美元樹 (DLTR) 2007 Q1 法說會逐字稿

Good day and welcome to this Dollar Tree Stores, Inc.

first quarter 2007 earnings release.

As a reminder today's call is being recorded.

At this time I'd like to turn the call over to Mr.

Tim Reid, Vice President of Investor Relations.

Please go ahead.

Thank you, Steve.

Good morning, and welcome to the Dollar Tree conference call for the first quarter of fiscal 2007.

My name is Tim Reid.

I am Vice President of Investor Relations for Dollar Tree.

Our call today will be led by Bob Sasser, our President and Chief Executive Officer, who will provide some insights on our performance in the 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 second quarter and the remainder of fiscal year 2007.

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

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

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

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

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

Bob?

Thanks, Tim.

Good morning, everyone.

I appreciate your interest and your presence on the call.

This morning we announced earnings for the first quarter of $0.38 per diluted share.

That represents a 22.6% increase over last year's $0.31 per share/ As previously announced, total sales for the quarter were $975 million, an increase of 13.8% over the first quarter of fiscal 2006.

Comp store sales increased 5.8% for the quarter.

And just a little color, this was the best comp sales performance at Dollar Tree in nearly seven years.

These sales result are on top of a 4% increase for the first quarter of last year and this was the fifth consecutive quarter of comp store sales increases equal to or greater than 4%.

Once again our first quarter comp store increases were the result of an increase in both store traffic and our average ticket.

I want to start today by offering some color on the sales and operating initiatives that drove these results.

I'll point you towards some key metrics and then I'll turn the call over the Kent for the financial detail and guidance.

Sales performance in the first quarter was driven by several factors.

As always our merchandise initiatives led the way, and sales were driven by seasonal excitement and new products.

Beginning with Valentine's Day our seasonal business was strong, with credit going to the merchants for the assortment and to the stores for a quick transition and impactful presentation.

Valentine's Day continues to grow in importance for us.

It's a fun and colorful holiday for our stores and they found ways to make it a special event for our customers.

In some of our stores the ceilings were virtually covered with helium balloons in preparation for the big day, and as a result, you couldn't go into the store without buying something and you certainly could go in without knowing that Valentine's Day was coming up.

Our customers responded positively to the product selection and value and we had a great sell through, so we started off the quarter well.

As you know Easter came one week earlier this year.

We had a little calendar shift and a shorter selling season typically means a sales challenge.

Our merchants, our marketing and store teams met the challenge head on with some key initiatives, which proved to be successful and offset the potential sales store fall.

First of all, with product the value was terrific, the product was fresh and our stores transitioned very aggressively and quickly into the Easter product set.

Secondly, using sales history and improved planning and allocation tools, our allocations and replenishment team focused on maximizing sales at our highest potential stores and the improved allocations overall.

We wanted to make sure that when the customers were there that we didn't miss any sales.

And third, sales were driven by marketing and promotion.

We changed our mix of electronic and print advertising to more print and we added more markets to our Easter insert, which ran on March 18th this year.

While we spent less on advertising in the first quarter this year, we expanded market coverage and the results were positive.

In addition to the Easter-specific product there was a constant flow of new non-seasonal general merchandise.

These were promotions that add excitement and provided unexpected value to our customers; promotions like our [luau] themes product and our own trend promotions of theme casual dinnerware and accessories.

Both of these promotions brought added interest and merchandise excitement to the stores.

We also launched a new line of our Anna Grace social expression cards and stationary with great success during the quarter.

As those of you who shop our stores know, there's always something new at Dollar Tree and always at a great value.

We believe this continuous flow of fresh product and great values keeps our customers coming back.

It is a key differentiating factor for us and a strategy that has worked particularly well this year in offsetting the potential negative effect of the calendar shift and an early Easter.

In addition to our seasonal excitement and our new product excitement, the expansion of our frozen and refrigerated product to more stores continues to yield positive results.

We added freezers and coolers to 110 Tree Stores during the first quarter, bringing the Company total to 742 Dollar Tree Stores compared to about 250 the same time last year, and we're well on our way to our target of adding 250 new frozen or refrigerated stores this year.

As I said earlier, results have been terrific.

We're attracting more customers more frequently with the product and the increased traffic is resulting in a higher average transaction size and incremental sales.

Along with this product rollout we can usually qualify to accept food stamps.

We currently accept food stamps in more than 700 stores with positive results.

That number is growing and it will expand to over 800 stores by the end of this year.

We talked a lot about expanded payment types and I'll mention it once more because we continue to benefit from the expansion of our debit card acceptance.

It continues to provide a lift to our average ticket as well as traffic.

This benefit will continue throughout 2007 and beyond, as penetration continues to increase.

I want to make just a couple of comments on a balance sheet item.

Kent will give you more details, but I want to point you to our ending inventory number for the quarter.

We continue to leverage our investment in logistics and technology to improve our flow of inventory to stores.

Our investment in POS applications has given us the ability to expand our automated store replenishment, which is improving -- helping us improve our in stock of basics.

It's helping us develop smarter allocations of seasonal product consistent with sales trends.

And together these processes are enabling us to lower our inventory investment.

Using this technology, our planning allocation and replenishments team has been highly effect in reducing inventory per store and increasing our inventory turns over the past two years and I'm proud to say this trend continues into the first quarter of 2007.

With 161 more stores than last year, we ended first quarter with $34 million less inventory.

That's about 10% less inventory per store across the chain.

Speaking of new stores, during the first quarter of this year we opened 75 new stores, we relocated and expanded another 27 stores, and we're on track with our plans to open 225 new Dollar Tree Stores, 25 new Deal$ stores, and to expand and remodel 100 existing stores this year.

Our targeted size remains 10,000 to 12,000 square feet.

Last year our new stores averaged just over 11,000 square feet and the 2007 class will also be in that range.

I want to give you a Deal$ update.

It's one of the most exciting things that we have going on around here and I know you want to hear more about it.

We've now owned the Deal$ chain for one full year.

As most of you know, we're using these stores as a platform to develop an additional format, leveraging the strengths and infrastructure of Dollar Tree, and I want to emphasize this is an additional format.

In addition to our very successful Dollar Tree format where everything's a dollar, we're taking the Deal$ chain and we're using this platform to develop a brand new concept that offers us an opportunity to expand our business in other ways.

Last fall we lifted the restriction of the $1 price point in these stores and converted 122 of them to the multi-price point offering in the September/October time frame just to give you some reference there.

We continue to see improved results.

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

We have opened three new Deal$ stores in the first quarter.

We have plans to open 25 new Deal$ stores this year.

These new Deal$ stores will provide some new data points.

We'll open up multi -- we'll open them up multi-priced.

That's a big difference than changing an existing customer expectation.

so we'll learn a lot there.

Most of the customers will be new to the concept.

The site selections for the new stores were strategic, and these stores will provide an opportunity to more fully develop the sales potential and the operating metrics Right now at Deal$ our attention's focused on the most important metric and that is the rationalization of the merchandise assortment and refining the value proposition.

And I just have to say again, Deal$ is an additional growth opportunity that we're very excited about, but it is a new model, and there's more to learn and there's more to improve upon.

We'll continue to roll out in a measured and thoughtful way as we refine these operating metrics, and we'll keep you updated as we progress.

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

Kent?

Thanks, Bob.

Good morning, everyone.

Our comparable store sales increase of 5.8% was driven by a 2.6% increase in traffic and a 3.1% increase in transaction size.

This is the fifth consecutive quarterly increase in traffic.

These results were accomplished despite an earlier Easter, which we believe could have potentially resulted in about $15 million of lost volume when compared to the first quarter of last year.

Our 22.6% increase in diluted earnings per share for the quarter was driven by the sales increase and a 20 basis point improvement in operating margin.

For the next few minutes I'll talk about the components of gross margin, SG&A expense, balance sheet management and cash flow metrics, followed by comments on guidance for the second quarter and the remainder of the year.

Margin.

For the first quarter the gross margin rate was 33.4%, which is the same as the first quarter last year.

Several factors contributed to this performance.

First, we had improved mark up on merchandise delivered this past quarter.

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

The sales penetration of lower margin consumable merchandise increased approximately 0.05% in the first quarter this year versus an increase of 2% last year.

Also, while the Deal$ stores continue to negatively impact our margin rate somewhat, the margin rate of the Deal$ stores is improving.

In addition, we benefited from positive leverage on buying distribution and occupancy costs associated with the 5.8% increase in comparable store sales.

These improvements were offset by increases in transportation cost, arising primarily from higher outbound freight costs due to higher diesel fuel prices and a higher shipment volume to our stores.

SG&A expenses were 27%, expressed as a percent of sales, a 20 basis point reduction versus 27.2% for the first quarter last year.

Addition to gaining leverage from positive comparable-store sales we did a good job holding the line on payroll and related benefits and travel.

We also reduced our advertising expense through a more targeted ad spend via more newspaper inserts and far less radio and TV.

These expense rate improves were partially offset by increase in expenses for professional services, insurance cost, and debit card fees, arising from higher penetration of debit card acceptance than planned.

For the first quarter depreciation and amortization was $39.3 million.

The overall rate as a percent of sales improved 20 basis points compared with the first quarter last year.

By the way, we expect depreciation of about $157 million to $160 million for the year, which as a rate of sales should be down about 25 to 35 basis points.

Our operating margin for the quarter was 6.4%, a 20 basis point improvement compared to first quarter last year.

The tax rate was 37.2% for the quarter versus 37.4% for last year.

Looking at the balance sheet and statement of cash flow, cash and investments approximated $189 million at the end of first quarter 2007 versus $287 million at the same point last year.

This is after spending about $250 million for share repurchase through accelerated buyback programs during the past two fiscal quarters, including the $150 million program initiated in March 2007.

We have approximately $273 million remaining from the $500 million share repurchase program authorized by our board last November.

Capital expenditures were $39.7 million for the first quarter versus $42.5 million last year.

The majority of capital expenditures in the first quarter were for our new stores, remodels and expansions to our Briar Creek distribution center, and our home office and data center in Chesapeake, Virginia.

We continue to expect capital expenditures in the range of $180 million to $190 million for fiscal 2007.

Capital expenditures will consist primarily of the aforementioned components and the addition of frozen and refrigerated capability to approximately 250 stores.

We continue to focus on balance sheet management.

As Bob mentioned, our investment in inventory was down $34.1 million at the end of first quarter, compared with the end of first quarter last year, despite increasing square footage by 8%, compared with the prior-year period.

In addition, inventory turns improved by another ten basis points in the first quarter.

Also, our payables to inventory or leverage ratio improved from 29.6% at the end of first quarter last year, to 31.1% at the end of Q1 this year.

This is a continuation of a trend that began last year.

While the inventory decrease and increase in payables leverage impacted cash flow favorably, the combination of higher income tax payments, along with payment of bonuses and profit-sharing distributions, which were accrued at the end of last year, caused a major swing in working capital changes versus the first quarter of last year.

Also, first quarter 2007 reflects about $30 million representing one-month's worth of rent payment, which is embedded in other current assets on the balance sheet.

This is due entirely to the shift caused by the 53-week retail calendar in 2006, where in rent that is normally dues on the first of next month now occurs in the last week of the quarter.

Now for forward guidance.

As to 2007 sales earnings guidance for the second quarter, we are forecasting sales in the range of $960 million to $985 million and diluted earnings per share in the range of $0.29 to $0.32 a share.

This implies a low to mid single-digit increase in comparable store sales.

For the full year 2007, we estimate sales will be in the range of $4.28 billion to $4.38 billion, based on an approximate 9% to 10% square footage growth and a low single-digit increase in comparable store sales.

Based on these sales estimates, we are forecasting diluted earnings per share in the range of $2 to $2.12, reflecting an increase of about $0.04 and $0.02 in diluted earnings per share above the low and high end of previous guidance for 2007.

This also includes the projected impact of an estimated $60 million of additional share repurchase activity for the remainder of the year.

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

There is one important development as it relates to our projected EPS comparisons.

Our stock price performance has improved significantly over last year, which is really good news.

However, we've had a significant amount of stock-option exercises occur in the first quarter, and we believe this trend may continue.

While the cash flow and tax benefits generated are favorable, these events work somewhat against the impact of lower outstanding shares from our share repurchase activity, thus our weighted average share count may stay in the 99 to 100 million share range for the balance of the year.

As for gross income, as I said on our conference call last quarter, gross margin improvement is a real focus for us to return to higher operating margins in the long term.

While we expected margins to stop the rate of decline or flatten out toward the end of second quarter, it appears we arrived a little earlier than expected in the first quarter thanks to the above plan comparable store sales results.

Although diesel fuel prices have escalated of late, we stilt see opportunities for improvement in the second half with imports increasing in the mix.

Thus, gross margins will be down slightly in the second quarter, but could be flat to last year for the second half, based on a 26-week comparison.

From an SG&A standpoint, again we're off to a good start on our stated goal to reduce the SG&A rate in 2007 versus last year.

Our modest redesign of our healthcare program in 2007 should mitigate some, but not all of the impact of rising healthcare costs.

In addition, incentive compensation as a percent of sales should be down in the second half of the year, as 2006 was a very high payout versus a very low payout for 2005.

And while debit fees are higher, we're seeing top line benefit.

So when the dust settles, our SG&A rate should be slightly down for 2007 versus 2006.

Our buying team and our field operators, aided by new analytical tools, have done an excellent job of managing assortments and reducing inventory per store over the last two years.

Inventory per store is presently planned up slightly for 2007; however, we believe we are up to the task of finishing flat to slightly down in inventory per store in 2007.

And of course, our first quarter above plan-sales performance was a good start toward that goal.

Now I'd like to turn the call back over to Bob.

Thank you, Kent.

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

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

Sales increased nearly 14%, and earnings per share are up 23%.

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

And we continue to demonstrate the ability to self fund the growth of our business while generating substantial free cash.

During the first quarter we expended over $153 million on share repurchase.

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

Looking to the second quarter, with energy prices a constant concern, we must remain focused on driving sales by delivering great value to our customers.

Our stores are well positioned.

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

We're off to a good start on the season with the launch of our cool summer savings promotion last week.

We are now ready for your questions.

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

Thank you.

(OPERATOR INSTRUCTIONS) We'll go to John Zolidis of Buckingham Research.

Hi, good morning, great results, guys.

Thanks, John.

You touched on the gross margin a little bit, but I was wondering if you could expand on what enabled you to produce the flat gross margin year over year earlier than you had anticipated when you gave your original outlook for the year?

And specifically can you talk a little bit more about the IMUs and the sourcing improvements that you've done?

I know you talked about that earlier as something that was primarily going to impact the back half.

Did -- were you able to get that product in earlier in the first quarter or was something else at work there?

Thank you.

John, I think from the gross margin improvement, I think when I compare the components this year versus last year, the biggest thing that stands out to me, is really the rate improvement on buying and occupancy costs, because once we got into the 4% range and above, we see tremendous leverage on the fixed components of those costs.

Secondarily, when taking a look at our merchandise costs, our first costs we had some significant improvement.

The only thing I can say is that, when you take a look at the first quarter with a better Easter sell through and better seasonal assortment, that certainly helps the margin rate overall.

The only thing I can say is working a little bit against us is the diesel fuel prices.

We're concerned about that, so we lost a little bit of ground on the outbound freight piece.

Thank you.

And we'll go next to Jeff Sonnek, FBR.

Thank you.

Can you guys talk a little bit more about the Deal$ stores.

I think you mentioned in your remarks that you're going after a store demographic or a similar consumer, but, when you look at site selection, are there differences from what you guys have historically done at the Dollar Tree Stores versus what you plan to do at Deal$?

And the follow up would be what are some of the big action items left at the Deal$ stores and where are we in terms of the margin ramp?

Jeff, the Deal$ stores we've opened up three new ones, and other than the original cadre that's what we have to talk about real estate on.

But, we see this is a middle income customer, the middle American customer.

We are aiming this at those people; families, families with children.

Our strategies of completing the assortment -- lifting the restriction of the price point at Dollar Tree and adding in those items for the customers, the things the customers want that we could never sell at the $1 price point, that is working.

We're also having some success with our stock-up-and-save; larger sizes, larger savings philosophy in our Deal$ stores.

And, of course, the high-value closeouts.

We no longer have to pass on the closeouts that we find them.

This may be terrific value, but you just can't sell them for the $1 price and make money, the things that we've been passing on in the past.

So those are getting some traction.

Our customers are liking it.

The surveys that we've done, our customers really do see the value and they appreciate the value, and they're buying it if it is of value.

Our main focus right now is rationalizing that assortment, though.

What piece of it?

Where do you start?

What piece of it is $1 and what part is not?

And the Dollar Tree is not in the Deal$ store that we're replacing with something at a higher price point.

So that's going to take us some time.

These new stores will give us the ability to test that on some new customers, and test it on customers that did not have a preconceived notion of what a Deal$ store was, so we're excited about that.

It's early on, but we've opened up three and they opened up at or a little -- one of them a little better than the expectation, so we feel pretty good about that.

The store's going to be still -- it's a convenience store.

It's in the 10,000 to 12,000 square feet range, offering the things that people need and people want.

We're looking at being variety and value, and we are striving to offer a shopping experience in these stores; a reason to go there other than I need something, and -- or just what you've got to go for.

We want our customers to have that same thrill when they come in to our Deal$ stores that they do our Dollar Tree Stores and that is, oh, my goodness, look what I found.

You've exceeded by expectation.

This is fun place to shop.

So those are the real -- merchandise assortment and that thrilling assortment and shopping experience that we're building upon.

And we think we've got a pretty good shopping experience; layout, the look of the store, the feel of the store.

In the 122 that we first started we're getting good marks from our customers on that, but it's early on the new stores so we'll have to do a little more consumer testing and find out how they really feel about it.

Just to give you -- I'll give you some quick facts, and this is first quarter facts.

Average ticket with the multi-price items in our Deal$ stores was $16.36.

That's down a little bit from fourth quarter, but I believe that to be the fourth quarter phenomenon, where in fourth quarter, of course, we had some higher ticket gift items and the like.

Our average ticket without multi-price items is a little over $6.

24 -- a little better than 24% of the transaction had multi-price transactions in them, so our customers, when they 're coming in and they're seeing the value they are buying the multi-price -- the higher than the $1 items.

Our average retail for multi-price is is about $3, which is exactly where we thought it was going to be.

It was a little lower than fourth quarter, once more because of the gift product that we had out there for fourth quarter, but the $3 average is squarely where we anticipate this assortment serving.

So those are some of the metrics of first quarter, some of the things that I've provided for you in the past.

We've got virtually all of the Deal$ stores selected for the rest of the year, and we are going to be trying some Deal$ stores in some different kinds of markets; some in a more metropolitan market, which I believe it will -- I think it's going to find a niche there, but that's something we've got to do before I could tell you that it has.

But we are going to try the Deal$ concept in some more densely populated markets as we go forward.

Great.

Thank you so much.

We'll go next to Patrick McKeever, Avondale Partners.

Thanks.

Good morning, everyone.

On the debit penetration, just wondering if you could talk about where that stands right now?

And it sounds like that -- the penetration, at least the ramp-up or the increase, might have more legs to it than you thought, because you're talking about it as a benefit -- contained benefit through the balance of the year.

And also just wondering how things are going with your Discover Card program and if you're thinking about doing anything else in that are with additional tender types, maybe Visa or MasterCard?

Okay, as far as the debit card penetration we hit 20% in first quarter this year and that was earlier than I had expected, so we're obviously seeing some great benefit from the acceptance of debit card.

It's 11% of our total transactions, so I think those are two very relevant metrics for the penetration piece.

Discover Card, Patrick, really isn't what I would call a major player right now.

Obviously in different environments have seen Discover Card acceptance, and the most that I've ever seen in any retailer is something in the vicinity of 3% to 4%.

It's only about 1% of our sales.

Perhaps to some small degree we are getting some incremental sales from Discover Card holders, but I'm not looking at Discover Card to be a major driver of sales.

What I am looking at -- what we are looking at is further acceptance of credit cards, potentially Visa and MasterCard.

I choose not to go any further on that since we're trying to finalize the contractual commitments on that, but certainly those tenders are being looked at.

Got you.

So the penetration rate for debit, that can continue to go higher, you think, Kent, from 20%?

Oh, yes.

I think it can go higher for two reasons.

The fact that we don't have Visa and MasterCard credit competing with that, along with we don't have a proprietary credit card competing with that, I think potentially the debit card could get somewhere north of 25% of total sales, so we still have plenty of legs, we believe, in the debit card program.

And then a real quick second one.

Is the guidance for second quarter same-store sales growth, low single digits to mid-single digits, does that incorporate any benefit from the Deal$ stores?

Is it material, do you think or will it be material?

Well the Deal$ stores are embedded in our total sales guidance.

It just so happens that the way we calculate comparable store sales is Deal$ won't come into the comparable store sales calculation until probably late June, early July, so they're really not included in the comp guidance.

Okay.

Thank you, Kent.

You're welcome.

We'll go next to William Keller, FTN Midwest.

Good morning.

Good morning.

Hi, great quarter.

Could you talk a little bit about the mix of sales in the stores, and how that is impacting the merchandise margins in the quarter?

Mix of sales in the stores, we went through some pretty good seasonal periods of time, February, with our Valentine's Day and then St.

Patrick's day a smaller season following that and, of course, the big seasonal emphasis on Easter.

Our seasonal product is always a higher margin than our consumer basics, So we have gone through with our typical first quarter mix.

I believe, though, that as I have been saying for sometime, that with our new allocation replenishment methodology and our information that we are filling some gaps now as we are selling more of this higher-margin product we're able to see that sooner.

And when we're not selling something we're able to see that, too.

So what's the result of all that is a smoother flow of the higher-margin product into our business as we move forward.

I believe that's going to -- that has shown up in the form of gross margin this quarter, first quarter, and as I said -- as Kent said, a little bit earlier than we had guided to earlier.

Terrific.

Thank you very much.

And we'll go next to Meredith Adler, Lehman Brothers.

Great quarter, guys.

Thanks.

Couple of questions.

Could you talk a little bit about the plans for growth and maybe I'll start with a question.

If I understood what Bob was saying about Deal$, it sounds like if you expand the concept it will be completely unique from Dollar Tree; that you have no intention of converting the Dollar Tree Stores to multiple price point.

I want to confirm that you've made that decision and then talk a little bit about can you get your growth rate back up above -- back into double digit in the coming years?

We've-- I've always said that Dollar Tree is our major -- our core business.

It's the one that has brought us to this point and it has a lot of legs, a lot of runway, as we say, ahead.

We're very committed to the Dollar Tree business.

Customers love it.

We're at the top end of profitability in our sector.

It's a vibrant business and we can operate a whole lot more stores, so we're very good -- our team is very good at executing on that model.

We're going to continue to do that.

In addition to that, we have built infrastructure along the way.

We've built logistics infrastructure.

We've helped technology, we've people infrastructure, and all of the things that you could use and leverage to provide another business model.

In addition to the very successful Dollar Tree model, we're looking at an opportunity to lift the $1 restriction and we're developing the Deal$ concept from that.

By lifting the $1 restriction, can we develop a model, and I know that we can, That we can put into places that may have higher ar -- may be higher areas of cost of operation for us, for example.

By lifting the $1 restriction, can we drive top-line sales to higher levels than ever?

Can we get more leverage on fixed cost?

And by the way all the while continue to operate and grow the Dollar Tree model as we've guided to.

So Deal$ is an additional concept, I've always said that.

It's not instead of Dollar Tree, it's in addition to Dollar Tree.

What's the growth opportunities ahead?

I think they're terrific, but we've only got -- we have the 122-ish stores that we bought that we converted and we've only this year begun opening -- we're going to open up 25 new Deal$ stores this year, which is a pretty good number for a new concept.

We've only got three of them open so far, though, and I can't tell you what that means as far as one year out, two years out, and three years out.

It's going to be a successful concept, it's going to be an additional growth vehicle for us.

We're in the proving stage of the model right now, and all the while business is great at Dollar Tree.

So as long as those customers still like it and as long as we can execute to that strategy, we're going to keep doing that one.

I guess my question was will there be a point where you go back to square footage growth for the entire Company of back to double digit?

You know, we won't grow at the size we are at the same percentage square footage growth as we used to when we were much smaller.

The law of large numbers does eventually get you.

We are continuing to grow at -- it's a pretty good clip when you talk about 225 new Dollar Tree Stores and 25 Deal$ stores.

That's 250 new stores out there.

We have always said we are going to grow profitably, and as the market will allow and as we find the economics that support, there's a lot more places for that.

But we're not going to stretch out there for the sake of growing at a double-digit square footage growth to open new real estate.

It's always going to have to be profitable and well planned and strategic.

There's plenty of room, but we're not growing for the sake of growth percentage sake, but for the sake of the bottom line.

And I just have one quick question.

How long does it take a Dollar Tree Store to hit a mature level of profitability?

Do you get there in the first year or does it take several years?

We used to get there about the first year when the stores were smaller.

As we expanded the size, one of the reasons we expanded to the larger-size store was so that we could ramp up and had the ability to do more business year over year over year, and I don't know that we've found the answer to what -- how many years that is.

I believe it's in the five to seven-year range.

That's my educated opinion but that's still -- I can't prove that because we only started opening up these larger stores less than that time ago.

We're still seeing growth, though, on stores that we've opened in the past five years in these larger ranges.

And it's really about growing the concept.

It's about the merchandise.

It's about all the initiatives that we've put out there to drive sales and drive merchandise in these stores.

You see by the sales per square foot that our sales per square foot, we have seen an influxion in that and that is what I look at as the opportunity to increase the productivity as our existing stores go forward.

That's an opportunity for us.

Thank you very much.

We'll go next to Adrianne Shapira, Goldman Sachs.

Thank you.

Question, last quarter you had shared some smart changes to your compensation structure and it sounds as if you've begun to institute them, as you said we should expect compensation to be down in the second half.

I was just wondering how has that been communicated to the managers and if you think about it in the back half, should we be expecting compensation in some instances to be down on a per-store basis and how are managers bracing for that change?

Thanks.

Yes, you're welcome.

I think that when you undergo a major change in your incentive compensation structure, what you really have to do is you have to go through an education process with the constituents.

The short answer is the people within the field organization at a higher level -- and I'm speaking with respect to regional VPs and the like and to some degree the next level, we started off with that group.

But then what we have to do is we have to be begin educating both the district managers as well as the sales managers in the stores, because there's information that they previously haven't seen in detail.

So going from -- like if I'm a store manager, where I used to be compensated primarily on hitting a sales bonus or exceeding a certain sales level, eventually I'm going to be judged and compensated based on my margin, how I can impact my merchandise margin, how well I control some of my expenses, including payroll.

But we really have to go through a process and transition to educate these people and give visibility to the metrics before we can begin holding them accountable.

So, it's probably going to take a good 12 months from where we are right now to get to the point that we want to be.

On the merchandising side, it really isn't what I would call a major change, other than emphasizing the performance of the individual merchant on their sales and margin goals.

It just has become a bigger piece in terms of how we slice their incentive compensation.

I want to add, too, is I don't know if I understood the question, but our intent is for people to make more money, but we're incenting them on the things that are important to our business, and we can now do a little more of that because we have visibility of some information that we haven't have five years ago.

For example, we've always incented our managers based on sales only.

Well, that was one number we could and it was important to drive sales.

Now that we have margin available down at the store level, we can also add that as a component to their incentive.

But I would expect them to make more money, and at the same time, I would expect the Company to make more money by incenting them not only on sales but on the quality of those sales and the margin that's involved.

That's the philosophy.

I think that as we rolled it out to different levels of the organization, it's been accepted in that vain, and seen as opportunity to improve their own -- if you look at last year's pay, I don't think any -- I had no complaints last year from the field on their bonus compensation, so it -- so far so good, and I'm pretty happy with the results of it.

Just to follow up, I understand the philosophy that you're trying to get, incent people to focus on what matters, but just so we're clear, I thought I had heard Kent say compensation to be down in the back half?

I understand that you want people to refocus on important metrics, but how does that fit with wanting compensation to be down and yet Bob saying, wanting to pay people more?

It's down as a rate of sales.

The dollars are up.

It's down as a delta, too.

Okay, thanks.

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

Thanks.

On your advertising, do you expect a shift to print over the course of the year to allow more market coverage?

Well, I tell you what, I liked what with our Easter circular, so as we go forward, it's not just the medium, it's also the kind of the merchandise to that medium, and the print circular really did give us a better opportunity at Easter to focus our stores.

Our buyers bought it, focused our stores on getting it set into the store, quicker, better, faster.

And then that ad just supported to the customer so that when they walked in the store with that ad they actually saw the ad in place on the end cap for the futures.

I really liked the answer for first quarter, and going forward we're going to keep moving in that direction.

On the topic of lifting the restriction on the $1 price point, will you be testing higher price points at Dollar Tree Stores later this year?

Well, we have.

We have already.

I told everyone last call, I think, that we were -- had an impending test.

I got to tell you, it's a small test, 25 stores, a few items, 20 feet in the store.

And what we wanted to do was find out a couple of things.

Customer acceptance.

Everything is $1 except for this.

We named it Oops, by the way.

That's what we call it.

Oops, I know it's not $1 but the value was too good to pass up, so we're passing the savings along to you.

We created a separate, segregated assortment, 20 feet on the back wall, signed it up, priced it up, and, frankly, our customers -- there's been no pickets out front of our store, that we've seen some good sales on the items that we've put in there.

Next step, I'd like to do it in 25 more stores and for a little longer time.

We did this -- we rolled it out April 30th, so it's been a month now.

So after only a month, it's got some opportunity.

It seems to have something that we could -- I don't know what it is yet, but it's certainly an encouraging sign.

So that's where we are.

We're going to go through with another 25 stores sometime in the back half and that'll give us 50 stores this year.

It's an every changing mix.

It;s sort of like a separate promotion in the store.

So of kind of like what some of the other retailers had done with the $1 mer -- remember when they put the wall of values and the $1 walls and the $1 sections in their stores, well we sort of reversed that.

We put the "It's not a dollar" section in our store, and so far so good, but I can't tell you if it's more than 50 stores or not.

Thank you.

You're welcome.

We'll go next to William Keller, FTN Midwest.

All right, thank you.

Just a quick follow up.

You mentioned that diesel prices and the impact on cost, can you discuss if you've seen any sort of activity in sales related to the gas price changes recently?

I'll tell you what, I haven't seen it yet, but it is certainly something that I keep looking over my shoulder for.

These things keep rising.

At some point they will impact the consumer to the fact that they'll stop driving as much, I fear.

Now that's what I fear.

So far it has not happened, and I can't tell you -- you can see our results in the first quarter, it certainly doesn't look like we've seen an impact at Dollar Tree.

Very good.

Thank you.

We'll get to next Charles Grom, JPMorgan.

Hi, this is [Paul Chosel] for Chuck.

Two questions.

First, could you give a little bit more color on the sales mix?

I mean, when we look at your comp, could you break it out into a few different buckets for us?

For example, in looking at your categories, the sales growth of consumer items that are in the freezers versus just shelf consumer items, versus seasonal, as well as the other categories, such as party, et cetera?

Also, if you could give a breakout, tell us how wide the gap is between stores with the cooler freezers already installed versus those without?

And lastly, a comp mix breakout between the markets that received the marketing print ads and those that didn't?

Thanks.

Well, I think you're asking for a lot of metrics that previously haven't been put out in the public domain.

The thing that I can address and consistently what we've spoken to in the past is that the mix of consumables, we did say that -- in our earlier comments that that had increased by about 0.05% in the overall sales mix.

Beyond getting specific on percentages,obviously in the first quarter because of the holidays, Easter the most important one with Valentine's Day and to a lesser degree St.

Patrick's Day, we get a nice bump on our margins as a result of selling the seasonal product.

In addition to that, we have certain categories, such as party, which -- as well as the floral categories, which are some of our highest mark-up categories, we get a nice markup in that and we usually do in the first quarter.

From a gap perspective in terms of the stores that have frozen and refrigerated versus those that don't, again what we've said in the public domain is that they're -- once we put in frozen and refrigerated that we see about a 7% to 8% lift in the business once frozen and refrigerated's in there.

Currently with some of our newer installations we're seeing a little bit better results, but -- so we are encouraged by that.

And then I think the last piece in terms of comp mix, it's a very hard way to quantify the various components.

We tend to take a look at it in terms of, okay, well what did the frozen and refrigerated stores do us, what does debit card do for us, and any of the other more significant initiatives.

But we haven't shared those various components publicly.

Thank you.

Second question on the Deal$ stores.

You spoke that the gross profit at the Deal$ stores is obviously lower than the Dollar Tree.

If you could quantify that gap at all?

And then also let us know -- you talked about it did improve, though --

I'm sorry, we did lose that line.

We'll go next to Mike Baker at Deutsche Bank.

(OPERATOR INSTRUCTIONS)

Thanks, guys.

So my first question is on the gross margin, so flat this quarter, down next quarter.

Is that simply because of higher gas prices and just not expecting another 5.8% comp so you may not see as much leverage on the fixed cost, or is there something else in there that we need to know about?

I think it's three things.

I think one is it's hard for us to project comparable store sales at roughly the same level, because it's been a long time that we've had these year on year types of comps.

So, yes, part of it is having a lower comp number embedded in our guidance.

I think diesel fuel prices are escalating somewhat.

I'm a little concerned about that.

It was more so in the latter part of the quarter.

Certainly you can see that in the gas prices at the pump, as well.

The other thing, too, is that -- and I think people can recognize that over the course of the past few years, in that the second quarter sales, the margin generated from them is a little bit lower than first quarter, and because there's less seasonal mix in those sales going from first to second quarter.

Okay.

Yes, that make sense, thanks.

And then I guess a similar question, I think the comp guidance this quarter low to mid single-digit comp, and I think if you're -- if I remember you said, did you say low single-digits for the year or something in that range -- anyway it's not to the extent of the 5.8% that you did in the first quarter?

Again, is that just simply being prudent?

It's probably not prudent to project 5.8% for the year.

Or again, is there something else that' underlying that type of outlook?

Mike, I think it's prudent to project low single-digit for the balance of the year.

Obviously, again, we've had some favorable trends that -- I have to look back to the years 2000 and 1999 when we've had this comp-on-comp performance.

but the things that concern me most is, again, diesel fuel prices and gas prices at the pump on the consumer.

While we don't believe we've seen the impact of higher gasoline prices yet, I think it's just prudent to be a little bit more conservative in our comp guidance because of that issue alone.

Yes, makes perfect sense to me.

Thanks, appreciate it.

We'll go next to Christine Augustine, Bear, Stearns.

Thank you.

I was wondering if you are seeing any sort of regional variation in our sales trends?

And then, also, have you seen any differences in the last quarter, or maybe even over the last six months in terms of the paycheck cycle?

Thank you.

I think from a regional perspective, Christine, we have had -- we';d like to say all of our stores in all of our regions do well.

We've had a bit of a struggle out on the West Coast.

We've had some management turnover issues and the like.

The good news is is that we've devoted a significant amount of resources over the last three to four months and we are seeing an improving trend.

And that's about as far as I want to go from a regional perspective, because by and large all of the regions I think did very well this past quarter.

In terms of the paycheck cycle, I don't see anything different than what we saw previously.

I mean, the first of the month and the 15th of the month are important and we do see a little bit of spike in business, but I don't see any major shifts or changes from history.

Thank you.

We are going to have time for one more question, please.

And we'll go to David Mann, Johnson Rice.

Yes, thank you.

Good morning.

In terms of the frozen food departments, I believe year over year you had about 200+ that were in their second year of operation in some stores.

Can you just comment on how those stores performed or those departments?

They are performing favorably.

They have increases in comps year on year.

Okay, great.

And then secondly, in terms of operating expenses with the strong comp, I think you explained why the operating expense line didn't necessarily leverage in the first quarter.

Can you just talk about what comp you think you'll need, given some of the factors in the rest of the year, what comp you'll need in Q2 and the rest of the year to leverage expenses?

Well, I think you'd have to break down expenses in terms of what comp is required.

I think our G&A is pretty well buttoned up, and I think if we can get in the -- even below a 2% range, I think we can get leverage on our G&A.

I think the biggest challenge is really in the buying and occupancy line, particularly the occupancy.

Embedded in our leases, when you take a look at the steps in the rent every five years or the annual caps on the increase in common-area maintenance, that usually resembles around 2% on the rent side and about 3% to 5% on the cam side, so if you do the math that says that that comp's going to have to get probably like in the 3% to 4% range to leverage the occupancy portion of our P&L.

Okay.

Thank you.

Okay.

Thank you all for your participation in the call today.

Our next conference call is scheduled for August 29, 2007, when we'll discuss second quarter performance.

Thank you again.

This does conclude today's conference.

Thank you for your participation.

You may now disconnect.