美元樹 (DLTR) 2006 Q3 法說會逐字稿

Good day and welcome to the Dollar Tree Store Incorporated third quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS]

At this time, I would like to turn the call over to Mr. Tim Reid, Vice President of investor relations.

Please go ahead, sir.

Thank you, Sheila.

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

My name's Tim Reid.

I am Vice President of investor relations.

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

Kent Kleeberger, our Chief Financial Officer, will provide a more detailed review of our financial performance and financial guidance for the remainder of the year.

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

I would like to remind everyone that various remarks 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 on our most recent press release, most recent current report on Form 8-K, quarterly report on 10-Q, and annual report on Form 10-K, which are all 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 our planned remarks, we will open your call to our 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.

Bob?

Thanks, Tim.

Good morning, everyone.

Thank you for joining the call.

This morning we announced that earnings for the third quarter were $0.32 per diluted share, a 10% increase over last year.

Total sales for the quarter were $910 million, an increase of 14.3%, and comp store sales increased 4% for the quarter.

This is the third consecutive quarter of 4% comp store sales increases.

And once again, our comp store sales increases were the result of increase in both our store traffic and an increase in our average ticket.

Year-to-date through third quarter sales were $2.65 billion.

That's an increase of 14.5%, and diluted earnings per share are $0.90, an increase of 12.5%.

Our third quarter performance was driven by consistent execution of five key elements and initiatives.

First of all, creating merchandise excitement with a seasonal focus throughout the quarter.

Second more basic merchandise in our mix.

We've developed a larger assortment of consumable products, more of the merchandise that people need every day.

Third, expansion of our frozen and refrigerated products to more stores.

Fourth, expanded acceptance of tender types, specifically debit, EBT, and food stamp acceptance.

And number five, reduced inventory levels have enabled a better flow of product, which has led to increased store efficiency.

Beginning with our number one initiative of creating merchandise excitement, our seasonal business is a key part in that strategy.

And we had a very good performance in our seasonal business throughout the third quarter, beginning with back to school.

In addition to all of the basic student needs for back to school, this year we expanded our Teachers' Corner concept.

This is unique to Dollar Tree and it's one of the ways that we create excitement and a fun shopping experience for our customers.

Teachers' Corner targets not only the student but also teachers, by bringing together many of the things that teachers need in their classrooms.

With Teachers' Corner, we have been able to broaden our reach and bring value to a new and larger segment of customers.

We continue to provide value in many ways to the Dollar Tree customers.

Another example, this year we set the stores early in third quarter with fall floral and craft items and introduced our build-a-cornucopia and build-a-wreath promotions.

These promotions were complete with project sheets and how to instructions, along with all of the product needed to build your own table decorations or your own wreath.

It was extremely popular with our customers.

Other retailers have done this, but none at our price point.

Again, everything was a dollar.

To communicate our merchandise excitement, we ran an advertising circular on October 1, and our results were good.

Key items featured in the ad included velveteen hats with coordinated gloves and coordinated scarves.

We had a six-function TV remote in the ad for just a buck.

We had all the great Halloween party goods that we sell at Dollar Tree and we had famous maker stemware on the front page, all for just $1.

This tab ran as a newspaper insert in 17 markets, covered about 1,000 stores and all of our stores received quantities of the featured merchandise, along with in-store signage and copies of the insert.

And of course, the big holiday in third quarter was Halloween.

Our merchandise included costumes this year.

Imagine Halloween costumes at just a buck.

Our values and our sell-throughs were strong on Halloween.

Our stores have made a clean transition from fall and Halloween and we are well prepared for Thanksgiving and the upcoming Christmas season.

Secondly, in addition to creating of seasonal excitement, our third quarter benefited from increased sales of basic products.

As most of you know, we've added a wider selection of consumer basics to our mix, merchandise that people purchase more frequently for their every day needs.

We continue to improve our replenishment methods and we are now providing a better in-stock position on these basic products, better than last year.

This increase in consumer basics and improved in-stock position has been a key to our increased customer traffic and has also contributed to the increase in our average ticket.

Our third initiative was to roll out frozen and refrigerated product, and it's well underway.

We added freezers and coolers to 170 stores during the third quarter, bringing the Company total to 531.

This compares to 224 stores at the end of the third quarter last year.

And we will end the year with frozen, refrigerated product in about 640 stores.

This is approximately 150 stores more than our original estimate.

We decided to accelerate the rollout because of the strong customer response, which is resulting in increases in both traffic and our average sale.

As we attract more customers more frequently with this consumable merchandise, we're also selling more of the higher margin variety merchandise.

This has been a key factor in our decision to roll out more stores, and for next year, we plan to continue our rollout of freezers and coolers to at least 250 more stores.

As I've said over the past several months, this planned increase in the mix of basic products, along with higher freight costs has put pressure on our margins, pressure in the near term and particularly in the first half of the year.

But this slight shift in product mix is a trade and one that we've been willing to make to gain market share, generate increases in our store traffic, increase average ticket and raise our store productivity, all of which we have done through the first three quarters of this year.

In third quarter we began to see less of a margin rate impact from product mix, as we have now begun to anniversary the growth of consumable products in our store.

Our fourth initiative, to expand our payment types, continues to benefit our sales.

This is not breaking news, I pointed this out to you on prior calls, but the positive impact continues to build.

As you're well aware, we now accept debit cards at all of our locations, while last year at this time about 2,200 of our stores accepted debit cards.

We also accept electronic benefit transfer cards at virtually all stores.

And we currently accept food stamps in more than 500 qualified stores.

That number is growing and it should expand to about 600 stores that will be accepting food stamps by year-end.

I have one new item to mention.

We launched a Dollar Tree gift card in the third quarter.

Customers have been asking for gift cards for some time, and now they can buy them, just in time for the holidays.

We believe that gift cards will provide a measurable lift to our sales post-Christmas and beyond.

Last, we continue to leverage our investment in logistics and technology to accomplish these initiatives and especially to improve our flow of inventory to the stores.

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

And this translates into increased customer satisfaction and improved sales and improved inventory turns.

Year-to-date our inventory turns are up about 30 basis-points and inventory per store was down about 4% at the end of third quarter.

Turning to real estate, during the third quarter this year, we opened 50 new Dollar Tree stores and we relocated and expanded another 28 stores.

So far, I'm pleased with the improved sales performance of the class 2006 stores, but we fell about three weeks behind our plan in getting stores open in the third quarter.

We're now back on track and we should be completed by the end of this week or next.

That means for the full year of 2006 we will have opened 210 new Dollar Tree stores, expanded and relocated 85 Dollar Tree stores, and we've grown total square footage about 14%, including the Deals acquisition.

Regarding progress on the Deals acquisition, we've now owned Deals for seven months.

In that amount of time we've installed Dollar Tree front end and back office systems, we've trained our store associates on Dollar Tree systems and procedures, we've integrated Deals stores into Dollar Tree replenishment, and we have begun supplying the store through Dollar Tree distribution.

All stores have been painted and relaid and remerchandised and we've converted 122 of them to a brand new concept with a multi-priced offering.

With the conversions we began seeing improved results almost immediately and I'm encouraged with the lift that we see in terms of average ticket, store productivity and margins.

We have a great lineup of products at the Deals stores.

In addition to the things that we sell for a dollar, some of the key items for over a dollar include fleece blankets for $3.

We have Levi jeans, $10 for kids sizes and $12.50 for adults.

We have a 6.5 foot Christmas tree for $20, and there's been great acceptance on that.

And if you don't like putting the lights on, we have a seven foot pre-lit Christmas tree for just $40.

We also have a great selection of toys for $5 and $10, just in time for Christmas.

These are just a few of the examples of the great values that we can offer at Deals.

And as we say at Deals, the deals are just too good to pass up.

I'm pleased with our progress to date.

It's an exciting concept that's giving us access to expanded assortments of high-value merchandise and an opportunity to bring even more value to our customers.

Now, we'll turn the call over to Kent, our CFO, who will give you more detail on the third quarter and guidance for the remainder of the year.

Thanks, Bob.

Good morning, everyone.

Speaking from a top-line perspective, our 4% increase in comparable store sales was attributal to a 2.3% increase in traffic and a 1.7% increase in transaction size.

This is the third consecutive quarterly increase in traffic, but a slightly higher rate, indicative of increased momentum, which has built throughout the year.

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 fourth quarter guidance.

For the quarter, our gross margin rate was 33.8%, 90 basis-points below the 34.7% in last year's third quarter.

The rate decline was greater than expected as a result of an adjustment to our shrink rate.

During the third quarter we completed the physical inventories for the last 850 stores.

And as a result, the shrink rate increased to 2.05% from 1.9% last year.

Not only did we adjust for those 850 stores, but we had to book a cumulative catch-up for all stores previously inventoried.

The net impact in the third quarter was an approximate $3 million hit at cost, which is worth about 33 basis-points.

I know I may said I don't lose sleep over our shrink rate, and a 2% rate isn't exactly hemmoraging; however with a 4% comp store increase, our rate should be lower than last year, not up.

Thus, I can tell you it wIll be a major focus for our loss prevention in store operations team in 2007.

We fully expect to get the rate back to below 2%.

In addition to the increase in our shrink rate, the planned shift towards more consumables continued to impact our margin rate, but to a lesser extent than in previous quarters.

Lower margin consumables increased by about one percentage point relative to third quarter last year versus 2% for the previous three quarters, as we are now beginning to anniversary our planned shift to more consumable products.

Also, the addition of Deals stores negatively impacted our margin rate.

The margin rate of the Deals stores, while significantly improving under the Dollar Tree umbrella, yet is still quite a bit lower than our Dollar Tree average.

Finally, increased occupancy cost due to higher real estate taxes and the impact of Deals stores that also have a higher occupancy rate than Dollar Tree stores made up the balance of the rate decline.

SG&A expenses were 27.9% for the quarter expressed as a percent of net sales, a decrease of 20 basis-points versus 28.1% for third quarter last year.

The lower rate was primarily driven from increased expenses from performance incentives and benefits resulting in 20 basis-points of pressure, along with higher utility costs, which was worth another ten basis-points.

These rate increases were more than offset by proceeds from early lease terminations, which amounted to $2.5 million of incremental gains over last year.

And the balance of the rate decrease was attributal to the positive leverage associated with the increase in comparable store sales.

For the third quarter, depreciation and amortization expense was $39.6 million or 4.3% as a rate of net sales.

The overall rate improved by nearly 20 basis-points from the third quarter last year.

We expect depreciation to be in the range of $152 to $153 million for the year, which, as a rate of sales, should be down about 25 basis-points, plus or minus two or three basis points depending upon actually fourth quarter sales.

The tax rate for the quarter was 35.8%, reflecting a one-time tax benefit in certain states, which occurred during the third quarter of this year.

For the thir -- for the first three quarters, the cumulative tax rate was 36.9%.

Looking at the balance sheet and statement of cash flows, cash and investments approximated $119 million at October 28, 2006 versus $130 million at the end of the third quarter last year.

This is after spending $54 million on the Deals acquisition and buying back 5.7 million of our outstanding shares during the first nine months this year for approximately $148 million.

Today we announced that our board of directors has approved a new $500 million share repurchase program.

This is in addition to the March 2005 $300 million authorization, which has $27 million remaining available to spend.

This is an affirmation of our board and management's belief in our ability to generate significant cash flow and our commitment to reward shareholders.

We continue to focus on increasing inventory turns.

While our inventory investment increased $43 million from last year, or up about 5.8%, our average per store inventory was down 3.9%, as we added 293 net new stores, which is about 10% more stores than last year.

Also our payables to inventory ratio improved by about 80 basis-points over last year's third quarter.

Looking forward, we believe lower back room inventories and improved product flow can help us reach to a flat or perhaps even slightly lower inventory per store comparison by year end.

Capital expenditures were $51.4 million in the third quarter of 2006 versus $39.7 million in third quarter last year.

The majority of capital expenditures in the quarter were for our new stores, remodels, and for frozen and refrigerated equipment installations.

We expect CapEx of about $155 to $160 million for fiscal 2006, which is about $16 to $20 million higher than last year.

As for fourth quarter and annual guidance, regarding sales and earnings for the fourth quarter 2006, we are forecasting sales in the range of $1.28 to $1.31 billion and diluted EPS in the range of $0.87 to $0.93 per diluted share.

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

For the full fiscal 2006, we estimate sales will be in the range of $3.93 billion, to $3.96 billion, based on 14% square footage growth and low single-digit positive comparable store sales.

We expect earnings per diluted share in the range of $1.77 to $1.83, which is $0.01 higher than our previous guidance.

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

Thanks, Kent.

Before turning the call over to everyone for questions, I want to leave you with just a few summary observations.

We had a solid third quarter, consistent with our guidance, and we remain on track to accomplish our long-range goals.

Looking to the fourth quarter, our focus will remain on delivering value to our customers with great seasonal merchandise, better stock in ba -- better in-stock in basics, and providing a bright, friendly, fun, convenient shopping experience.

We've made great progress so far this year.

Our stores are prepared for the holidays and our values remain high.

And finally, just a comment on the announcement today that we made that the board of directors has increased our share repurchase authority by $500 million.

Dollar Tree has demonstrated the ability to self-fund growth, while generating substantial free cash.

And today's announcement demonstrates our confidence in the Company's ability to continue generating a significant amount of free cash flow and our commitment to use our cash for the benefit of our shareholders.

We're 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.

Operator?

Yes, sir, thank you. [OPERATOR INSTRUCTIONS] And we'll take our first question from Stacy Turnof, Merrill Lynch.

Please go ahead.

Good morning and congratulations on a solid quarter.

Thank you.

Couple questions on the gross margin.

Could you tell us -- looks like this should really be over at this point.

Are you expecting to see anymore shrink accrual going forward into the fourth quarter?

And maybe if you could give us some color on what categories you saw some of the shrink in?

Thanks.

Yes, I would tell you, Stacy, we only have about 150 stores remaining, which we typically take in January, just to give us more or less a preview into the ensuing year.

I don't look for an acceleration in rate.

In fact, I'm hopeful the rate will actually decrease.

One thing we didn't mention in the call is that because with the increase in consumables, among other things, sometimes we have stores damaging out product that doesn't always get reflected in the markdown, so we usually do a catchup when we do the shrink adjustment.

So if I were to take a look at our combined markdown and shrink rate at retail this year versus last year, it's actually better.

But, you know, we're not accustomed to a shrink rate above 2%.

And as I said, with a comparable store increase at 4%, we really expected the rate to go down so we've got a little bit of work ahead of us for next year.

Great.

And my follow-up question is just on the Deals stores.

At the analyst meeting you had given us some statistics that those stores were tracking around $16 a transaction, which is well above what your core stores are doing.

Just curious how the performance of those stores are and where you are in that process?

Thank you.

Yes, Stacy, I'll give you a couple of factoids here, now understanding that it's 30 to 60 days since we've added the multi-price, and basically about 50 stores were converted first week of September and the remaining 72 were converted first week of October.

But the average ticket prior to conversion with $7.86.

That's risen 6.6% since conversion, up to $8.38.

Average ticket with multi-price point, in other words, customers that bought things higher than $1, in addition to some dollar things, possibly, was $16.83, which is about where we -- maybe even a little ahead or where we expected it to be.

About 22% of the transactions included something that sold for more than $1, and that's just right about, maybe, again, a little higher than where we expected that to be.

And then the average retail is just a little over $3, if that gives you any sort of an idea of -- while we have $20 and $40 Christmas trees, at the end of the day, average ticket to have the items that are more than $1 is about $3.

Great, thanks so much.

You're welcome.

And we'll take our next question from Jeff Sonnek, Friedman, BIllings, Ramsey Investment Bank.

Please go ahead.

Yes, thanks.

Good quarter.

Can you guys talk maybe a little bit more about the Deals, kind of what these stores look like?

Or really the stores that have been transitioned into multi-price point versus the stores that remain kind of the $1 price point.

Is there any mix difference between the two prototypes?

Yes, Jeff.

We left 12 stores at the single-price point.

By the way, they're doing very well.

We put our Dollar Tree mix in there and they're responding fabulously, really, to the new mix.

The margins up in those stores and the sales is up in those stores, the 12 stores.

The -- there is a big difference in the mix, though.

In the stores that we lifted the restriction of the price point, we also relaid these stores, we remerchandised them.

We put in new graphics packages, new signing packages that speaks to the difference.

One of the strategies that we have in the store, it's all the great things that you're used to for $1, and in addition, sometimes we find great values that are just too good to pass up.

They may sell for more than $1, but buy them now because they won't be here later.

That's just a value too good to pass up.

The other strat -- and that's usually more of the closeouts and more opportunistic buys.

The other key strategy to this is stock up and save.

There's a lot of things that we sell at a Dollar Tree for $1, just terrific values, but you'll never be able to sell a gallon of milk, for example, for $1 and make any money.

So in our Deals stores we have a gallon of milk instead of the $1 smaller container.

We have multi-packs in our toilet paper and our paper towels, bundle packs because that's the way people want to buy them now.

We have great values at $1 for one roll of paper towels, but in our Deals stores, you know what, you want to buy six rolls, we'll sell you that, too, and at price less than if you bought six of the individual.

Our larger sizes in our laundry detergents.

The 32-load is the most popular size, so we've added that in, and you can buy -- it's a greater value if you buy the 32-load than if you buy the eight-load.

So, stock up and save has been a key component of our mix in our Deals stores.

And we're still working on that.

There's going to be a lot more in the ne -- again, we're only a month or two into this, as far as changing the mix.

And as we go forward, really the magic is going to be in the getting down into these categories and subcategories and building the assortment so that it offers the increased value to the customer.

So early on, that's where -- and we're also trying to offer -- we insist on offering a better shopping experience than you might find.

We've always prided ourselves in Dollar Tree as providing more value in addition to the merchandise and to a fun shopping experience, and we want to translate that into our Deals stores, too.

And what does a fun shopping experience mean?

It means being thrilled by finding something that you didn't expect to find, like Levi jeans $10 for kids, $12.50 for adults.

You know, you walk in you don't expect to find that kind of thing, and, holy cow, when you do, you're just thrilled by it.

So, the cleanliness, the bright-lit stores, the thrill of finding something that you didn't expect to find is key to making this new concept work as we go forward.

Does the addition of these closeouts in these multi-price point stores kind of imply longer term that these Deals stores should do better from a gross margin perspective than the existing Dollar Tree stores?

Or does that kind of wash itself out at the end?

You know, I would hope to at the end the day make more money.

I don't know that I can tell you now where the gross margin is going to lie in the new stores, because one of the other things we're looking for is higher volumes in these stores, by lifting the restriction and selling something for $10 versus $1.

We want to drive the volume in these stores.

So we're going to use these as a platform to try the new assortments.

We're also going to have a lot of consumable products in there.

The consumable products, although may be better than consumable products in a Dollar Tree store, they're still consumable, and they're not going to be as high as the traditional old Dollar Tree margins that we remembered from five years ago, when all we had was the variety merchandise and the high-margin imports.

And as we've added more of these consumer products, the margin does tend to go down.

With the Deals stores, there's an opportunity to drive that volume with the higher tickets and we're expecting that to really offset.

At the end of the day, we're going to make more money.

And we'll take our next question from Michael Baker, Deutsche Bank.

Pleased go ahead.

Hi, thanks, guys.

And my hat's off to you for another great sales performance.

My question is on the margins on the -- your fourth quarter guidance, it looks like sales expected to be up a lot more than earnings, again.

So, I back into -- and correct me if I'm wrong -- operating margin's down at the mid-point of your guidance and over 100 basis-points, am I calculating that wrong?

Or am I missing something?

Or is that your expectation?

If you were going off the mid-point, Michael, it's probably like in the 80 to 90 basis-point magnitude.

Okay.

And so that is actually even maybe similar to, if not a little worse, than the third quarter?

I'm surprised with the higher sales number.

Is there something missing that maybe fall on this early lease termination benefit, which is about 25 basis-points in the third quarter?

Is that something that probably doesn't repeat?

That's probably something that doesn't repeat, I would tell you that the other items we've included in our guidance, first of all, we have increased sales and incentive bonuses for our field and management, as a result of the improved performance for the year.

With that comes profit sharing contributions, as well.

We haven't necessarily reflected any potential upside in two areas of benefits, which is workers' compensation and health insurance.

We've started to see a little bit of relief on the medical side in third quarter, and I'm anticipating we're going to have some good news when we true up our workers' comp reserves in the fourth quarter.

Okay.

Thanks, I appreciate it.

I'll turn it over to someone else.

And we'll take our next question from Chuck Grom, JPMorgan.

Please go ahead.

Hi.

Thanks a lot.

And just to follow-up on Michael's question there.

Despite your best comp rate this decade, looks like it's going to be close to 4%, your operating margins are still going to be down this year.

Can you provide some time line on when you think this margin -- or if it's going to end?

Is it an '07, '08 event?

We think that the margin erosion probably will come to an end sometime in mid-point of '07.

Okay.

So for the year next year you're looking at flat operating margins probably?

Haven't given guidance yet and you'll have to wait for the fourth quarter earnings call to get a little more specific.

Okay, and just more 30,000 foot here.

You know, Wal-Mart's been pretty sharp on pricing thus far in the holidays and I know you go head-to-head with them more than DG and Family Dollar, could you speak to what you've seen in your markets and whether the environment thus far has been anymore irrational than what you'd anticipated?

First of all, I don't think we'll go head-to-head any more than anybody else does, frankly.

We do like to co-locate near them, as we do other large big-box retailers because we like the traffic that they bring.

We think we can merchandise our way through the -- and offer another alternative and a different shopping experience and mainly convenience to the customers.

As far as looking at what they've done, we don't really compete on a lot of the things that you've seen them really pound the table about, with consumer electronics and some of the toy items.

You know, ours is still only $1, so we're still convenient, we're your stocking stuffer headquarters, we're your wrap a package headquarters, we're the last-minute gifts for the teachers and the neighbors.

We're the greatest wrapping and bags and gift bags and all that kind of stuff.

So really it's not -- there's not an item out there that I can tell you that they've taken a stand on specifically that's something we can't overcome.

Again, we really offer a different shopping experience and really a totally different retail format than them.

We'll go next to David Cumberland, Robert Baird.

Please go ahead.

Good morning, thanks.

Kent, on the early lease terminations, why did those help your expense ratio and what caused those to be higher than normal?

Well, you know, essentially we had term left on a couple of our leases somewhere in the neighborhood of five to seven years.

These stores were profitable.

We made a decent amount of money.

However, in each of the cases, the landlord decided to redevelop these properties and we basically held out for a number that we thought was equitable.

I think you also have to take into consideration last year we also had an involuntary conversion on one of the stores up in Long Island that resulted in a substantial gain, as well -- previous year.

And as my follow-up, what has been the impact you've seen so far from accepting Discover credit cards and would you expect the impact to be similar to what you've seen from accepting debit cards?

Actually, Discover has not been a major factor in our payment by tender type analysis.

It's currently running about 1%, which the program's only been in place for about 3.5 months.

And in terms of developing expectations, you know, my experience has been, you know, Discover card will never amount more than 2% to 4%.

We still continue to see incremental sales and transaction size in debit card.

Our debit card acceptance is now close to 18% of sales, whereas the beginning of the year it was around 11%, I think, for 2005.

So debit card continues to see significant increased penetration and we don't believe that program has stalled as of yet.

Thank you.

We'll take our next question from Meredith Adler, Lehman Brothers.

Please go ahead.

Hey, I was wondering if you could talk a little bit about the ROI on the coolers?

And maybe just talk a little bit about what kinds of products you put in the coolers?

Meredith, the -- we sell a variety of frozen and refrigerated products.

We have frozen TV dinners and pot pies and vegetables and desserts and any variety of things for a meal in our frozen selection.

It's all for $1, so it's a great value.

You can do your shopping basically for breakfast, lunch and dinner there.

In our refrigerated area, we have milk and we have dairy products and all the basic refrigerated products.

The lift in there -- we haven't quantified that for everyone, but the lift in the cooler stores are experiencing a higher comp sales growth than the non-cooler stores and you can look at the moment where we put it in and you can measure that, and we're seeing a lift immediately and we're seeing it continue over time.

We also look at the related items that the customers are buying.

And one of the things that I'm excited about is we're not only selling the milk and the dairy and the TV dinners, but we're -- with the increased traffic that that brings into these stores, we're also selling some more of the toys, and the party and the higher margin goods.

I believe that over time, our challenge and our opportunity is to convert the traffic that is created by putting in this frozen refrigerated product -- which is profitable, but at a lower rate -- but taking that traffic and leveraging that to sell more of the higher margin goods, the things that we've always been known for at Dollar Tree.

The things that set us apart from everyone else in this sector, things like the Teachers' Corner, that I pointed out.

You won't find that anywhere else nor will you find that kind of offering or even that thought process, probably, at anybody in our sector.

So, we want to continue to use the consumable products to increase our traffic and so far this year it's worked.

Our traffic is up.

It's up more, too, in the frozen, refrigerated stores.

You take that increased traffic and you sell them, of course, the broad mix and our broad mix includes all those great import items and the party and the stationary and the toys and the gifts and gift bags and all those things.

I guess my question was, given that there are increased costs, there's more equipment costs, electricity costs, have you calculated an ROI on just the cooler items themselves?

Yes, we have, but we haven't broken it out and shared that with everyone, but it's worth the investment.

Okay.

And then my second question is just a question for Kent.

You did a great job in terms of managing the tax rate in the third quarter.

I just wonder what your anticipation is for the fourth quarter and do you think there will be opportunities for next year, as well?

Well, Meredith, I think we're all hoping when congress reconvenes that they pass these tax extenders.

One of the most important items in there is the work occupational tax credit, which is a magnitude of somewhere in a $2 million range, which we've enjoyed over the past two years.

So if we can get that portion of the bill passed, that would impact our rate, obviously, favorably in the 2007.

I think of all the things, that's probably the biggest impact to our tax rate, both in the fourth quarter and in 2007 that could happen.

and we'll go next to Christine Augustine, Bear Stearns.

Please go ahead.

Thank you.

Kent, could you just clarify what you said about the early lease terminations?

Did you say you had one last year also?

I just can't find it in the 10-Q.

No, we had a gain.

We had a fire at one of our stores on Long Island, where we received insurance proceeds.

So is it pretty much a wash on a year-over-year basis then?

No, it's about maybe two -- what'd I said, about $2.9 million, $2.6 million incremental over last year.

Okay, so that was incremental.

Okay, thank you.

And then what sort of shrink kind of rates are you seeing in the multi-price point format stores versus where you're -- you know, for the total chain?

We haven't taken physical inventories at those stores.

They were just converted, 50 of them over Labor Day weekend and 72 of them on October 1st, so we'll wait and see when we get into the January time frame, perhaps.

and we'll take our next question from Dan Wewer, Raymond James.

Please go ahead.

Thanks.

Bob, I know you're not yet prepared for a multi-price point strategy for the Dollar Tree branded stores, but if you were to assume that minimum wage increases -- let's say a couple of dollars an hour over the next few years along with some of the other cost increases you alluded to like utilities, what is the game plan on how you pass that through your customer?

Well, you know, we've had those things for 20 years now.

This is our 20th anniversary of selling everything for a dollar.

And we've always -- as long as we've been able to see it coming, we've been able to manage around it.

I expect that we will continue to manage our everything's a dollar strategy and be able to remain viable and find ways to reduce costs in other areas.

Specifically to your question about the multi-price strategy, that's is -- that's really more of a -- it's a customer-centric strategy.

It's aimed at offering more value to the customer.

It's not a -- necessarily a defense against higher cost, although I would assume that, given the ability to move the prices around, then that would allow you to pass along some of the costs. --It's too early to say what that means, but certainly it's something that we as we go forward with this that we have in mind.

We will test the multi-price strategy in a limited way in some Dollar Trees as early as next year.

We will see what that means, as we take a few stores in a remote area so that we get away from the rest of the chain, we'll take -- and I say a few, I'm talking about less than 20 -- but we do have plans underway to redevelop a few Dollar Tree stores.

You know, we've bought 122 Deal stores.

We've converted those.

I do want to see what would happened if we took, like I said, less than 20 Dollar Trees and put in some of the key items from the more than a dollar mix.

Kent, when you had noted that the operating margin could begin recovering in the second half of next year, did you take into account the likelihood of an increase in minimum wage?

Well, we don't believe the minimum wage will have a significant impact on our expenses.

We have a number of our associates in our distribution centers and there are stores that make above the minimum wage, so the impact to us from an expense standpoint will be negligible.

The follow-up question I had on shrink.

I was surprised that it would increase when the inventory per store is actually down 4%.

It looks to me like you would have a lot fewer opportunities for shrink.

And I'm assuming on the dairy items, though, that inventory's actually owned by your distributors, is that correct [inaudible] the shrink?

No.

No, we own the inventory.

So when these items are getting close to the expiration date, the managers may throw away the milk or the yogurt, but not zero it out on the cash register?

Is that where we think the shrink --?

That's entirely a possibility, I believe that one of the reasons the shrink was up, as I indicated earlier on the call, is that we may have product that's been damaged out for which the markdowns have not been reflected, and so --

That's just going to be kind of a -- that's just a cost of doing business, I guess, of being in the cooler category.

Yes, I think so.

Great, thanks and good luck.

And again, though, a 2% rate is not hemorrhaging, but we'd like it to be lower.

Sure, thanks.

We'll go next to [Scott Mallett], Goldman Sachs.

Please go ahead.

Hey, good morning.

I just wanted to follow-up on the debit, and maybe if you could talk about stores that had debit in 2004 and how they're comping and how long the tail of improvement?

And along with that, what kind of lift you're getting from food stamps in the 500 stores, and do you need store signage to kind of highlight that food stamps?

Thanks.

Well, to be honest, Scott, I quit breaking out the 2004 stores.

I'm really just sort of lumping them all together.

As a result of that, we just continue to increase penetration, both in sales as well as transaction.

So that's as best as I can answer that.

The food stamp program is generating about a 1.8% comp in those stores that accept food stamps.

And we are -- we do signing in the stores when we begin accepting food stamps.

And that 1.8% is incremental to the average?

Is that -- I'm sorry, I don't know where I get the 1.8% comp?

Yes, I think it is for now because most of that represents, I believe, a customer that we previously didn't have because we were unable to accept food stamps.

Okay.

Thank you.

We'll go next to David Mann, Johnson Rice.

Please go ahead.

Yes, just to follow-up on Dan's questions a couple of moments ago.

The stores that you inventoried during the third quarter, how many of them of what percentage of them had coolers in them?

I really don't have visibility to which of the 850 had coolers.

Okay.

And then switching to advertising, can you give a sense on your thought process on circular versus TV advertising now?

And how should we look at your fourth quarter advertising plan in terms of mix and in terms of dollars year-over-year?

David, the switch to more print -- we have our best success -- it starts with the merchandise, and we have our best success when we're out in front and we've plan these promotions and we plan what's going to be out in the stores front and center.

And then when we turn that into print advertising and also some electronic support through radio, that's the combination that we found to be most effective for us as we go forward.

But it really starts with the merchandise and that real hard focus on key items, as we plan these promotions.

Advertising dollars this year for the quarter, Kent, are going to be up -- is that $5 million?

Yes, it's going to be basically double what we spent last year for the quarter.

2.4 to 5.1.

We'll go next to John Zolios -- excuse me, Zolidis, Buckingham Research Group.

Please go ahead.

Hi, good morning.

Morning.

That would be Zolidis, I think?

You got it.

It's not that easy of a name.

Just one housekeeping question.

Did you guys say what the ending square footage was in the quarter?

No, we didn't, but I can certainly give that to you.

At the end of the quarter on a gross basis, we were like about 32.9 million, just under that.

Okay.

And then I guess looking at the comps, year-to-date, running up, you know, in the 4% range probably the best comps you put up in about five or six years, is there anything big picture about the fourth quarter that would suggest that a similar rate was unachievable?

Unachievable?

I would rather think achievable, John.

I think, you know, all of the results that we've -- our hard work in terms of tender type and systems and in-stock and basics, you know, I think it has given us some real momentum.

So when I take a look at last year, the only thing I can tell you that may be a couple of blips to think about is that the last few days in December were real strong for us last year, I think as it was in all of retail.

And then looking ahead to January, we had some extremely favorable weather last year, so that obviously gives us some cause for concern that we can have similar weather patterns.

However, I personally feel, depending on how successful our gift card program will be, I think that will be probably help mitigate those compare -- those tough comparisons that we're up against in December week five, as well as for the whole month of January.

Okay.

And then. obviously you've convert -- you've had the Deals now for seven months and you've already gone ahead and put the multi-price point section in all 122 of those stores.

I guess looking at the Dollar Tree stores, if you decided at some point in the future to introduce a multi-price point section into the Dollar Tree stores, is there some reason that it would take you materially longer to do that than what you've just demonstrated you're able to do at the Deal stores?

You're getting way ahead of us on the assumption that we would do this in a whole lot more stores.

But I think the answer to your question is that you can introduce things for more than $1 into the stores fairly quickly, within -- certainly within a year or seven months into a lot of stores.

But the first decision that has to be made is that you're going to do it.

With these, we decided when we bought it that we were going to do it and we took it about seven months -- five to seven months to do.

The next decision, which has not been made, is would we begin rolling it out in a larger way?

And once you make that --if you make that decision, then you can put together a plan that says you can do it pretty quickly, I think.

But, you're way ahead of us on the decision to roll it out.

We think just it's real prudent to be trying these things and trying things, and I call it lifting the restriction of the price point and making available a whole lot more merchandise that you can offer to the customer.

So, while we're going to be -- we're refining the 122 Deals stores, we're also going to try, like I said less than 20 new stores next year on the Dollar Tree side and try some of the key items in there, probably around promotional time periods, and test that venue.

We may even open a new Deals store or two next year.

So we just think it's prudent to begin trying things and developing new formats, in addition to the current format, which we know and love and it's terrific, and that's the Dollar Tree where everything's $1.

Great, well I'll look forward to investigating that test and good luck for the holidays.

It's exciting times, thank you.

Thanks, John.

[OPERATOR INSTRUCTIONS] And we do have a follow-up question from Michael Baker, Deutsche Bank.

Please go ahead.

Hi, sorry, just one last maintenance question.

I didn't get the answer on the fourth quarter tax rate.

What's in your guidance?

Is it 35.7% or is it back to a more 37 and change type number?

Back to 37.4%.

Okay.

Thank you.

And we have a follow-up question from Meredith Adler, Lehman Brothers.

Please go ahead.

You mentioned that you're hopeful that the gross margin will start to pick up in the second half of next year.

I was wondering if you have any comment about what percentage of your total sales mix would be basic items, say, when it sort of leveled off or stabilized?

Well, you know, I think what's happened is that, as I indicated earlier, the increased penetration was only about 1% this year.

You may recall last year in third quarter was when we started the increased penetration of basics and consumables and really started to be, you know, rolling out some frozen, refrigerated equipment to stores in a meaningful way and that was about a 1.5% increase in penetration last year.

I think as we anniversary this, I think it'll be less of an impact.

The other good news, which I haven't dwelled upon and, yes, it's only 130 some stores so far, but the Deals margin is drastically improving.

I mean, when one considers that when we acquired them they were overridingly consumables in their mix.

And once we got them under the Dollar Tree umbrella and changed the mix and got better product in there at better pricing, we've had a significant improvement in Deals margins and so I look for that trend to continue into next year.

And then as we get smarter about multi-price point, particularly in those stores, that gives us an even better chance to improve the margin rate.

Okay.

Thank you.

And at this time we have time for one further question and we'll go to Patrick McKeever, Avondale Partners.

Please go ahead.

Okay.

Thanks.

Good morning, everyone.

On -- and I apologize if this question was already asked but I had to join the call a little bit late.

But if you look at the inventory shrink in the quarter, is there anything -- I know there's a question about coolers, and if that had any effect -- or at least that was the point that that question was getting at, I think -- if that had any effect on inventory shrink, the rollout of coolers, but -- and didn't really get an answer there.

Is there -- I guess my question will be more broad -- is there anything changing just in your business overall that would drive an increase in inventory shrink?

Does it have anything to do with the acceptance of EBT or the Deals stores, for example?

Patrick, the Deals stores, we're accruing at a little higher rates, because we didn't know what they were, so we took what they had been and we're running with that until we do the inventories.

But, you know, the point that I'd like to maybe leave you with is if you were to add our shrink and our markdowns together this year -- and when we do it we look at what we expect it to be at the end of the year -- and you look back over five years, this year is actually lower than most of the five years when you take the two together.

So while our shrink -- and we don't like it over two, I can tell you we're going to bring that back down -- so while our shrink crept up a little over two this year so far, our markdowns have been down.

And I believe, as Kent said, that some of it -- that we're not capturing all of our markdowns and some of it may have things to do with the perishability of the product that we're learning.

But we'll get our arms around that I have no doubt.

But as we go forward, there really isn't another key factor out there that I believe we have pretty darn strong controls.

We have a history of being able to manage shrink.

This year, again, if you take the two together, shrink and markdowns, it's really lower than most of the last five years.

That's where we are, I don't expect it to be an ongoing issue. but it certainly is one we're all over.

Okay.

All right.

Well, thanks, very much.

At this time, I would like to turn the conference back over to Mr. Tim Reid for any additional or closing comments.

Well, thank you all for participating in our conference call.

Thank you for your continued interest in Dollar Tree stores.

Our next conference call is scheduled for Wednesday, February 28, 2007 when we'll give our year-end results.

Thank you, again.

That does conclude today's presentation.

Thank you for your participation, and you may disconnect at this time.