美元樹 (DLTR) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the Dollar Tree Stores first 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 anyone should require assistance during the conference, please press star and then zero on your touch-tone telephone.

As a reminder this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Tim Reid, Vice President of Investor Relations.

Mr. Reid, you may begin.

Thank you.

Good morning and welcome to the Dollar Tree conference call for the first quarter of fiscal 2006.

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 first quarter and update you on our strategies.

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

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

And 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, our most recent current report on Form 8-K, our quarterly report on Form 10-Q and our 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 call over to Bob.

Thanks, Tim, good morning, everyone.

Thanks for joining the call.

This morning we announced our earnings for the first quarter of $0.31 per diluted share which was an increase of 19% over the same period last year.

Total sales for the quarter were $856.5 million, an increase of 14.3% over the same period last year and our comp store sales increased 4% for the quarter.

I'm pleased to report that both comp store sales and earnings per share are at the high end of our guidance.

We had an increase in both average ticket and transactions in the quarter.

And our sales performance was driven by several factors.

First of all, there was just a whole lot of seasonal excitement in our stores with two seasonal celebrations in the quarter.

Valentine's sales for us continues to grow in importance and now that we have sales history by item and by store, we're doing a lot better at getting the right amount of product into each of our stores.

The improved sales data is a great help as we begin to maximize sales in tried and true categories like our helium filled balloons and our seasonal candy business and we continue to add new items.

This year we even had long stem red roses for just a buck a stem.

So we made a lot of guys heroes for just a few bucks at Valentine's Day.

Easter this year was later, we had a longer selling season and our stores were well prepared.

Our Easter product sell- through was improved which was partially the result of improved allocation of product based on our improved sales data and partially the result of better weather associated with the later Easter.

As we enter second quarter our inventories were cleaner than last year and better balanced and we were ready for Mother's Day and the summer selling season which we refer to our 100 Days of Summer Fun.

Our seasonal business is very important to us.

It's one of our strengths.

It adds excitement to our stores and at better than average margins.

Most importantly, we see the opportunity to expand our seasonal business using the POS sales data, merchandise allocation replenishment systems that we've built over the past few years.

In addition to improved seasonal business in the first quarter, sales benefited from increased sales of basic products.

We've added a wider selection of merchandise that people need every day and we continue to provide better in stock on these basics offering the customer more of what they want and when they want it.

This additional merchandise provides customers another reason to shop with us more frequently and we believe this to be an important element to increase the foot traffic into our stores, especially when their disposable income may be limited by economic pressures like higher gas prices.

The initial markup is slightly lower but the merchandise turns faster.

These are incremental sales and we believe the increase in shopping frequency and average ticket will more than offset the lower initial markup in the long-term.

Our frozen and refrigerated initiative is on schedule.

We now have over 250 stores with frozen and refrigerated products compared to 61 first quarter last year.

And we're pleased with the performance of these stores.

We plan to end this year with about 500 stores depending on construction and permitting issues.

Again, this product is incremental to sales, it turns faster, it gives our customers a reason to shop with us more frequently.

Our initiatives to offer our customers more ways to pay is having a positive impact on sales especially on the average ticket.

In first quarter last year, we had less than 800 stores accepting debit cards.

This year in Q1, we had 2,250 stores accepting debit cards at the beginning of the quarter.

We added about 750 more stores during the quarter and we now accept debit cards at over 95% of our locations and we're going to complete that rollout during the second quarter.

As we rollout debit card acceptance we're also rolling out EBT acceptance and as we add the required products, merchandise products in our stores, we become eligible to accept food stamps.

We currently have this capability in more than 300 stores and expect to grow that number to over 500 stores by year-end.

This expansion of tender type has helped to increase our average ticket in the first quarter and we expect it to continue to benefit sales going forward.

Our investments in retail technology over the past few years is providing tremendous positive benefits.

It's our network applications that allow us to accept these expanded forms of payment which have helped to increase the average ticket.

Our investment in POS applications has given us the ability to expand and improve our in stock of basics with auto replenishment while providing smarter allocation of seasonal product consistent with sales trends in each store.

We've been able to improve product flow, particularly around key holidays, leading to a cleaner, more efficient store with less inventory in the back rooms and that translates into increased customer satisfaction and improved sales.

I'm especially proud of the progress made in managing our inventories.

We were highly effective in reducing inventory per store and increasing our inventory turns last year and these trends continued in the first quarter of this year.

We ended the quarter with less total inventory than last year while adding almost 12% more stores and over 17% more square footage.

Our inventory average, our inventory per store was down 12%.

During the first quarter we opened 74 new Dollar Tree Stores, we expanded another 30 stores and we acquired 138 Deal$ stores.

We're on schedule to achieve our 2006 growth plan of 12 to 14% square footage growth for this year.

We continue to focus on improving productivity of these new stores.

Last year, we had some success.

The sales per square foot of our new store class improved more than 20% from the year before and ROIC improved by more than 10%.

Our goal is to achieve additional improvements in the 2006 class and, so far, the performance of our new stores has been encouraging.

As an update on the acquisition of the Deal$ stores, the transaction was completed the end of the March and our first quarter results include one month of Deal$ sales.

We're on schedule with the integration, virtually all Dollar Tree front end and back office systems have now been installed and the associates trained on Dollar Tree procedures.

The Deal$ stores are now in the Dollar Tree replenishment programs and are being supplied through Dollar Tree distribution network.

We're currently in the process of remerchandising and relaying these stores and we're optimistic over the results that we see as we complete this process.

As a reminder, these stores are well located, they give us an opportunity to increase our presence, especially in the Midwest and Southeast, and over time as in previous acquisitions, we will improve their sales productivity and their margin and we plan to operate them under the Deal$ banner.

Operating as Deal$ with a separate buying team and a separate store operations team, we're going to use these stores as a platform to test the merchandise assortments, new concepts and expanded price points while maintaining our focus on the single price point strategy at Dollar Tree.

We're on schedule with these plans and I'll give you more updates as appropriate.

At this time I'll turn it over to Kent, our CFO, who will give you more detail on the first quarter and guidance for the remainder of the year.

Thanks, Bob.

Good morning everyone.

Sales for the first quarter of 2006 were 856.5 million, representing a 14.3% increase over last year and reflect a 4 % increase in comparable store sales.

The increase in comparable store sales was attributable to a 3.4% increase in transaction size and a .6% increase in traffic which was the first increase in traffic in more than a year.

I'd like to point out that our comparable store sales results were achieved despite rising gasoline prices which we believe were about $0.55 per gallon higher than first quarter last year.

The negative impact of higher gasoline prices on transactions during the first quarter is difficult to quantify, however, we believe higher gas prices should be expected to continue at least through the summer.

And we believe many of the initiatives which started last year, expansion of tender types, expanded automated store replenishment and introduction of frozen and refrigerated products to an additional 250 stores this year will continue to mitigate the impact of higher gasoline prices.

Diluted earnings per share for the quarter was $0.31 which is at the high end of our guidance and represents a 19% increase over last year's $0.26.

For the next few minutes I'll provide some color on our operating results as well as speak to certain balance sheet items followed by second quarter guidance.

As for margin, margin for the quarter was 33.4%, 50 basis points below the 33.9 in last years first quarter.

The decline in rate was primarily due to an approximate 2% increase in sales penetration by lower margin categories such as household consumables and foodstuffs, along with increased transportation costs rising primarily from higher diesel fuel prices and higher shipment volume to our stores.

The addition of Deal$ stores, which demonstrate a lower margin due to their current product mix, also negatively impacted our margin rate ever so slightly.

The negative impact of the aforementioned merchandise cost increases was partially offset by lower markdowns and positive leverage on buying, distribution and occupancy costs associated with the 4% increase in comparable store sales.

SG&A expenses were 27.2% expressed as a percent of sales, that's a 30 basis point reduction versus last year's 27.5%.

In addition to gaining some leverage from positive comparable store sales, we experienced some other favorable expense news including lower than expected cost for employee medical benefits, reduced workers compensation claims, a trend that has continued from 2005, reduced advertising expense resulting from a better targeted ad spend and lower bank service charges.

It should be noted that the current year equity grants, including the impact of FAS 123R, accounted for about 475,000 of increased compensation expense over last year.

This is a relatively small amount and that would have been much larger had we not accelerated divesting of the then outstanding stock options in December of '05.

Moving to depreciation and Cap Ex, for the first quarter depreciation and amortization expense was 36.3 million.

The overall rate as a percent of sales improved 10 basis points from the first quarter last year.

We expect depreciation to be from 150 to 155 million for the year which as a rate of sale should be down about 15 to 25 basis points from last year.

Capital expenditures were 42.5 million in the first quarter 2006 versus 33.9 million in the first quarter last year.

The majority of the capital expenditures in the first quarter were for our new stores and remodels.

We expect Cap Ex in the range of 148 to 155 million for 2006 which is about 10 to 15 million higher than last year.

A quick review of our balance sheet displays cash and investments approximating 287 million at April 29, 2006 versus 170 million at the end of first quarter last year.

During the first quarter we completed the acquisition 138 Deal$ stores and related inventory for approximately 50.8 million in cash.

We also purchased 1.9 million of our outstanding shares during the quarter for approximately 50.2 million.

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

We presently have approximately 125 million remaining against this authorization.

As Bob stated, we continue to focus on increasing inventory turns.

We're pleased to report that our investment inventory was down 10.5 million for the total Company at the end of first quarter.

You'll also note that our payables to inventory ratio improved from 21.4% at the end of Q1 last year to 29.6% at the end of Q1 this year.

About 2% of that change was due to higher imports while a good portion of the balance is attributable to better payment terms with our suppliers.

Now for sales and earnings guidance.

Regarding sales and earnings guidance for the second quarter of 2006, we're forecasting sales in the range of 855 to 875 million and diluted EPS in the range of 24 to $0.27.

This implies flat to positive low single-digit comparable store sales results.

From an operating margin and diluted earnings per share perspective, remember that the second quarter last year had some unusual one-time reductions in healthcare costs related to plan redesign and we also had some favorability in markdowns.

Accordingly, we will be challenged in the current quarter to display a meaningful improvement in these areas and thus a significant increase in our earnings for the second quarter versus last year.

For the full-year 2006 we estimate sales will be in the range of 3855 billion to 3.940 billion based on a 12 to 14 % square footage growth and flat to low single-digit positive comparable store sales.

We expect earnings per share in the range of $1.70 to $1.82 which includes the impact of our repurchase program to date.

We continue to expect the gross margin rate to be down slightly for the remainder of 2006 based upon a continued modest shift to consumables in our merchandise mix, which we will anniversary in the third quarter this year, coupled with the impact of the rollout of frozen and refrigerated product to about 250 stores.

Also, the Deal$ stores will have some small impacts since they presently have lower gross margin rates.

Further, we expect fuel prices to impact all aspects of our freight and transportation costs, however, as comparable store sales results exceed the 1 to 1.5% range we should begin to lever our fixed buying occupancy and distribution costs in a meaningful way.

From an SG&A standpoint, we are anticipating a flat to slightly up rate over last year, about 10 to 15 basis points, primarily due to rising utility and potentially higher healthcare costs which we believe may offset and lever some of the savings in leverage in other areas of our expense structure contemplated for 2006.

While we are pleased with the results in the first quarter for healthcare and workers compensation expense, it is important to note that our healthcare costs were actually down 2.5% for all of last year and well below expectations.

For now, it's not certain that that favorable trend will continue throughout 2006.

As for inventory, we did a good job of reducing inventory in the first quarter, however, as we expand frozen and refrigerated product to additional stores and begin to test multi-price points in some of the acquired Deal$ stores, our inventory is planned up about 2 to 3% per store by the end of 2006 which is consistent with previous guidance.

However, we still believe we can lower back room inventories and improve product flow to allow us to achieve flatter, perhaps slightly lower inventory per store by year-end.

With that, I'd like to turn the call back over to Bob.

Thanks, Ken, and before I turn the call over to you on the telephone for questions, I want to leave you with just a few summary observations.

Through the first quarter, we're on track to accomplish our goal.

Sales increased more than 14%.

We continue to open stores on schedule and we're honing in the store size for optimum performance which we found to be in the 11 to 12,000-square foot range.

Our investments and infrastructure continue to translate into better inventory management, more efficient stores, improved in stock position and a better overall shopping experience for our customers.

Our SG&A expense ratio was down from last year.

Our earnings per share were at the high end of our expectations for the quarter, and we remain confident relative to our guidance for the full-year and our balance sheet remains strong.

Looking to the second quarter with energy prices, the constant concern our focus must remain on delivering great value to our customers.

Last weekend we launched our 100 Days of Summer Fun promotion.

Our stores are well prepared.

We're seasonally relevant and our merchandise value is the best ever.

We are now ready for your questions.

So that we can accommodate as many callers as time permits we ask that you limit your questions to two.

Thank you, Mr. Sasser. [OPERATOR INSTRUCTIONS]

Our first question or comment comes from Michael Baker of Deutsche Bank.

Mr. Baker, your line is open.

Hi thanks, guys.

Good quarter.

So two questions.

One, Kent, you talked about gross margin down slightly.

You know, you quantify the SG&A, what you expect, can you sort of tell us what down slightly is in your mind and I guess if you can't give a number how does that relate to the down 55 basis points in the first quarter?

Should it get better or worse than that given all of the facts that you cited?

And then my second question would be in the past you've quantified what the Easter shift what it has meant to you both positive and negative.

Can you help us out there and then do you expect the same type of lift with some of the second quarter holidays?

I think Mother's Day and the Fourth of July perhaps in this quarter?

Thanks.

All right, well from a gross margin perspective, Mike, looking forward I think the second quarter will be a little bit more challenged than the first quarter.

We're trying to reposition the Deal$ business which is a little more heavily weighted toward the consumable category which carries a lower margin that will have a slight impact.

As far as the transportation costs go that impact on the inbound and both outbound, we did see an increase in diesel fuel prices in the second quarter to date over where we trended in the first quarter.

Diesel fuel averaged about $2.58 a gallon in first quarter and currently is tracking just under $2.90 a gallon, so there's a little bit of pressure on that.

I think we've got some good news on our import freight to partially mitigate that, but I think the gross margin rate as it relates to second quarter will be, in terms of a decrease, a little bit larger than what we experienced in the first quarter.

On the other hand, when we look to the second half of the year I'm encouraged because when we started seeing this consumable shift, it really started in third quarter last year and so compared to third quarter last year, the increased penetration has not accelerated that much in terms of increased penetration percentage so I feel pretty good about that.

And your other question was with respect is what is Easter and Mother's Day worth in terms of sales volume?

What I recall last year and this year is that we had an idea that just because of the calendar shift it was probably worth about 20 to 25 million, however, when you consider the impact of weather, where it was really negative last year, we had lousy cold weather whereas this year, we had quite favorable seasonable warmer weather this year, it also helped other areas of our merchandise assortment because when people were coming in buying Easter product, they were also buying summer toys, they were buying lawn and garden, they were also buying household and cleaning supplies which, quite honestly, was a miss in first quarter of last year.

So, you know, Easter, when all things said and do is probably worth about 30, 35 million bucks.

Mother's Day?

You know, we have Mother's Day each and every year it's really, from my perspective not really worth going into how much that's worth.

Okay.

Well thank you very much for the clarity.

Yes.

Thank you.

Our next question or comments comes from Jeff Sonnek of Friedman, Billings.

Mr. Sonnek, your line is open.

Thank you.

Can you talk a little bit more about the direct import program, kind of where that's at?

It was clearly a significant benefit to payables leverage in the first quarter.

You know, what is that in terms of percentage of sales and where does that go over the next few years?

The direct imports as a percentage of sales are continuing pretty much the same as they've always been, Jeff.

The shift that you're seeing I guess in the tables, if that was the question, has more to do with the way that we're flowing the product to our DCs and to our stores now.

We are doing it better but there's some changes in shifts from quarter-to-quarter that that creates.

We're very proud of our import product.

It's one of the things that we have the chance to set ourselves apart and have set ourselves apart from others in our sector and others in retail with because it's product that we develop mostly for Dollar Tree only.

There's a lot of our own private label that we've developed in Asia, especially in China particularly, that really is special.

The Tradewinds Bay promotions that we did again this year was, you saw it nowhere else except maybe some look-alikes in department stores at much higher prices, so we're continuing to pursue our import products and our import categories, we think we can continue to get better with it and better with flowing it.

As a percent of business we're still doing probably 40 and change percent which is fairly consistent year-over-year with what we have done in the past.

I would tell you, Jeff, that we are trying to phase down the LC business and try to get some more favorable turns particularly on the import side and we've had some fairly decent success in the first quarter so far but we're still working on it.

Can you provide any updates?

We haven't heard about those metropolitan stores you guys tested in some more metro/urban- type markets.

Anything there?

Yeah.

They're still performing at amongst the highest sales per square foot stores that we have.

They continue to get better.

We continue to learn more about how to run them.

The product mix in some cases is a little bit different, but we're very pleased with it.

It's really past the test stage, Jeff.

We're going to continue to open up as the opportunity of real estate develops.

We are very particular in what we take.

It does take us a little longer to do the Deal$ because they're a little more expensive but when we get them done, we're going more, they're more productive so it's not really a test, it's just more of a, we're learning how to make them better and take a little more time to procure the real estate.

Thank you.

Ladies and gentlemen, once again, we do ask that you limit yourself to one question and one follow-up question only.

Our next question or comments comes from Reed Anderson of MJSK.

Your line is open, sir.

Good morning and good quarter.

Just a couple questions.

Back to the gross margin kind of following up on Michael's question.

So from your comment, Kent, it sounds like we're kind of transitioning gross margin here the next couple quarters, so does that imply as you get to the back half we're looking at flatter year-over-year margins and then beyond that, this is sort of stable or do you see sort of a gradual degradation in gross margin over the next couple years just based on mix?

I think that we're narrowing the gap on gross margin in the second half, Reed, and I would like to think that, you know, 2006 is the pivotal year where we more or less sort of bottomed out on the year-on-year comparisons and begin to show meaningful improvement.

I personally believe that when we take a look at the upside in terms of multi-price point which we'll be testing will be a big help there.

We, you know, constantly get questions about inflationary pressures on our cost side not being able to raise prices but, you know, actually, our costs were down, and the first cost was down in the first quarter this year, so we seem to be addressing the issue.

Okay.

Good.

And then on the payable side, just back to that also, kind of the upside you saw there in terms of leverage from improved vendor terms, et cetera, I mean is that as good as it gets?

Is there more opportunity above that because I thought the working capital was extremely impressive this quarter?

Well my Assistant Treasurer is in the room and he and I, along with a couple other people, have been working hard on that with Bob Rudman.

We still think there's opportunity out there to reduce the LC business and get more favorable terms so our work's not cut out yet.

Good, thanks.

Thank you, sir.

Our next question or comment comes from David Cumberland of Robert Baird.

Your line is open, sir.

Good morning.

Bob, can you elaborate on the 100 Days of Summer Fun program?

What changes are planned for the program this year versus last year when you had it, including in the area of advertising for the program?

Yeah, this is a restate of a sellout from last year.

The 100 Days of Summer Fun promotion is one that we started last year and it's really just a focus on all of the summer categories.

Once you get past Mother's Day, there's really not a -- it's a summer holiday the way we're approaching it.

So it's all the things for the pool and the inflatables as well as things for the patio, the dinnerware, the melamine, the glassware, all of the things for picnic supplies and all of that.

And it's a focus for our people in the stores, we want to turn these stores like the season so that when you walk in, it looks like summer, it feels like summer and you're thinking about the beach, you're thinking about vacation, all with this $1 price point, bucket hats and tote bags and flip-flops and all of the hot things that you find in some of these high priced stores so that's really what it is.

This year, we did drop a flier last weekend in a segment of our stores, it was about 10 or 12 markets I think in that neighborhood and the flier just highlighted some of the key values from our 100 Days of Summer Fun to our customers and in addition to our radio advertising, we supplemented that with some print.

That's the difference in the advertising, but I think the biggest difference in the stores is that we really have honed in on these key summer items.

We're well prepared for the Summer with the things that people are wanting for the beach and for these hot days and suntan lotions and things for the beach, so our associates are excited about it, our stores look like Summer.

Sidewalk sales going on, all the usual things that happen when June starts to roll around.

Thanks.

And my other question is on auto replenishment.

About how many SKUs could be added to that by the end of '06?

Kent can help me with the numbers on that.

We're currently about --

We're right around, we're about 720 on auto replenishment.

I think what part of the issue will be in trying to address in the first half is SKU integrity and I think, you know, once we make sure that we increase our rate of compliance and scanning every item, then we can begin to replenish additional products.

You know, to pull a number up in terms of how many SKUs, you know, 720 could probably grow to, you know, 900 within the next 6 to 12 months but we really need to focus on SKU integrity before we roll this out any further.

Thank you.

Thank you.

Our next question or comment comes from Patrick McKeever of Avondale Partners.

Your line is open, sir.

Thanks.

Hi everyone.

Hi, Patrick.

Could you perhaps quantify the effect of debit cards on average ticket or at least give some ballpark figures there?

And maybe address the penetration at the store level, the percent of sales that are done on debit cards at the stores that have them?

Well the one thing that I forgot to bring into the room was my debit analysis.

I'll try to remember some of the pieces.

I think our average transaction size is, you know, overall for the business is tracking I think somewhere in the vicinity of about $7.30, and that's before the impact of holiday in the fourth quarter which will raise your transaction size.

When I last looked, I think debit average transaction size was tracking around $15.60, somewhere around that vicinity.

In terms of total tender, I believe that the dollars are in the 14 to 15% range which is to me surprisingly high as relatively new as this program is, and the penetration of transactions is probably around the 7% range.

So it's pretty good and where it's coming from, it's coming from predominantly cash and check.

So from a cash transaction standpoint, which is probably closer to about $5 or $5.50, so what it really means is the cash transactions are stepping up in terms of transaction size.

Is the 7% penetration, Kent, is that for the entire Company or is that for the stores that take debit?

That's total Company.

Total Company, okay.

And you said 90% of stores at this juncture have --

95 I think.

95%.

Okay.

And I guess as a follow-on, does your experience with debit, does that change your thinking at all on credit card, rolling out some kind of a credit card acceptance program or credit card acceptance?

We've got to get a deal that works for us, Patrick, on the credit cards.

We're still looking at that.

I think it probably could help us within increasing our average ticket.

I think that there's an opportunity there.

Right now though, the cost to accept them is higher than what we see as the benefit and the sales lines.

And on the debit there are no incremental transaction fees or anything, are there?

Well actually, the way debit works is that there's an interchange fee just like there is on credit cards.

It just happens to be cheaper because there's less credit risk exposure.

What happens is really all on the back end and the processing piece is where you can shave the cost down because most of the processors will have matrix pricing so as your volume increases your cost to process a transaction should go down and we're really beginning to see that over the course of the last three to four months.

Did that have a material effect on SG&A during the quarter?

Not really.

Okay.

Thank you.

You're welcome.

Thank you.

Ladies and gentlemen, again in the interest of getting to as many participants as possible, we do ask that you limit yourself to one question and one follow-up question if necessary.

Our next question or comment comes from Joan Storms of Wedbush Morgan.

Your line is open, ma'am.

Hi, good morning.

Hi, Joan.

I have a question on the Deal$ acquisition and Bob, you had talked about them having sort of a separate buying team.

Could you just give us like a little bit more detail on that because you think that you'll be able to leverage from your large buying power and how the buying teams might work together?

Yeah, Joan.

We're going to leverage all the back office functions and the logistics, all of the IT functions, accounts payable, everything that you have to do for a store, we leverage all of those with Dollar Tree but we've set up a separate store operations and separate buying team, small buying team, although it may be because I want to keep the focus at the everything's a dollar merchandise at Dollar Tree.

Now, we're going to take a lot of the product that we're buying for Dollar Tree is going to these Deal$ stores, but in addition to that, we're going to have products that may not be at a dollar price point but by the separate buying team that adds to the value.

We look at it as lifting the restriction of the $1 price point in these Deal$ stores and taking that same how do we create value thinking and putting that type of a thought process into the merchandise.

Where we're still looking for deals, the deals may be outstanding but I can't sell them for $1 but they're great at $2.

So we're finding a lot of closeout merchandise that our Dollar Tree team never really sees because it can't possibly fit a $1 price point.

We're surfacing a lot of that merchandise so it's a lot of opportunistic buying, it's a lot of looking at the right size of the product and trying to offer bigger savings on bigger sizes.

We're putting together some merchandise plans to do that in the store but when you walk into the store, you're still going to feel that value equation is still full of great opportunities, all the classic $1 merchandise that you might expect from the Deals$ stores originally, plus this product that right now it may not be here tomorrow, this close out-type opportunities that we find that we just can't do in the Dollar Tree Stores.

The separate buying team, their whole focus is finding that product for these Deals$ stores.

Could you just give sort of like what a range of price points might be at the Deal$ stores?

Is it $1, $2, is that like 50% of the mix or does it go up to 7 and $8?

You know, most of it's going to be under 10, Joan, and haven't really, we're not going to say it's limited 10, but most of the product that you're going to find in these Deal$ stores is going to still be $1 and then the things that aren't $1 are probably under $10 still, so it's still that high value product, mass appeal, variety merchandise, but even more value at the higher price point.

The percentage, you know, right now it's looking like maybe 20, 25%, maybe at price points other than $1, but that's still in the works, so we're still developing those metrics, we're going to try a lot of things, again, this is 138 Deal$ stores, gives us a chance to try a lot of things in a meaningful way yet not jeopardize anything in the Dollar Tree 3,000 stores.

So, we're going to try a lot of things.

We're going to try different product categories, different price points, we're going to try different layouts in these Deal$ stores and we're going to do a lot of work with the consumer to see what they say they like and then we're going to test that and see how they really respond when we make these changes in the stores.

So I'll be able to tell you more later in the year where I can only share with you the vision today.

We're sort of in the process of putting all that in place.

That was very helpful.

Thank you.

Thank you.

Thank you.

Our next question or comment comes from Stacy Turnof of Merrill Lynch.

Your line is open, ma'am.

Thanks.

Good morning, everyone.

I've got a general question for you guys.

Have you done any recent survey work by income level in terms of, you know, how that customer is spending particularly given such a strong comp this quarter it seems like you might be having a customer start to trade down and shop within your chain.

Stacy, we really haven't done much on that this quarter.

Done a lot of customer work but it's mostly in terms of the Deal$ stores that we're currently integrating.

My gut feel is though that more people are different and higher income levels are shopping our stores, our sector in general.

We've always felt that we had a higher income customer.

I think with higher gas prices and a low pressure on everyone's wallet they're looking for a value place to shop.

We want to offer them an atmosphere and an environment that they feel good about shopping, have a fun shopping experience and we've added a lot more of the things that you really need in your every day life.

In addition to all of the things that we sell that that are discretionary, we do have a pretty good mix of non, well, product that's not discretionary things that you need.

So I think as prices go up on fuel, I think everybody ought to be looking for a value and that's the way we're looking at our mix in our stores.

We're going to do a little more consumer testing and I'll share it with you as we find that out.

Great.

And one other follow-up.

Have you guys quantified, I know it's early, but transactions in coolers versus non-coolers?

Yes.

Well, we really haven't quantified in terms of transactions since it's such a fairly new initiative, we are tracking it quarterly.

I can tell you that our execution gets better and better.

You know, the execution for the coolers that we installed in the second half of '05 were better than the first half of '05 or even the '04, so, you know, we're convinced that they're absolutely the right thing to do and we're seeing some meaningful business generated both in top line and four-wall contribution.

Anecdotally, you know, I can't give you a number but anecdotally, as I look at these stores individually, transactions are up and the average ticket is up in the store because this is additional product that we didn't carry before, so as they buy that, it is turning into incremental business and the transactions are up in those stores, so that's more anecdotal than quantitative.

Great.

Thanks so much.

Thank you.

Our next question or comment comes from John Zolidis of Buckingham Research.

Your line is open, sir.

Hi, guys.

Congratulations on hitting the high end of your sales and earnings guidance for the quarter.

Thank you.

Question on your forward-looking guidance.

The $1.70 to $1.82, can you remind us what the previous guidance was and if it went up, what is the reason for increasing the guidance?

And then on top of that could you also mention if there's a 53rd week in the current year and how material that is to earnings?

Thank you.

The original guidance for the year was $1.68 to $1.80.

It's up about $0.02, you know, there are some moving parts both in gross margin SG&A but there's also moving parts in the share count so it wasn't just a knee jerk reaction where we just said okay, we've got lower shares and we'll raise the $0.02 but it had some thought behind it.

In terms of the 53rd week, I believe the sales volume numbers was somewhere around 60 million bucks and, you know, there's some debate in terms of what the EPS number is, you know, because some things are fixed cost like depreciation that don't change, on the other hand, you don't get a one-week rent holiday, you still have to pay the utility bills and soon and so fourth, so it's probably worth a couple of pennies, 2 to $0.03 at least so that's, you know, consistent with my past experience.

Thank you.

And then my follow-up question --

Yes?

We're slightly lower in the SG&A ratios were slightly higher.

Is that a permanent feature of the Deal$ stores or do you anticipate those margins coming more in line with Dollar Tree over time?

John can you repeat your question?

You cut out for about the first 10, 15 seconds.

I didn't hear the whole question.

Sorry about that.

Can you hear me now?

Yes.

On the Deal$ stores when you made the acquisition, you initially mentioned that the gross margins were slightly lower and the SG&A ratio was slightly higher and my question is: Is that a permanent feature of those stores or should we expect that margin should become more in line with Dollar Tree over time?

Yeah.

I think we intend for them to become more in line with Dollar Tree over time.

The SG&A, we feel like that we can lower through leverage on our infrastructure and our processes.

The margin, I think it's going to be as we find the mix, I believe is, certainly, I know there's opportunities to increase the margin and the markup on the merchandise in the Deals$ stores and I believe that that's going to come together with the Dollar Tree-type SG&A and margin.

Great.

Good luck with the rest of the year, guys.

Thank you very much.

Thank you.

Our next question or comment comes from Dan Wewer of Raymond James.

Your line is open, sir.

Kent, I wanted to see if you could help me understand the second quarter guidance of flattish earnings per share.

You know, the comparisons looked easy a year ago, gross margin was down 90 bips from second quarter of '04 and down 150 from the same period in '03.

I understand what you're saying about, you know, some healthcare, you know, benefits to SG&A a year ago, but I really don't see it in the numbers.

Well, I'll tell you specifically what it is.

The healthcare was a one-time favorable variance in second quarter about 3.7 million.

We had significant favorability in the markdown which was worth almost a million bucks, that's 4.7 million, you're almost looking at $0.03 so the way I look at it on an adjusted basis if you look at '05 results instead of 25 it's probably closer to 22.

And, you know, just the natural cadence of the business is that, you know, second quarter notoriously, there's no holidays in there, so in terms of the seasonal product and the like, you really don't have as much of an opportunity as you do in the first, third or fourth quarter, so, you know, from a merchandise margin perspective there's a little bit of pressure on that just because of the natural cadence of the business so, you know, I think that the 24 to $0.27 is that, you know, is absolutely the right number one considers it last year was probably closer to 22.

I guess I didn't recall from last year that you had -- so it was even worse than it is in the first period a year ago?

Uh-huh.

Wow.

Second question we've now had four consecutive quarters of inventory per store dropping 11 to 12% and now that we've anniversaried the successful initiative, do you think that the inventory per store is going to begin to flatten out on the year-over-year comparisons?

Yeah.

I think in my earlier comment I indicated how we had planned it to be up slightly like 2 to 3% because of the multi-price point deal so if something, let's say a buck has a $0.50 cost then something that's $4 has a $2 cost, so that's part of it.

The other part is that as we begin to rollout frozen refrigerated there's a little bit of investment in advance of the sales.

But I still believe when I go out to the stores and take a look at some of the back rooms we still have opportunities, you know, we continue to leverage the investment and our point of sale infrastructure each and every day to do a better job replenishing and purchasing product to the store so we can store less and less in the back room and get it quicker out on to the selling floor.

So I still think there's some opportunities but the 12% decrease is probably hard to pull that out on a go forward basis but even if it's like, you know, 3 to 5% I'll take it.

Right.

Okay, great.

Thanks and good luck.

Thank you.

Our next question or comment comes from Charles Grom of JPMorgan.

Your line is open, sir.

Good morning.

Nice job.

With the Deal$ stores you commented last quarter that embedded in your '06 outlook was some improvement I believe in the second half.

Do you still expect this to be the case and could you touch on where the larger opportunities for cost savings whether it's going to come from more GPM or SG&A?

Thanks.

Well, the Deal$ stores, yes, we still believe that we're going to improve those stores both on the margin and on the sales productivity as we go deeper into the year for a lot of reasons, we're leveraging, again, putting our Dollar Tree infrastructure over there and leveraging all that we have and we're going to lower the cost of operating those stores.

The merchandise shift, we've still got to sell-through what we've bought, so there is, as Kent said, there's a period of time where we're selling through product at the lower margins as we put in new product at improved margins and that's going to take us into the second half but we're going to be seeing an improvement in these stores in the second half of this year.

As far as large cost savings, you know, we still have great opportunity as we manage all aspects of our business including our labor we just put in, we've actually just closed the loop on our labor management system for our stores.

Where now our schedule's actually tied to the sales, actually tied to the hours worked in the stores giving us better visibility of that.

Now, I don't intend to take all of that efficiency and turn that into cost savings.

Some of it we're going to turn into driving more business and sales in our stores, filling the counters better, having people there in our stores when the customers are there, really working on the top line improvements with that and that's the way I'm looking at these improvements that we're making in our cost structure is how do we reinvest that into driving the top line because our biggest opportunity is on those comp store sales.

As you can see with a 4% comp you get a whole lot of leverage in this Company and when it gets past 1 to 1.5 that's when we see a lot of opportunity to get leverage on these fixed costs.

So driving the top line continues to be our largest focus, our biggest opportunity, as we look at improving the operating metrics in the Company.

Thanks.

That's helpful.

And then switching gears a bit, can you touch on the health of your customer, how were your traffic levels during were the past, say three to five weeks on the heels of Wal-Mart's comments a couple of weeks back that their customers had softened up since the middle of April?

Thanks.

I will only give you the color that we feel pretty good about where we are against our plan.

We haven't, you know, we don't announce sales except quarterly but I believe that we're well positioned for this second quarter with our inventory, really the best in a long time as far as the balance of the type of merchandise.

We do have more of the things that people need now and that does seem to be helping us offset some of the drags on traffic.

This increased tender type, additional tender type is helping us offset some of the drags that we're seeing out there.

That's when we get people in they are spending more, so we're, while we feel prudent that we continue to look at, as we look forward and we see the possible impact of higher fuel prices out there, we don't know where that's going to go but we do know that it does have an impact on the consumer so we think that it's prudent to guide conservatively and to run our business conservatively on the expense side.

While saying that, though, I believe absolutely that we've positioned ourself in a great spot as we have entered the second quarter.

Thanks a lot.

Long answer, I'm sorry for it but --

That's helpful.

Thank you.

Thank you.

Our next question or comment comes from Ralph Jean of Wachovia.

Your line is open, sir.

Great, thanks.

Just one thing I wanted to follow-up on the accounts payable thing.

I know that over the years you've used letter of credits predominantly to pay for imports and classified it as a long-term debt due to, you know, the amount of time it would take.

Did you shorten that amount of time or is it accounting, new accounting treatment or what?

Not accounting treatment.

It's just really a change in payment terms.

It's migrating away from LCs.

I mean, you know, we've had a somewhat concentrated vendor base and we do a significant amount of business with a handful of vendors and these guys over time have become less reliant on letters of credit in order to take it to the banks in order to fund raw material purchases, so I think that's part of it but, you know, I just think that, you know, with the people that we do business with and the amount of volume, I think there are alternatives if they do need to [inaudible] the purchase the purchase of raw materials outside of the LC business.

Okay.

And then a quick question on the Deal$ acquisition.

What do you think you need to ramp up here to start rolling that out as a growth vehicle for you guys?

Is it, you know, the learnings you need to master is that in the merchandise side and the multi-price point side?

Is there an infrastructure build-out for, say, a new store opening team and when do you think you might be able to start ramping that up as far as store openings?

The thing that we have to ramp up, Ralph, is it's on the merchandise side.

You know, we're really good at the dollar price point, we're extremely good at the value, offering value, and as I've said before, we have built an infrastructure now that we can leverage, it really doesn't care what the price point is.

The questions that we have on the Deal$ concept and expanding the price points and lifting that $1 restriction is really on the customers and their reaction and on the merchandise learning what sells and what we can -- where we can bring value to those customers and that's what I want to find out.

I can't -- I really don't have a rollout plan until we get into this.

Currently, what we're trying to do is just get everything integrated, get the store teams up, set, get the systems in place, get the logistics in place, get the buying in place, relay these stores and stabilize the baseline I guess of the sales in the stores.

Then begin adding in these new concepts store-by-store and learning how the customer reacts to that.

If we find that we have lightning in a bottle here, then we will flog it like you've never seen!

But I've really got to get into it first and understand it.

I'm excited about it.

I will tell you our team that's focused on the things they can just move mountains and great opportunity here, because we're finding such great product, but we haven't done it yet, and really the proof of the pudding is when we do it and see the reaction of this customer.

So, I'll share more of it with you next quarter and the next quarter but there's no rollout plan as of yet.

Okay.

Thanks, Bob.

Thank you.

Thank you.

Our next question or comment comes from Christine Augustine of Bear Stearns.

Ms. Augustine, your line is open.

Thank you.

Kent, does your guidance for Q2, your EPS guidance include any buybacks?

No.

Okay.

And can you share with us if you saw any regional variation during the quarter?

Well, yeah, we do have and that could be flipped but we've got probably about 18 or so different regions that we track and, you know, we do see some meaningful difference but usually it's more weather-related than anything else and in some cases we may have a management issue in one part of the country but, you know, for me to answer I don't think there's anything that I would say that was a huge outlier versus the other regions.

As it relates to how you plan the regions?

Is that what you mean?

Yeah.

Okay.

Thank you.

Thank you.

Our next question or comment comes from David Mann of Johnson Rice.

Your line is open, sir.

Yes, thank you.

My question relates to your advertising effectiveness, excuse me, effectiveness comment that you made.

How did the markets with the targeted advertising perform relative to the markets that didn't have it in terms of comp?

David, it's better.

The advertising markets are ahead of the non-ad markets as far as comps.

When you do the advertising though, you cover new stores, existing stores, comp stores, non-comp stores so there's a bigger effect than just on the comp but we can measure those and we do see that there is a lift.

It's, advertising for us though has been, although we're doing better, it has not been a slam dunk that when we run advertising in a market that we're going to get our ROI immediately from that.

It's a slow burn we're building, we're building markets now that year-over-year we've been advertising and year-over-year they're improving and improving, so it's an opportunity for us to continue but it's not like you might find in traditional multi-price point retailers.

And what I've seen is this, is at $1 price point, we're a $1 day, we're going to be a $1 tomorrow, we were $1 yesterday, and our urgency created by an ad is not as if another's Company where they may say it's $9.99 today on sale for $6.99, hurry and come on in the next three days.

So we don't quite have that urgency.

Our opportunities have been more on top of mind awareness, being in front of the season, getting some interest from the customer, getting that new product out there.

This ad that we dropped, this print ad that we dropped last Sunday, I don't, you know, it's only been a few days but I've been looking at that and we've had some pretty good results from that, but it's not like you would find from a multi-price point retailer when you drop an ad still.

I mean what percentage of your Company sales might be represented by those markets that have advertising and since you measure it, what effect on overall Company comps might you think you've gotten in the first quarter?

It's about 20% of our sales and about 20% of our markets as I remember, it's in that range, plus or minus that we do advertise in.

Those markets overall I believe are up maybe I'm going to have to, 3 to 5% over the non-ad market.

I don't have the numbers with me, David, but that's fairly consistent.

Right.

And on the one follow-up question you talked a lot about how you felt like weather helped you in the first quarter.

There been a lot of, I guess, mixed weather around the country quarter to date in the second quarter.

Can you just give a sense on how you feel the weather has gone this far for you?

So far the weather is fabulous.

The blue skies and we should be outside and not inside and as far as the first quarter comment, you know, we use weather enough when it hurts our business so I thought I'd share with you that it helped us this year in the first quarter.

Easter, it was a later Easter, certainly is a benefit to us.

I'm sure it is to other retailers and one of the reasons that it is is because it does get you into a better weather pattern when that Easter peak traffic starts so we were helped by, you know, and it's better than the year before.

Last year was probably the worst weather to us and the worst calendar as far as Easter that we'll have.

Very good.

Thank you.

Thank you.

Our next question or comment comes from Annie Erner of PAW Partners.

Your line is open, ma'am.

Annie?

Ms. Erner, your line is open.

We'll go back to Ms. Erner.

Well, actually, we're past our time, so I think on that note, it's appropriate that the call conclude.

We thank you all for participating in this call.

It was an excellent call.

If you have follow-up questions, this is Tim Reed Read, please give me a call, we'll do our best to help you.

Our next scheduled conference call is August 23, 2006.

Thank you very, very much for your attendance.

Thank you.

Ladies and gentlemen, this concludes today's conference.

We thank you for your participation.

You may all disconnect and have a wonderful day.