美元樹 (DLTR) 2006 Q4 法說會逐字稿

Good day, and welcome to this Dollar Tree Store Incorporated fourth quarter 2006 earnings release conference call.

As a reminder, today's call is being recorded.

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.

Good morning, and welcome to the Dollar Tree conference call for the fourth 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 some insights on our performance in the fourth 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 fiscal year for 2007, including our first quarter.

Before we begin, I would like to remind everyone that various remarks that we will make about future prospects for the Company constitute forward-looking statements for the purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995.

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

We have no obligation to update our forward-looking statements, and you should not expect us to do so.

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

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

Bob?

Thanks, Tim.

Good morning, everyone.

Thank you for joining us this morning on our call.

There's a lot of news out there today, and I appreciate your time with us.

This morning, we announced earnings for the fourth quarter of $0.96 per diluted share.

That represents an increase of 18.5% over last year's $0.81 per diluted share, and it was achieved on total sales for the quarter of $1.319 billion, an increase of 22.2% over the fourth quarter of fiscal 2005.

Please note the fourth quarter of fiscal 2006 included 14 weeks commensurate with the 53-week retail calendar for fiscal 2006.

Comp store sales increased 5.5% for the quarter.

That is a 14-week comparison versus the same 14 weeks a year ago.

These results are on top of a 1% increase in the fourth quarter last year.

Comp store sales increases were very consistent and solid throughout the year, and this was the fourth consecutive quarter of comp store sales increases equal to or greater than 4%.

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

So for the full year 2006 -- fiscal 2006, we achieved earnings per diluted share of $1.85, a 15.6% increase from the previous year.

Sales totalled 3.969 billion, an increase of 16.9% from fiscal 2005, and comparable store sales were up 4.6%.

That's our largest increase since fiscal 2000 when we were a much smaller company.

Sales result for the fourth quarter were the result of continued focus on five key initiatives that we have emphasized throughout the year and you've heard me talk about throughout the year.

First of all, at Dollar Tree it starts with our merchandise excitement, and our buyers and merchants put together an exceptional line up of seasonal merchandise for the fourth quarter.

The value was high; it exceeded our customers' expectations of what you can buy for $1, and they responded positively.

Our themed ornament wall was better than ever, and our key Christmas items in home decor and trim a tree and our candy items were really right on the mark this year.

Additionally, we placed an increased focus on the flow of basic seasonal product into our stores.

And I really got to brag on our allocations and replenishment department this year using sales history.

They did just an outstanding job of smoothing out the shipments and giving the right amount of product to the stores as the stores needed it.

With the improved flow of product, the stores were more productive with less inventory in the back rooms, and their execution was much improved this year.

As a result, our wrap supply, including our gift boxes and our gift bags and our gift wrap, and all the bows and ribbons and tissues were in stock throughout the Christmas season, and it produced strong sales right up to the holiday.

It's all about the merchandise, and at Dollar Tree, it's all about the shopping experience; and I hope that all of you had a chance or at least many of you may have had a chance to drop in and experience that with us firsthand over the fourth quarter.

If you did earlier in the quarter, you may see our Build A Wreath promotion, complete with how-to project sheets and all the product required to build a holiday wreath for your home and for only a few dollars.

Later in the quarter, you would have see our Build A Gift Basket promotion, showing our customers all the great products that we sell for just $1 each, and how to put them all together to make a special gift.

Both of these promotions were done to encourage multiple purchases in our stores.

They were done to exceed our customers' expectations with high value for what you can buy for the $1 and to provide a fun shopping experience.

This gives our customers more reason to shop at Dollar Tree, and we believe it is a differentiating factor.

To bring new customers to our stores, as planned, we increased our advertising in the fourth quarter.

Our focus was on the holiday season.

We communicated these messages using a combination of radio and/or TV at about 28 markets over four to six weeks.

We added a holiday tabloid that ran on November 26th, supporting 17 markets, and our Feature Item of the Week program continued to be successful as a means of identifying the key items and was also a way of changing the front of the store each week with new and better merchandise.

In addition to our merchandise excitement over the fourth quarter, we benefited from increased sales of our basic products.

One of our key initiatives has been to increase the selection of consumer basics in our merchandise mix.

More of the things that people need every day and more of the things that are more frequently purchased.

We continue to improve our product selection and our replenishment methods, and we are providing a better in-stock position on these basic products.

This increase in consumer basics and improved stock position has helped us increase the traffic, and along with the increase of traffic in the fourth quarter, it has contributed to an increase in our average ticket.

Our next key initiative has been to expand our frozen and refrigerated product to even more stores, and it's continuing to yield positive results.

We added freezers and coolers to about 100 stores during the fourth quarter alone, bringing the Company total to 632 stores compared with 240 stores at the beginning of 2006.

This is approximately 150 stores more than our original estimate for the year.

We accelerated the expansion because of the strong customer response.

We are attracting more customers more frequently with this product, and the increased traffic is resulting in a higher average transaction size in those stores.

For fiscal 2007, we plan to continue our expansion of freezers and coolers to at least 250 more stores.

Our fourth key initiative was the expansion of our payment types, and we've talked about it throughout the year, but it still continues to benefit our sales.

We now accept debit cards at all locations.

At the time last year, about 2500 stores accepted debit cards.

We accept electronic benefits transfer cards at virtually all stores that accept PIN debit, and we currently accept food stamps in nearly 600 qualified stores.

That number is growing and should expand to over 800 stores that will be accepting food stamps by the end of this year, 2007.

Lastly, we launched a Dollar Tree gift card late in the year, just in time for the holidays.

The gift card program got off to a successful start and provided an additional lift to our sales post-Christmas.

Lastly, we continue to leverage our investment in logistics and technology to especially improve our flow of inventory to the stores.

Our investment in POS applications has given us the ability to expand our automated store replenishment, improving our in-stock of basics, providing smarter allocations of our seasonal product consistent with sales trends and enabling us to lower our inventory investment.

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

This translates into increased customer satisfaction, improved sales, and improved inventory turns.

I'm very proud to say that we were able to improve our inventory turns last year, 2006, by nearly 50 basis points.

That's almost a half a turn improvement in one year.

In addition to comp store sales -- comp sales growth, we continue to grow our store count.

During the fourth quarter this year, we expanded 40 -- we opened 40 new stores, relocated and expanded another 9 stores.

And for the full year 2006, in line with our plan, we opened 211 new Dollar Tree Stores, we expanded and relocated 85 stores, and we grew our total square footage about 14%, including the Deal$ acquisition.

Our new stores averaged 11,200 square feet, squarely within our targeted size range.

We ended fiscal 2006 with 3,219 stores, and we believe there's room to grow the Dollar Tree concept to a range of 5,000 to 7,000 stores.

In addition, it was just one year ago on this call that we announced our intention at that time to acquire the Deal$ chain and to use these stores as a platform to develop an additional format, leveraging the strengths and infrastructure of Dollar Tree.

Well, we've had these stores about 10 months now.

We spent the first six months on the usual issues of integration, and that is the training and installing new technology and integrating the supply chain and painting and fixturing and remodeling and really transitioning to a new assortment and, indeed, transitioning to a new model.

We lifted the restriction of the $1 price point and converted 122 of them to a multi-price offering in September -- in the September/October time frame.

It was about 50 in September and about 70 in October.

With these conversions, we began to see improved results almost immediately.

We had good customer response to our multi-price holiday assortment, and we're encouraged with the lift that we see in terms of average ticket and our store productivity and margin improvements.

We're excited about this new model and the additional growth potential that it provides.

This year we will begin to expand the concept with plans to open the 25 new Deal$ stores.

These will be our first new Deal$ stores, and they will provide an opportunity to more fully develop the sales potential and the operating metrics of the new model.

I'll continue to update you as we progress.

Now, I'll turn the call over to Kent, our CFO, who will give you more detail on the fourth quarter and guidance for 2007.

Thanks, Bob.

Good morning, everyone.

Our 5.5% increase in comparable store sales on a 53-week basis was attributable to a 3.6% increase in traffic and a 1.9% increase in transaction size.

This is the fourth consecutive quarterly increase in traffic and at a higher rate, indicative of increased momentum which built throughout the year.

Sales and earnings for the quarter were also favorably impacted by the addition of the extra 14th week commensurate with the 53-week retail calendar which contributed $70 million to sales.

The next few minutes, I'll provide some visibility to our operating results, as well as speak to certain balance sheet and cash flow items, followed by guidance for the fiscal 2007 year and the current first quarter.

For the quarter, our gross margin rate was 35.7%, a 40 basis point improvement over the 35.3% in last year's fourth quarter.

The improvement was driven by two key factors.

First, we saw a 37 basis point reduction in occupancy cost attributable to the 53rd week and the increase in comparable store sales.

Second, the negative impact from the plan shift towards more consumables was smaller than in previous quarters.

The sales penetration of lower margin consumable merchandise increased approximately 1.3% in the fourth quarter this year versus an increase of about 2% last year.

Also, while the inclusion of Deal$ Store continued to negatively impact the margin rate somewhat, the margin rate of the Deal$ stores is improving under the Dollar Tree umbrella.

So after backing out the impact of the 53rd week, it appears our gross margin rate was about flat to last year.

And I'll speak to our plans on improving the gross margin rate in a few minutes.

SG&A expenses were 23.9% for the quarter, expressed as a percent of net sales, compared to 22.6% for the fourth quarter last year.

The higher rate was primarily driven by increased expenses for sales and performance incentives, along with benefits that resulted in 100 basis points plus of pressure.

Also, our planned increase in advertising spend added about 20 basis points.

For the fourth quarter, depreciation and amortization expense was $45 million.

That's a 3.4% rate, which is about flat with last year.

For the year, depreciation and amortization expense was 159 million, which, as a rate of sales, was down 15 basis points from last year.

The fourth quarter came in a little higher than previous guidance as we accelerated the depreciation of assets in certain stores identified for closure in 2007, along with the write off of certain hardware and software costs.

The income tax rate for the quarter was 36.4% versus 35.8% last year and included the benefit of federal work opportunity tax credits, which were reinstated by Congress during the quarter.

For the full fiscal year, the tax rate was 36.6% versus 36.8% last year.

The lower annual rate was primarily attributable to the increase in municipal interest income generated on our investment portfolio.

Capital expenditures were 35 million in the fourth quarter of 2006 versus 25 million in the fourth quarter last year.

For the full year, 2006 CapEx was about 175.3 million, which is about 36 million over last year and about 15 million above previous guidance.

A substantial portion of the variance from previous guidance is due to the timing of amounts paid on new stores for the ensuing year and additional freezers and coolers to select stores.

Looking at the balance sheet and statement of cash flow, cash and investments approximated 308 million at the end of fiscal 2006 versus 340 million the previous year.

This is after spending $54 million on the Deal$ acquisition and approximately 248 million for share repurchases, including our 100 million accelerated share repurchase in December.

We now have approximately 427 million remaining from the 500 million share repurchase program authorized by our Board of Directors last November.

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

As for inventory, we continue to focus on increasing inventory turns.

As previously mentioned, we not only increased our annual inventory turns by 50 basis points in 2006, we were also able to reduce our average inventory per store by 5% at fiscal year end.

The total inventory investment increased 28.5 million, up 4.9% from last year.

But keep in mind we added 305 net new stores, which is about 10% more than last year.

And what is especially important from a cash flow perspective, our ratio of accounts payable to inventory increased from 23.5% at the end of last year to 31.3% at 2006 fiscal year end, which is nearly a 50 million positive impact on cash.

Now, for forward guidance.

As to 2007 sales and earnings guidance for the first quarter, we are forecasting sales in the range of 935 to 955 million.

And diluted EPS in the range of $0.32 to $0.35 per share.

This implies low single digit, positive comparable store sales results, and takes into account the potential negative impact of an earlier Easter.

As a reminder this year, Easter falls on April 8th, one week earlier than last year, which will potentially result in about $15 million of lost volume when compared to the first quarter of 2006.

For the full fiscal year 2007, we estimate sales will be in the range of 4.22 billion to 4.33 billion, based on an approximate 10% square footage growth and a 1% to 3% positive comparable store sales increase.

Based on the estimates, we are forecasting diluted earnings per share in the range of $1.96 to $2.10, which includes the impact from about 200 million of estimated share repurchase activity.

Our EPS estimates also include the reduction of interest income associated with the use of those funds that have been consistently invested in tax free and municipal income securities.

Now, as for our gross margin rate.

We expect the gross margin rate to be down somewhat in the first half compared to last year.

However, we expect to see some gross margin improvement in the second half, such that 2007 fiscal year gross margin should be flat to slightly down on a 52-week comparison.

I'd like to take a couple of minutes on how we're going to get there.

It is a real focus for us to return to higher operating margins in the long term.

So just as we have had some success in our real estate area by tying our incentive compensation to their specific performance, we are instituting changes to our field organization and buying areas bonus plans by focus on gross margin improvement as well as focusing on other metrics, such as improving inventory turns, shrink, markdowns, and for the stores organization, control over store expenses such as payroll and supplies.

This way, we become more aligned on improving operating margins by paying for performance.

In addition, we expect to see imports increasing in the mix in the second half of 2007, so stay tuned.

From an SG&A standpoint, while health care and utility costs are always a concern, we have once again executed a modest plan redesign of our health care program in 2007 which should mitigate some but not all of the impact of rising health care costs.

Further, 2006 had nearly perfect weather, which was good for sales and utility consumption was down.

Incentive compensation as a percent of sales should be down as 2006 was a very high payout versus a very low payout for 2005.

So the comparison between 2006 and 2007 should moderate.

Thus we expect our SG&A rate to be moderately lower in 2007.

As for capital expenditures we are planning CapEx to be in the range of 170 to 190 million in '07.

For new stores and remodels, we are planning 225 new Dollar Tree stores and 25 new multi-priced stores along with 100 remodels.

The addition of frozen and refrigerated capability is estimated to approach 250 stores next year; and further, we will also be expanding our Briar Creek distribution center as well as our home office here in Chesapeake, Virginia.

So thus CapEx is going to be up a little bit over last year.

Depreciation and amortization is estimated to be in the range of 155 to 160 million, primarily reflecting the increase in our store base.

We anticipate that depreciation expense as a percent of sales will continue to decline in 2007.

Our buying team and our field operators aided by higher than expected sales in 2006 have done an excellent job of managing and reducing inventory per store over the past two years.

While inventory per store is presently planned up about 2% for 2007, we believe we're up to the task of finishing flat to slightly down inventory per store in 2007.

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

Thanks, Kent.

Before turning the call over to all of you for your questions, I want to leave you with a few summary observations.

We had a strong fourth quarter and a very consistent and solid year overall.

Our investments in infrastructure continue to translate into better inventory management, more efficient stores, an improved in-stock position, and better execution of our model.

The end result has been better overall shopping experience for our customers.

For 2007, we're focused on the following key initiatives.

Beginning with continuing to drive our comp store sales with a focus on operational excellence.

That means running better stores, more exciting stores.

Surprising merchandise value and merchandise excitement in our stores.

New merchandise with an ever-changing mix of product arriving.

Stronger in-store promotions.

We've had great results with our in-store marketing and our in-store promotions, and more powerful marketing over all.

Next, we're expanding our frozen and refrigerated product.

We've had great customer response to that.

We'll be working on expanding it to more stores, but we're also going to be improving the efficiency of our existing stores and refining that assortment.

We have opportunities there.

We'll be refining the multi-price model at Deal$ this year, continuing to rationalize the new assortment and really honing in on the operating metrics of this new model.

We're going to continue to refine our real estate processes, opening more stores earlier.

Continuing to improve our new store productivity, improvements in our grand opening processes, and lowering our construction costs.

We'll be improving our margins through a merchandising focus.

It really is all about the merchandise and about the stores, and as Kent said, the realigning of our incentives to provide more incentive to improve store level margin.

We're going to be, again, increasing our inventory turnover.

With continuing to reduce the amount of inventory in our back rooms, we still have opportunities there.

And continuing to improve our data integrity to provide continued improvement in our product flow.

Finally, we're a growing business, and we continue to demonstrate the ability to self-fund our growth while generating substantial free cash.

During fiscal 2006, we expended nearly 250 million on share repurchase, and we saw our stock price react to our improved performance.

We're confident in the Company's ability to continue generating significant amount of free cash flow, and we remain committed to use our cash for the benefit of our shareholders.

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.

[OPERATOR INSTRUCTIONS].

Jeff Sonnek, FBR.

Thanks, guys.

Congratulations on another great quarter.

Can you talk a little bit more about gross margin and just -- I know automated replenishment on the basics category has been a win for you guys.

How many SKUs is that on?

Are there additional opportunities in other categories?

When last I looked, Jeff, we were probably around 900 or so SKUs in terms of the automated store replenishment.

We think there's additional opportunities out there, and we've also looked at it not just from basic every day-in and day-out goods, but also some opportunities in perhaps some of the seasonal categories, which over an extended period like Christmas would lend itself to ASR.

In terms of a number, maybe it's another 300, 400 additional SKUs in the near term horizon.

Jeff, there's a couple other things, too, I'd just share with you.

And that is we spent last year -- you saw the -- you see the inventory turn improvement that we had.

We spent last year selling through inventory that we had some of it backed up in our back rooms.

Some of it very much higher margin product, but while we were selling through, we were buying less of that kind of product.

Now that we have visibility of what we own and what we're selling, we're buying back what we're selling and replenishing that.

As a result, our imports and our higher margin purchases last year -- this past year reduced a little while we were selling through some product that we already owned, now that we know that we had it and where it was.

As we go further into 2007, that changes because we're back open to buying in a bigger way on our higher margin import categories.

We're starting off the year with a little lower margin in beginning inventories, but that begins to inflect by the second half.

That, plus continued improvement in our comp store sales and leverage from our comp store sales, plus improvements in our shrinkage this year that we are intending to have, and all of that together gives us better gross margin, especially as we enter into the second half.

Sounds great.

And then, on this Deal$ expansion, almost lapped a year now, and you've learned a lot.

Things are ramping up.

In terms of the profitability ramp of that business, can you kind of give us a sense what inning are we in?

Where -- how much opportunity's left?

What are kind of some of the big milestones?

Well, Jeff, all of the opportunity's left really because what we've done so far, we've had September, October, through now experience -- especially going through fourth quarter of experience with a new multi-priced assortment and the operating metrics of a store like that.

So we're still learning.

We're encouraged by the results.

We're excited about the opportunities, and we are going to open up 25 new Deal$ stores this year.

That's going to be a new learning experience for us because there's a whole lot -- it's a much different scenario when you're converting an existing model to a new model as to opening up a brand new store and offering that to your customer.

So we've learned a lot.

We've had some good experience.

We've raised our margin in our Deal$ stores.

We've found some things that we found sort of kind of what we think we can sell now.

We've zeroed in on the price points a little better.

We've built a little bit of an organization, some oversight and some management and some supply and replenishment.

All the things that you need for a new model, and we're excited about now it coming out in the beginning of this year and starting to open up new stores like that.

So it's -- all the opportunity is ahead of us for this.

And it is absolutely one of the most exciting things that we've undertaken in many years.

John Zolidis, Buckingham Research.

Hi.

Good morning, and let me say what a great year you guys put together.

Kent, question on the guidance.

This looks like the most detailed guidance I've ever seen you guys give.

Any reason or any kind of change in thinking process about how you're providing guidance going forward?

Well, I think a couple of things.

I don't think it's all that different from where we were a year ago, John.

I think that there's been some confusion, what I was able to observe over the past 12 months in terms of analysts' models, the impact to share repurchase being one.

And so we thought we would clarify that because that's -- it's somewhat hard to project and predict the impact as well as a lot of models haven't necessarily taken into consideration the loss of the interest income, which, by the way, is tax free and almost falls at the bottom line dollar-for-dollar so that's probably why it's a little bit more detailed.

I think the other thing, as you recognize, there's discussion, a little bit of overhang in terms of our gross margin and our operating margin rate over the past few years, and I think it was important for us to come out and make a stand and said we're looking for the second half of 2007 to be the bottom of the trough primarily, so we begin to see some improvement in the overall business and get back on track.

Thanks.

I get a follow up?

Sure.

Okay.

On the gross margin, thanks for telling us how much the leverage from the extra week contributed.

You did mention that mix was still a negative, apparently that was offset by something else.

Was there -- was there a benefit from shrink or was there some other item in there that helped offset the negative impact from mix?

Thank you.

Well, if you look at the overall rate, we did get some improvement in our leverage on our distribution costs, and then as I recall in the fourth quarter, we had some favorability in our purchase markup as well.

Stacy Turnof, Merrill Lynch.

Good morning, everyone, and congratulations on a good quarter.

You mentioned that this year, you're planning to open up 25 multi-price stores.

Could you give us a little bit more detail if it's going to be any different than the Dollar Tree model with the exception of the multi-price point?

And is this something that you plan to then accelerate going forward?

Stacy, I -- we do plan to accelerate it going forward.

We're going to get these first 25 under our belt first.

We still have some metrics -- some operating metrics to hone on these stores.

Again, the stores that we bought, it's only been, what, 10 months now, and we've spent money and time and effort on transitioning in those stores and then going through fourth quarter.

And I'm really hungry for some level set -- a little level playing field as we go forward so that we can really see where our opportunities lie.

We're going to start with the 25 stores because I want to start with a new out-of-the-ground offering to our customers.

No preconceived notions.

We open up a brand new store.

We're going to invite them in, and I think we're going to learn what they like and maybe what they don't like so that we can then begin to step on the gas accordingly.

What I need is enough history under our belts that we can make that decision that it's time to step on the gas.

It's not yet.

When it is, we are very good about taking that thing and whipping it towards the finish line, as you say, and that's before us.

I can't handicap it and tell you that it's going to be in X many months or when that is, but that's certainly something we expect in our future.

Okay.

Great.

And I've got one -- a second question, but it's good to see the gradual transition.

You'd mentioned about import change.

Could you update us on where imports are?

Where do you see imports going to?

And is this going to be part of the benefit to gross margin in the back half?

That will be part of our benefit.

Our mix -- as we go into the back half of next year, the playing field begins to level.

The -- all of the new the consumer products, but faster turning but lower margin goods.

We will have gone through doing that now for some time and sort annualized a lot of that.

We will have annualized a lot of our frozen refrigerated roll out.

Again, much faster turning product, but lower margin.

So the playing field levels out by the second half.

And secondly, we are and have sold through this past year a lot of the goods that were the slower turning goods that we had built up, back during the day when we did not know what we owned.

And now that we do, we have adjusted our buying accordingly.

We sold through a lot of those categories and items this past year, and we're open to buy.

So our import mix will be up in second half of the year from the second half last year, and I don't have that number in front of me.

It's going to be up in two ways, though.

The mix of imports is up.

A higher percentage of the higher margin imports in the second half, and then also the mark up on those imports is also up, so there's really a double opportunity for us there.

Great.

Thanks.

Congratulations.

Thank you.

Charles Grom, JPMorgan.

Hi, thanks a lot.

Can you quantify the average ticket in those 120 Deal$ stores that you took up the price point on?

Let me give you what I -- the average ticket for purchases, the basket, when they bought something that was more than $1 was $17.84 in the fourth quarter.

That's a little higher than it had been running.

I think last -- the last --

It was around 16, right?

16 and change.

So that's gone up a little bit as you might expect in the fourth quarter, frankly.

Average ticket in baskets where there wasn't a multi-price -- item higher than $1 was $9.36.

That, too, climbed a little bit.

Again, I think that's attributable to the fourth quarter.

About a fourth of all the transition transactions had, by the way, items that sold for more than $1.

That's a little higher than we had started off anticipating.

So we're getting good customer acceptance on these items.

Then, just as a follow up to the Deal$, have you faced any hurdles with customer awareness -- people walking in thinking they're buying 10 items for $10 and it winds up being more.

And along with that, have you -- how have you approached the product displays of the stores?

I mean, are you comfortable with it, and will you change that with the new 25 stores?

Yes, we're going to get -- we're getting better at that, Charles.

The -- we've hit that issue head on because we expected it to be.

So from the time you walk into a Deal$ store, the first thing you're going to see in there is something that's talking about we've changed and we're different and still all the great things that you found for the $1, and most everything sells for $1, but some things don't.

And those that don't we've ticketed them and we've signed them, and we've clearly done our best to identify them as great values but not at the dollar price point.

Having done that, there's a learning curve on execution.

I think we've done -- our operators have done a pretty good job at that, frankly, but I think we can -- we will get better at that with time and we'll get better on our display.

It's something that we've tried a couple different ways.

We've done some stores where we've put all the merchandise that wasn't $1 in one area, and then we've done some where we've put it throughout the store.

We've found throughout the store is the best way in the Deal$ stores we think because that's the way customers shop.

But it does require a higher level of execution.

And along with that, we're going -- we're going to keep working on getting better with that.

Those are some of the obstacles.

What we found from the customer intercepts that we do is that they're concerned about it.

They do say, well, you know, I now have to look and see if it is $1 or not when I look at the sign.

We do hear some of that.

But what we find is what you would intuitively know, and if it's the right merchandise and it's great value they're not offended.

They clearly buy it if it's a great value, so there's our opportunity.

And it really is all about the value that we're trying to create, lifting the restriction of the price point to offer even more value to our customers is the future of these stores .

Okay.

One more, if I could.

Have you -- I know Kent's talked about changing the banner in the past.

Will these 25 stores carry the Dollar store banner or will it be the Deal$ banner?

Deal$.

These 25 are going to be the Deal$ banner.

Okay.

Thanks very much.

Meredith Adler, Lehman Brothers.

Hello.

This is Ivy for Meredith today.

Going back to the Deal$ stores, can you tell us how will you determine where you're going to locate those 25 Deal$ stores?

Have you determined what markets are most suitable for these multi-price point stores?

And lastly, will you continue to supply the stores through the Joliet facility?

The Deal$ stores that we've identified are done the same way we identify our Dollar Tree stores.

If first of all starts with the opportunity.

There has to be space there.

The economics of the deal have to be affordable.

We're looking for a size that's in that 10 to 12,000 square foot range, so the size is important.

And we're looking for customer density, customer demographics, that middle income -- broad middle income customer that lives within 5 miles of the store.

So, it's really all the same kinds of demographics that we look at for a Dollar Tree -- Dollar Tree store.

We don't have all 25 of these Deal$ actually locked up right now.

We've got the majority of them locked up, and right now they're all within the Joliet facility.

That does not mean that they will stay within the range of the Joliet facility.

That just means that's where we've started.

I do certainly expect to expand that past the delivery area of Joliet over time.

Okay.

And can you also -- switching gears, can you comment on, have you seen much use of EBT?

And also, in terms of debit, when you look at the first group of stores that received debit capabilities, can you tell us what percentage of sales come from debit in these stories?

Well, Ivy, I can only tell you the debit penetration only is a very high level because we've been into this at least 12 months now, and we've decided to combine all the groups of stores.

But once again in the fourth quarter, debit penetration increased.

It tracked to almost below 20% of sales in the -- in the fourth quarter.

So -- so it has legs to it.

We still have a number of stores that we did in the first quarter of this year, so we look for that to expand.

We also looked at potentially -- credit could potentially expand.

As far as EBT, it's tough for me to get a handle on because I combine that with other forms of tender.

But I do know that, for example, like our food stamps, which was part of our frozen refrigerated strategy, which is a form of tender and perhaps a customer we didn't have previously, is somewhere just south of about 1.5%.

So I look at that as incremental as well.

Okay.

Thank you.

Scott Malat, Goldman Sachs.

Hey.

Good morning.

Can you just talk about new store productivity?

You had said that it had been improved, and now with the new store size that you'd taken down a little bit this year.

How has NSP trended if you can qualify that a little bit more?

I'd say the 2006 is comparable to the 2005 class.

Okay.

Thanks.

And then just on the increased foreign sourcing, what about direct sourcing with in that?

I know you said in the past about a third of the 40% of foreign sourced goods may one day may be directly sourced.

Where are we with that, and what percentage of kind of -- of the new stuff that you'll foreign sourcing can we also see direct?

That's still -- there's still a majority of it that is not direct with the factory.

There's still an intermediate either trading company or an agent in the middle of that.

We have yet -- although we have an office there that we use for our buyers and our people here to go to a working place, sort of a center of operations there with all the connectivity that they have here, and we don't have foreign employees yet.

So we still rely on those third parties to do the inspections and the insurance that we are delivered the right goods at the right time.

We have not chosen to go the route of adding those.

So as a result, we still do have people in the middle.

There's an opportunity, though, and over time we will continue to add -- I guess factory by factory, we will continue to go more directly with the source, and I think that's an opportunity in our margin.

Although our foreign margin is fairly high, I think there's still a little more opportunity in it as we do that.

Any time frame on that improvement?

It's just -- you know what?

It's going to be a -- over time, it's a continued sort of keeping the -- keeping your shoulder against the wall because -- and pushing on it because it does require taking on other responsibilities there like inspections of the product and insuring that they get shipped, so I really don't have a time line.

I just -- I see it there.

I see it as an opportunity, and it's one that it -- there will be at some point a tradeoff there as we begin to add some more employees in order to do some of that, but that's going to take us some time.

I don't have a time line.

William Keller, FTN Midwest.

Good morning, everyone.

Great quarter.

As you expand the multi-price point at Deal$, could you just give us a little bit more detail on how you plan to keep those differentiated from maybe the other multi-price point type small box discounters?

We look at Deal$ stores sort of in the same light as we look at Dollar Tree when we talked about the shopping experience.

So -- and I can't really -- I'm not going to give you a comparison to anyone in particular, but we believe that there is a need for a shopping experience when people shop these stores.

We're going to be variety merchandise.

We want our customers to be thrilled when they come in with the product and the price.

And, oh, my gosh.

I can't -- can you believe the price on this.

So we want to exceed their expectations on value.

We want to offer them a bright, clean, well-merchandised store.

We want to offer things in the shopping experience that aren't just product and price like as I was talking about in fourth quarter.

For example, with our Build A Wreath and our Build A Basket and all the things that we do at Dollar Tree to inspire people to have a good time.

The things that we do with the Teacher's Corner in Dollar Tree.

Those are the kinds of promotions -- in-store promotions that we'll -- that we do and will be doing in our Deal$ stores.

But it's a clean store, it should be a fun store.

Brightly lit, full of merchandise, great values.

Thrilled by the price points.

Lift the restriction and offer even more value is our goal.

So, that's -- that's our strategy.

That's, I think, something that is needed out there.

I think especially at the $5 and less price point, and we haven't limited ourselves to that, but certainly, I think there's a need and an opening out there for a general merchandise store that operates that way at a $5-ish and less price point.

Okay.

And looking at the expansion that you talked about, do you still plan on having some multi-price point Dollar Tree tests?

Yes.

Yes, we're -- we still plan this quarter to test some more than $1 product in 20 stores or so.

It may be a few less, a few more.

Terrific.

Thank you very much.

You're welcome.

David Cumberland, Robert Baird.

Thanks.

Good morning.

On the stock by back -- maybe I missed this -- what was the number of shares repurchased in Q4?

I don't have the exact number for you, David.

Tell you what -- the -- I know that -- 3-1?

Okay. 31.

Most of that came about as a result of the accelerated buy back.

Great.

And then on advertising, what are your plans for 2007, including types of advertising and also spending as a percent of sales compared to '06?

It's about the same percent as '06 that we have planned, David.

Any then any change in types of advertising or your approaches this year?

I think we've gotten really excited about print.

I think we're really excited about what we can do with -- it's not advertising, but with our marketing budget.

We're excited about some of the in-store things that we've done.

Thank you.

David Mann, Johnson Rice.

Thank you.

Good morning.

Can you just elaborate the shrink impact in the fourth quarter and then how much benefit you think you're going to get in '07 and how you'll achieve that?

It -- the shrink negatively impacted us by about 7 or 8 basis points in fourth quarter.

So there was some improvement?

No, it was -- that's basically a consistent rate.

I mean, we took a few inventories in January, but we basically kept our accrual rate the same.

Basically, we're at 2.05 at retail.

Okay.

And then one other question in terms of your remodel and expansion activity, can you just give us an update on how many stores are left in the whole base that you feel like you will want to expand over the next two or three years?

That's a bunch, I guess is the quick way to answer it.

I mean, when I take a look at how our -- store size, I guess, is the first indicator, we still have slightly in excess of 100 mall-based stores.

Obviously, most of those are the ones that we're targeting for relocation.

Not all.

I mean, some are very profitable.

But I would say the vast majority of those are targeted for relocation, and then we probably have another 500 or so stores that are under 6 to 7,000 square feet, and as we begin to expand the assortment, especially when we add frozen/refrigerated among other things, we look to expand those stores as well.

And the stores that are under 7,000 square feet, how are they generally comping?

The smaller stores, including the mall stores, are under performing the balance of the Company.

I mean, would they be negative or are they seeing some improvement?

Slightly negative.

Okay.

Thank you very much, Kent.

Patrick McKeever, Avondale Partners.

Hi.

Thanks.

Good morning, everyone.

On Deal$, Kent, you mentioned that the integration or the inclusion of Deal$ in the fourth quarter had a slightly negative effect on the total company operating margin, but it was a little better -- the impact, I guess, was a little better than -- from a trend line standpoint or perhaps better than you thought it would would be.

What is -- what has changed at Deal$, just looking at the different components of margin?

Is gross margin improving?

Is SG&A improving?

What are the key leverage points or leverage opportunities at Deal$?

Well, I think some of the low hanging fruit was in the merchandising line, especially when you take a look at the variety portion of the store because that's what Dollar Tree stands for.

And we're able to deliver value and actually we generate some pretty decent margin on the variety portion of the mix.

The other thing, too, is when I take a look below the margin line and I look at the operating expenses, there were some real opportunities in payroll -- store payroll, getting that closer to the Dollar Tree model.

We're not quite there yet, but we've made some significant improvement.

And then there were some other store operating expense like they had armored car service in all of their stores, but we eliminated substantially all of that, so their expense structure is beginning to get more in line with Dollar Tree stores.

Okay.

Okay.

And just a quick follow up.

When do those stores fall into the comp base?

June.

Probably June.

We -- the acquisition took place.

We had them under our umbrella in the last week of March, so we include them in our comps base, I think, after the 15th month.

Okay.

Thank you very much.

You're welcome.

[OPERATOR INSTRUCTIONS].

Dan Wewer, Raymond James.

Hi.

Good morning.

On the improvement in the average ticket and the transactions, were you achieving that in stores without the coolers and freezers?

Yes.

Yes.

And are they improving at the same rate as the stores with the coolers and freezers?

No, the coolers and freezers are improving at a higher rate.

Okay.

And then, Bob, a second question I had is a longer term question.

Historically, Dollar Tree has been highly differentiated from the other small box discount formats, but as you add more basic merchandise, add more consumables to your mix, the gap between you and the others narrows somewhat.

At what point do you know that maybe you've gone too far in moving away from the variety store concept and adding to much in the way of basics or food?

I don't know -- we're not going to go too far.

It's really trying to -- or attempt to appeal to the broad middle consumer.

A lot of -- a lot of the consumer demographics that we get, it's where you put your store for one thing.

So we -- although we have stores everywhere now, and in all different settings.

But our perfect model for a store is a little up real estate.

It's typically with those class A or class B real estate people with along side some of the big box guys that we all know and love.

And I want to put the stores where middle America lives and where they shop.

Along with that, I'm providing to them a mix of variety merchandise, things they need and things that they want at a great price.

Trying to exceed their value.

Not only in the value of the product, but also in the standards of the store that we put out there.

So adding what we do on the convenience foods and the snacks and those kinds of things I don't think detracts from our offering as a variety merchant.

It's rather an addition.

And frankly, as we've added more of the cookies and chips and snacks and those kind of things, our party business goes up too.

And we add the frozen and refrigerated, our frequency of shopping goes up.

More people coming more often.

And our toy business is going up, too.

So all of our businesses are rising as we've increased the consumer products.

Once more, it's a reason -- one more reason to come to us.

Somebody else is selling it, so we can do it, too.

And it's just our attempt to attract that broad middle.

How will I know if it's gone too far?

If we were not seeing increases in traffic and increases in average ticket as we do this, then I would say maybe we got it wrong.

But what we're doing so far is clearly a homerun to the -- to our consumers.

The traffic improvements that we've seen in the past year are due to several things.

One of which is that more frequently purchased, higher turning things you need more frequently product line.

So I don't think we've gone too far.

I don't think we will go too far as long as we're listening to our customer, as long as we're reacting to the market and trying to fill those opportunities.

And, Bob, just as a follow up on the added imports in the second half of '07, will that be in categories that you would consider to be more wants rather than needs, or will it focus more on basics?

It's mostly wants, and when you look at our import programs, it's mostly the toys and the party and the variety merchandise that we've always been so really good at, as well as all the private label opportunities.

The Royal Norfolk dinnerware and the Christmas dinnerware and the stemware and all those kinds of things .

We are doing a few more things, moving a few more things to our foreign sources as some of the prices domestically have gone up.

We have made some moves, and we'll continue to do that.

We'll continue to follow the lowest price around the world.

We're importing some plastics now that we used to buy domestically.

If our resin prices change, we also have domestic sources we could go back to.

But right now, it is -- there is some opportunity on basics.

But I'd characterize it as mostly the variety merchandise that you know from Dollar Tree.

Christine Augustine, Bear Stearns.

Thank you.

Kent, on the SG&A for 2007, the rate will be -- well, at this point the forecast is the rate'll be down a little bit.

So if advertising is pretty much the same percentage and you're going to have some redesign of the benefits so that should help offset some of those costs.

So is the real swing the incentive compensation, or are you also looking for some efficiencies in payroll?

Christine, I don't think that there's a huge opportunity right now for us to impact payroll particularly in the field area.

I think we've done an excellent job in managing that down over the last few years, but I think we're at a point that if we did it any further, I think we'd be sacrificing customer service.

Plus, we're going to have to manage through this minimum wage increase as well.

Now, we don't think it's going to impact us significantly like it may impact other retailers, but that -- that in itself does.

I think that -- the other thing that I'm -- that had me a little concerned, too, is utility costs.

I think 2006, from a weather perspective, was wonderful.

I think even in the warmer months where it cost more to cool, like in the August/September timeframe, we had some moderate temperatures.

So the big issue I see is the utility costs, trying to mitigate that.

But the nice thing about our business is that we're very frugal in terms of headcount in the support areas of the business, and as such, we should begin to lever those types of costs year-on-year.

Okay.

So really, it sounds like the incentive compensation is going to be the main swing factor because of the comparison to '06, so as you cycle that, that should be favorable?

That'll be -- that will definitely be a big swing factor.

Okay.

Thanks for clarifying that.

Okay.

Thanks to all of you for participating in this call today.

Our next conference call is scheduled for May 30th, 2007.

Thank you again.

Thank you, everyone.

That does conclude today's conference.

You may now disconnect.