putting their focus on their grocery business, these Deal$ stores are performing pretty darn well.

We think we can improve the margin.

Every acquisition we've ever made we've been able to improve the margin.

We've always been able to improve the cost of operating the store, and I believe we'll find those in the Deal$ opportunity also.

We have, though, planned conservatively and planned ourselves some runway to get there, so that the improvements are going to come later in the year, not earlier in the year.

We got to first get the acquisition done, get in there and figure out what all we have and how we're going to transition some of the categories, but I believe we can improve the margins and the SG&A in those stores.

Okay.

And then one final one.

As it pertains to the rollout of debit, that sort of thing, do you have any specific targets this year for whether it's penetration rates versus your overall transaction volume or any type of hurdles you're targeting for your debit program this year?

You know, my experience is, Reed, any time you rollout a new form of tender, it probably takes 18 to 24 months to hit roughly about a 20% penetration.

I have to say that with respect to where we are currently on those 14/70, we're really exceeding my expectations, so you may recall originally we targeted '05 to only do 1,000 debit stores and we pumped it up a little bit in the latter half of the year, did another 470, so we're going to try to get the balance of the chain as quickly as we can in first quarter.

Our next question comes from John Zolidis from Buckingham Research.

Your question please?

Hi, guys.

Good morning.

Hi, John.

Two questions.

One is with regard to the Deal$ acquisition.

Wonder if you could share some of the other metrics of the store?

You did say the store size, but how do the sales per square foot at those stores compare to Dollar Tree Stores?

And then for the first quarter guidance for sales, does that include anything from Deal$?

I know you said expect it to close in March.

And then my second question is on the free cash flow that you generated this year.

I just want to confirm that the guidance, most recent guidance you gave for free cash flow was like 180 to 190 million and you came in 250 million, is that right?

I think you're probably a little high, but it was higher than180.

I think you had three questions, John, so let me try to follow-up on each and every.

As far as metrics on the Deal$, we're really not sharing the information in terms of productivity and like, because if anything, it's going to change, and if anything, it's going to improve, so it's really not relevant as far as we're concerned.

As far as Q1 guidance, there is a little bit of volume embedded in the first quarter projection.

It's not a significant number.

The estimated closing date has sort of been a moving target and it just seems to keep slipping later and later, so therefore the sales and the guidance is not significant.

You know, lastly, from a cash flow standpoint, if I really look at it, if you see the decrease in cash and cash equivalents on the cash flow statement that was disseminated this morning with the press release, if after you add back the share repurchase, add back the principal payments under capital lease obligations, and then add back about 29 million or so or just under 30 for the restricted investments, you're probably going to get to about $182 million number, which isn't that far off the mark.

Originally we thought it'd be about 200 million at the beginning of the year, but because of the elimination of bonus depreciation, that timing difference reversed and we had to pay Uncle Sam a little bit more money this year.

So that's how we got back to about 182 million of free cash on an adjusted basis.

Great.

Thank you.

Yep.

Our next question comes from Meredith Adler from Lehman Brothers.

Your question, please?

Hey, guys.

A couple questions for you.

First is, I wonder if you could talk a little bit about some of the things that you think are going to impact expenses this year?

You specifically talked about health care and utilities.

You had made some progress with health care costs in '05.

Can you talk about how you did that and what you think, you know, how come you're not going to see further progress this year?

Well, I think with respect to the expense structure and utilities, I think we were just, we did a lot of things right in plan redesign, and then we were just lucky.

The plan redesign, we raised co-pays, raised deductibles, we eliminated some insignificant coverages like morbid obesity and so at end of the day that obviously had an impact on our experience.

The other thing which was interesting to note, large claims can, you know, it's feast or famine when it comes to reviewing your health care costs on an annual basis, and we were just lucky this year that we didn't have that many large claims.

So we feel pretty good about that.

In looking ahead to '06, it's really a volume rate analysis, and when you couple with the increase in the number of covered lives with our new stores as well as the Deal$ acquisition, and then believe me, we kind of searched high and low for any type of guidance from a rate perspective, generally speaking, we're hearing numbers in the 7 to 9% range in terms of per capita increase, so that's really kind of how we got to about a 22, 24% increase in '06 versus '05.

Utilities, it's the same thing.

I think we saw both an increase in consumption and an increase in rates in the latter half of '05, and by our best estimates, which would be through the Federal Energy Administration, their published guidelines for '06, I mean they're projecting national gas prices to be up about 16.6%.

So you know, we factor that along with electric utilities in our guidance.

Thank you.

Our next question comes from Joan Storms from Wedbush.

Your question, please?

Hi.

Good morning.

Can you comment on the tax rate for the fourth quarter and also sort of what's our progression here for seeing some operating margin expansion?

You've got like really easy gross margin comparisons in the first half, and I'm just kind of wondering, like, what is going to be sort of pressuring the, you know, if 138 stores from Deal$ is less than 5% of your current store base, how could that have such a big impact on your overall gross margin rate for the year?

Okay.

First question on the tax rate.

If you look at the fourth quarter tax rate, we had an effective rate of about 35.8% in the fourth quarter versus 36.1 last year, and a couple things happened.

First of all, our investment strategy has been into municipal income securities because on a tax equivalent basis, it basically negates virtually all of our interest expense on a pretax basis.

So it just so happens that municipal interest income, which is exempt for tax purposes came in a lot higher than we were expecting.

The other piece is that in fourth quarter of this year, we reversed some state tax cushions because we had favorable results as a result of three audits, and just so you know that that is down compared to the cushion that was reversed in the fourth quarter of last year at the federal tax level because of the audit settlement as well.

So you know, really it's only three-tenths lower than last year and it's about $400,000 in tax expense.

Looking ahead to next year, we're expecting the tax rate to be somewhere around the 37.5 to 37.8 range.

The gross margin discussion, I think that if you recall from both second and third quarter as well as fourth quarter, with this modest shift in consumables in the Dollar Tree organization, it's impacting our gross income rate at about 20 basis points, so we really haven't lapped that yet until the first half of this year, so maybe it's half of that number.

The Deal$ margin is lower presently than Dollar Tree, and even though at Bob's earlier comment, we've always improved the gross income on the acquisition, they're still going to, at least we believe, track lower than Dollar Tree for the '06 year.

So believe it or not, only 138 stores, but it's probably about a 10 to 20 basis point impact to Dollar Tree overall.

Thank you.

Our next question comes from David Cumberland from Robert Baird.

Your question, please?

Good morning.

First, what are your advertising plans for 2006?

Any changes to the approach, and will spending as a percentage of sales increase?

David, it will be the same as this year.

We plan advertising spend at same percentage of sales next year as this year.

Our next question comes from Wayne Hood from Prudential.

Your question, please?

Yes, two questions.

I guess Kent, you talked about the inventory being up about 2 to 3% per average store for the coming year, and yet your comps are expected to be flat to up 1% and I know that you're rolling out food, but with inventory being up 2 to 3%, why aren't you expecting the comp number to be better than what you forecasted?

Well, Wayne, maybe we're being a little bit conservative.

I mean, you know, I take a look at our history over the last three to four years, you can't always count on a higher comp.

We seem to be in a very narrow range, either slightly positive or slightly negative.

I mean, I think we see the opportunity that both frozen refrigerated and the Deal$ multi-price point gives us, but I think we're going to be at least conservative now in our estimates on the impact of comparable store sales and overall sales.

Our next question comes from Stacy Turnof from Merrill Lynch.

Your question, please?

Thanks.

I guess I was disconnected earlier.

Going back to the acquisition, in terms of the multiple price points, are you planning to test different price points over the near-term in your regular Dollar Tree Stores?

And you know, sort of walk us through some of that timing where we'll see a translation from that acquisition to your store base.

Stacy, we have no plans in the near-term to roll these prices into our existing Dollar Tree Stores.

We're going to start with the Deal$ stores, some of the 138 stores may actually end up being sale price point stores, but our idea is to start there, do it under the Deal$ banner, explore the possibilities, perfect the execution, get the supply chain and the supply of product availability, refine the margins and refine the strategy, and then make a decision on where we go from there.

As always at Dollar Tree, as I said, we try to be thoughtful in our approach.

We are very, very much focused on continuing to run-- we'll open up our 3,000 Dollar Tree store-- actually, we may have already opened it this year.

So there's 3,000 Dollar Tree Stores out there that we have a whole organization focused on improving the value at the $1 price point and really offering even more value to our customers at that.

We do, though, think that it's prudent to begin looking at other opportunities to grow the business as we go forward, as the world changes, as we built all this great infrastructure that we can do a lot of things with, we'd like to explore some other ways of doing retailing, and this is one opportunity for us.

So I really can't tell you our rollout until we get the deal closed and can have some experience in developing this strategy and this assortment, then more to come.

So I'll keep you up to speed on how it's going, and we're very excited about it, but there is not a rollout planned at this point.

Our next question comes from Meredith Adler from Lehman Brothers.

Yes, I was wondering if we could just talk a little bit more about if you were to envision that you did move to multi-price points at your regular stores, who would your customer be?

Would you have to change your real estate in any way?

Who would you see at your competitors?

Because it seems to me that this would completely kind of change who you have always been for the customer.

You know, I don't think-- we don't see it that way.

We're looking at attracting and serving that broad middle America.

The broad middle, and the people at the middle, the low middle, the high middle, all the people out there that have families and work and go to work every day and schools and churches and all the activities that surround that.

That's what we focus our mix on at Dollar Tree and provide the value at the $1 price point.

Our real estate, we locate in the middle America, either where they live or where they shop or where they work.

We're going to continue with that same customer.

It's really all about how we serve them better and how do I serve more of them.

As I said, we're selling products in categories that they buy a lot from us, but then we turn around and we send them off somewhere else to buy their bath towel or their trash can or their Christmas tree or their party item that we just can't ever get to a dollar price point.

So what I'm saying and what we're looking at here is how do we take all of this infrastructure again and leverage it, it's retail.

Doesn't matter what the price point is, it's retail.

Can you deliver source product?

Can you deliver it efficiently?

Can you offer more value than the next guy out there?

And I believe we can no matter what the price point.

So that's the way we're looking at is really serving that customer and giving them even more ways to save at Dollar Tree.

It's not changing of the customer.

Okay.

Just real quick question for Kent.

Last year, you had some lease adjustment that went into the gross margin in the fourth quarter.

Right.

But it didn't show up in the numbers, I think, as you reported them today.

Well, it's embedded in the numbers.

Basically in the occupancy expense we took a accumulative adjustment that was roughly about $0.05 in the fourth quarter last year and roughly about $0.03.5 or so related to prior years.

Our next question comes from Joan Storms from Wedbush.

Hi, just follow-up on the margins.

So once we get the Deal$ integrated, et cetera, when can we expect to see some operating margin expansion?

I'd say if all goes well according to plan, perhaps in the fourth quarter this year.

Thanks.

Our next question comes from David Cumberland from Robert Baird.

Your question, please?

I have one follow-up question.

For the 2006 EPS guidance, is stock-based compensation expenses, are those included in guidance?

And if so, what is the amount of that expense?

You know, they're included in guidance.

What we've done is we've had a shift in equity compensation philosophy, where we've leaned more toward restricted stock and less on the options impact, and you may recall, we accelerated earlier this year, we accelerated the vesting of virtually all the outstanding options.

So the option impact is negligible.

Year-on-year basis restricted stock, we're probably up I think around 2.5 million year-on-year.

Thank you.

Our next question comes from Wayne Hood from Prudential.

I wanted to ask Bob a question about this movement to the multi-price points, as everybody's talking about.

As you think that through, I mean you're really not reinventing the wheel there, you're just applying it to what maybe the existing store base needed all along.

Let's say in a year from now that works well at Deal$ and you decide you're going to roll this back.

It seems to me that you would have to really go back and kind of do a rebranding strategy of the Company and there would be expenses associated with that as well as when you add new SKUs back into the core stores, planograms might change, what in the assortment would go out?

It just seems like there could continue to be margin pressure as you go through this and sort it out, not only over the next year but maybe the next two years, and I'm wondering your thoughts behind that?

Well, Wayne, a couple of thoughts around that.

This is 100-ish stores of the Deal$ chain that we're first going to do this in.

We're still going to, as I said earlier, we've got 3,000 Dollar Tree stores that we intend to continue to operate at high levels of profitability, at improving levels of profitability, offering more value, staying focused on that dollar price point, because there's a market for that.

There's a customer out there that really likes Dollar Tree, and we have that brand, and I believe we do it better than anyone else and I believe we can improve upon it and do it even better, and that's what this organization is really focused on.

This opportunity to take the small chain of Deal$ stores and try a new approach to retailing by looking at the opportunities to further serve that same customer, I believe is exciting, but it is not instead of the $1 price point business, and I want to make sure that we're on the same page with that, because we are clearly staying in the $1 price point.

My vision of this, even if we were to begin rolling out multi-price point stores, is that we still are going to have a predominant of product at $1 price.

This is in addition to our $1 store, our everything's a dollar variety and value story and customer.

This is the idea of taking all the great things that we do at Dollar Tree and by lifting the restrictions on the price point strategically, being able to sell that same customer even more value and more products.

Right now they're going elsewhere to buy.

So I want to make sure we are absolutely focused on our everything's a dollar strategy to make the leap ahead, Wayne, of what the economics might be of adding in multi-price point and the growth over the next two to three years is really a little too preliminary for me right now.

We will, as we go through this year, develop plans, and we will share those with you as we find opportunities and as we move forward, but I just want to make clear that we're committed to our core business, which is 3,000 stores across America selling things at the dollar price point.

I'm not showing any further questions, sir.

Okay.

Well, thank you very much for your participation today.

Our next conference call is scheduled for May 24, 2006.

Again, thank you very much.

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

This concludes the program.

You may all disconnect.