美元樹 (DLTR) 2007 Q2 法說會逐字稿

Good day and welcome to the Dollar Tree Stores second quarter 2007 earnings release.

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, Tom.

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

My name is 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 quarter and recent developments in our business.

Kent Kleeberger, our Chief Financial Officer, will provide a more detailed review of our second quarter financial performance and financial guidance for the third quarter and full fiscal year 2007.

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

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

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

At the end 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 would like to turn the call over to Bob Sasser, our CEO.

Bob?

Thank you, Tim, and good morning, everyone.

This morning we announced earnings for the second quarter of $0.33 per diluted share.

This represents an 18% increase over last year's $0.28 per share and it is at the high-end of our latest guidance.

Total sales for the quarter were $971.2 million, which is an increase of 9.9% over the second quarter of fiscal 2006.

Comp store sales increased 4.4% for the quarter and were the result of 3.3% increase in store traffic and a 1.1% increase in our average ticket with the largest increases coming in the months of May and July.

As a reminder, these sales results were on top of a 4.2% comp store sales increase for the second quarter last year and this was the sixth consecutive quarter of comp store sales increases of 4% or better.

Several key merchandise initiatives drove our performance.

First of all, our seasonal excitement was strong throughout the quarter beginning with the Mother's Day Build a Basket promotion and continuing through the Fourth of July red, white and blue celebration.

Memorial Day was especially strong with our picnic promotion and our steak sale was a real hit with the customers.

Can you believe steaks for a buck?

Our customers did, and they really loved them.

Throughout the quarter our cool summer savings promotion added excitement with an emphasis on beach toys and picnic supplies and beverages and snacks and sunglasses and many of the things you need for the beach, all for just $1.

Our store teams really get behind this promotion.

They have a lot of fun and good natured competition aimed at leading their district in sales during this period.

Secondly, and in addition to our seasonal business, our assortment of high value basics continues to gain sales momentum.

Our customers are finding a better selection in our stores of the things they need every day, and it is giving them a reason to shop with us more often.

These are categories like health and beauty care, housewares and household supplies, things that people need every day, and when they're in the store, we're not disappointing them.

The use of our POS data to drive smart allocations and our auto replenishment and our improved store ordering is producing a efficient flow of basic product.

Our in-stock position has improved greatly resulting in higher sales.

Third, we expanded our marketing initiative during the quarter.

In-store promotions and especially the item of the week drove add-on sales and in-store excitement.

Of special note, we reduced our electronic advertising and stepped up our printed coverage on on our May pre-Memorial Day tabloid and had great results.

Last, we continued our expansion of frozen and refrigerated product to more stores.

To give you an update on our progress here during the quarter, we added freezers and coolers to 131 Dollar Tree Stores bringing the Company total to 873 stores, that compares to 360 stores t the same time last year.

The results have been excellent.

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

Our original plan was to add 250 new frozen and refrigerated stores this year.

We stepped up the pace, and we now expect to add freezers and coolers to 60 additional stores during the remainder of the year for a total of more than 300 stores added in fiscal 2007.

In addition to these four merchandise initiatives, the expansion of our payment types, specifically food stamp acceptance and debit card acceptance contributed positively to second quarter results.

As we expand our offering of frozen refrigerated product and key basic food items, we meet the qualifications to accept food stamps.

We currently accept food stamps in about 825 stores.

That number is growing, and we will expand to nearly 900 stores by the end of the year.

As you all know, we now accept debit cards in all of our stores, and the penetration of debit card usage is growing.

This provided a lift to average ticket in the quarter as well as traffic.

Turning to our store growth, during the second quarter we opened 59 new stores, a little less than what we anticipated, and we expanded another 26.

This brings the total to 134 new stores opened in the first half of this yea, r and 53 expansions and relocations.

While we ended the quarter slightly behind plan on new store openings, we still expect to reach our goal this year of 250 new stores and 100 expansions and relocations.

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

The stores opened so far this year have averaged about 11,000 square feet, right in the middle.

I have an update for you on Deal$.

As most of you know, we're using the stores as a platform to develop an additional format, lifting the restriction of the $1 price point to offer even more value and convenience while leveraging the strengths and infrastructure of Dollar Tree.

We believe Deal$ fills a unique niche in the value retail segment.

The key elements of deal strategy are surprising value, convenience, and a fun and friendly shopping experience.

Most of the merchandise in our Deal$ stores is priced at $1, but we lifted the restriction, and this enables our Deal$ stores to complete the shopping trip for the customer by offering them things they want but that just can't be sold for $1.

It also gives our buyers the opportunity to take advantage of the numerous opportunities they find which are outstanding values but don't fit the $1 price point.

Customer acceptance of the concept has been good.

They responded enthusiastically to the extra value that we can offer.

We are especially excited over the lift that it gives in our average ticket.

To give you some feel for the shopping basket during the quarter, about 25% of the transactions in the Deal$ store contained an item selling for more than $1.

That's up slightly over the first quarter.

Almost 20% of the sales in the Deal$ stores came from items over $1.

The average unit retail for the over $1 items was $3.25, and again that's higher than the first quarter.

And the average transaction was more than $16 in the Deal$ stores when the customer bought an item over $1.

That's consistent with first quarter.

When compared to our Dollar Tree Stores average transaction of about 760, this lift in transaction size is very compelling.

As you know, most of these stores were acquired or converted, and as I said previously, I believe our best test of the concept is at opening new stores and new markets where customers have no preconceived expectations.

So far this year, we've opened five new and relocated two existing Deal$ stores.

This pace is going to accelerate in the third quarter, and we plan to open an additional 17 to 20 Deal$ stores in the second half.

We're very excited about the Deal$ concept, and we recognize the growth opportunity that this concept represents.

To keep this new business opportunity in perspective, though, I would like to say it is a new model, and it still has a lot of work to do in refining it.

In a moment I will turn the call over to Kent for a detailed review of our financial performance, but before I do I want to highlight a few of the numbers.

First of all our gross margin improved 40 basis points over second quarter last year.

We have been saying we would begin to see gross margin improvement as we cycle through the recent addition of more basic and faster-turning lower margin consumable products.

We're now beginning to see this and frankly a quarter or two ahead of schedule.

Second, in looking at SG&A, while the rate is higher than last year, our expenses continue to be well managed, if not for the increase in professional fees and charges associated with the settlement of certain employment related matters in California, our operating margin, which was up 4 basis points over last year would have increased by 34 basis points.

Our team continues to hold the line on payroll, payroll related expenses and key discretionary expenses.

Third, I am pleased to point to the continuous improvement in our inventory management by leveraging our investments in logistics and technology, store teams and our planning allocations and replenishment organization working together have been highly effective in improving our in-stock of basics and developing smarter allocations of seasonal product consistent with sales trends, and reducing our inventory per store and in consistently increasing our inventory turns over the past two years.

This trend has continued in the second quarter of 2007.

With 178 more stores than last year, we ended second quarter with about $19 million less inventory than last year.

That's about 8% less inventory per store and our in-stock position is better.

Now I will turn the call over to Kent Kleeberger, our CFO, who will give you more detail on these and other financial metrics during the second quarter and guidance for the remainder of the year.

Kent?

Thanks, Bob.

Good morning, everybody.

As Bob mentioned, our earnings per share this quarter was $0.33, which was above the high-end of the range of our initial quarterly guidance, and represents an 18% increase over last year's $0.28.

The improvement in diluted earnings per share for the quarter was driven primarily by the comparable store sales increase and improvement in gross margin.

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

For the third quarter, or second quarter rather, gross margin was 33.6%, 40 basis points above the 33.2% in last year's second quarter.

Several factors contributed to this performance improvement.

First, we had improved markup on merchandise delivered this quarter.

Next, the negative impact from the planned shift towards more consumables continues to diminish.

The sales penetration of lower margin, consumable merchandise increased approximately 1% in the second quarter this year versus an increase of about 2% for second quarter last year.

Also, while the Deal$ stores continued to negatively impact our margin rate somewhat, the margin rate of the Deal$ stores continues to improve.

As to other components of gross margin, we benefited from the positive leverage on buying, distribution, and occupancy costs associated with the increase in comparable store sales.

Moving down the P&L, SG&A expenses were 28.1% for the quarter expressed as a percent of sales, a 40 base point increase from 27.7% in the second quarter last year.

The increase in rate was driven primarily by an approximate $0.02 per diluted share charge to cover settlement of certain employment related litigation when combined with legal fees amounted to a 30 basis point hit to expense.

In addition, we had higher advertising expenses attributable to reaching more markets with greater frequency using printed media.

Also, while we are seeing top line benefit with increased debit card acceptance, we are seeing increased debit card fees arising from higher penetration of debit card in the overall mix.

For the second quarter, depreciation and amortization was $39 million.

The overall rate as a percent of sales improved 27 basis points compared with second quarter last year.

We expect depreciation of about 158 to $159 million for this year, which as a rate of sale should be down about 30 to 35 basis points for the year.

Operating margin.

Our operating margin for the quarter was 5.5%, a 4 basis point improvement over second quarter despite taking an approximate 30 basis point hit in the SG&A rate on the California employment related matters.

As for taxes, our tax rate was 37.1% versus 37.4% last year.

The lower rate in the current year reflects benefits from increased work opportunity tax credits in the current year, and the fall-off of certain state income tax reserves associated with the expiration of the respective statutes of limitation.

Looking at the balance sheet and statement of cash flow, cash and investments approximated $188 million at the end of the fiscal second quarter 2007, versus 180 million at the same point last year.

During the second quarter of 2007, we repurchased 1.58 million shares for $62 million.

These purchases were made in the latter part of the quarter, and due to the settlement timing the actual cash impact on the second quarter was $45 million use of funds with $17 million of trades settling early in third quarter.

Plus, we repurchased an additional 330,000 shares early in third quarter for an additional $13 million, so this year-to-date we have spent more than $228 million on share repurchase including the $158 million under an accelerated buyback program initiated in March 2007.

We have approximately $198 million remaining from the $500 million share repurchase program authorized by our Board of Directors last November.

One other further point of interest, our stock price performance improved significantly over last year prior to the recent market correction, and we have experienced a significant amount of option exercise activity, especially in June and early July providing additional cash flow and related tax benefits of about $80 million year-to-date.

Capital expenditures were $49.2 million in the second quarter 2007 versus $46.1 million in the second quarter last year.

The majority of the capital expenditures in the quarter were for our new stores, remodeled and relocated stores, along with expansion to say our Briar Creek distribution center and our home office and data center in Chesapeake, Virginia.

We expect capital expenditures in the range of 180 to $185 million for fiscal 2007.

Capital expenditures will be focused on the aforementioned priorities, as well as the addition of frozen refrigerated capability to approximately 300 stores.

For inventory, we continue to focus on lowering our per-store inventory investment and increasing turns.

Year-to-date, our inventory turns have increased more than 40 basis points through the end of second quarter, as per-store inventory finished down 8.1% at the end of the quarter.

You will also note our payables to inventory ratio also continues to improve from 31.6% at the end of second quarter last year to 35.4% at the end of second quarter this year.

This is a continuation of a trend that began in late 2005 and is attributable primarily to improved payment terms with our suppliers.

Inventory investment is presently planned about $20 million higher as of the end of this year versus last year, which we believe will result in inventories being down 2 to 3% per store.

Also, current assets at the end of second quarter 2007 reflect about $31 million of prepaid rent.

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

This timing event will continue for the balance of fiscal 2007 and in the third quarter 2008.

Now for sales and earnings guidance.

Regarding sales and earnings guidance for the third quarter of 2007, we are forecasting sales in the range of 1 to $1.02 billion, and diluted earnings per share in the range of $0.35 to $0.38.

This implies a range of positive low to low mid-single digit comparable store sales results.

For the full fiscal year of 2007, we estimate sales will be in the range of 4.28 to $4.35 billion, again based on the low to low mid-single digit increase in comparable store sales.

As a result of these sales estimates, we are now forecasting diluted earnings per share in the range of $2.04 to $2.14, 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.

We continue to remind investors and consideration of their estimates for fourth quarter sales and earnings that 2006 was a 53-week year based on the retail calendar, and as previous disclosed, this 53rd week added about $70 million of sales and a little over $0.07 diluted earnings per share in the last year's results.

Our guidance for 2007 also includes the impact of the $228 million of share repurchase activity so far this year.

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 municipal income securities.

Thus there is virtually no income tax benefit because of the lower tax exempt interest income.

Further, any future option exercises will work somewhat against the impact of lower outstanding share from our repurchase activity.

Thus our weighted average share count may be in the 98 to $99 million range for the balance of the year.

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

Thank you, Kent.

I want to leave you with a few summary observations before we go to questions.

For the sixth quarter in a row, we've had a very strong top line performance, and we remain on track to accomplish our long range goals.

We continue to hone our new store size for optimum performance, which we believe to be in the 10 to 12,000 square foot range.

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

We continue to demonstrate the ability to self fund the growth of our business while generating substantial free cash and rewarding our long-term shareholders by buying back stock.

During the first half of this year again, we spent over $228 million on share repurchase.

We're confident in the Company's ability to continue generating a significant amount of free cash flow, and we remain committed to use our cash to drive shareholder return.

Looking to the third quarter, we know that our customers face a myriad of challenges, especially from high and uncertain energy prices, and this environment, we believe that Dollar Tree can be part of the solution for millions of consumers across the country by delivering great value to our customers being in-stock and basic people need and providing a bright, friendly, fun convenient shopping experience.

We made great progress this year, and we look forward to an exciting fall season.

We're now ready for your questions so that we can accommodate as many callers as time permits, I would ask you limit your questions to two per person.

Thank you.

The question-and-answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS).

We'll take our first question from John Zolidis with Buckingham Research.

Good morning.

Good morning, John.

Two questions for you.

First question looking at the second half, do you still anticipate the improvement in gross margin that you had been talking about earlier in the year?

I guess when we started this year, the guidance or suggestion was that gross margins would be under pressure in the first half, in fact they've risen and now we're looking to the second half.

Does that mean they're going to accelerate, and my second question is on the inventory.

Is there some possibility that maybe we're a little bit too light on the inventory, particularly in the seasonal category?

Is there a possibility that could hold back the same-store sales performance heading into 3Q?

Thank you.

As far as gross margin goes, in the second half, John, I think we're always pointing people to see some slight improvement in the second half.

Again, I have to remind people it is on a 52-week comparison versus a 53-week comparison, because we did get some artificial leverage, if you will, in the buying and occupancy costs because of that 53rd week, but I think to say it is going to accelerate, we're probably getting a little ahead of ourselves, though, John.

We're comfortable.

We're pleased with the increase in markup, particularly in the first half.

We would like to see that continue, but we're not going to get greedy and expect any acceleration in the near term.

On the inventory, John, there is still room for us to continue to improve our turnover.

We still are seeing opportunities to flow the products more smoothly, better to the stores, closer to the time that they need that.

Having said that, I do believe that we missed some seasonal business in some of our stores throughout the first half of the year.

Now, that's mostly the result of still refining our allocations and our replenishment, getting the right amount to the right stores.

Those high-volume stores I think we may not have still fed them enough inventory yet.

I see that as an opportunity for next season and going into fall and holiday, I feel like we're just better than we've ever been, better positioned.

The inventory flow coming in is better.

There is no disruption that I can see out there, and our DCs are handling it really marvelously right now.

Thank you.

We'll take our next question from Mitch Kaiser with Piper Jaffray.

Thanks, guys, good morning.

I was wondering if you can comment on the multi-price point initiative you had in the 25 stores, kind of the results that you've seen that I think that you said that you were going to roll out an additional 25 in the existing Dollar Tree Stores, where you're at in that process?

Mitch, just to refresh everybody's memory, we talked about testing a concept we call Oops, and the concept is in 25 stores, we're testing 20 feet on the wall of product that was over $1.

Less than $5, $5 and less but more than $1, and the concept is Oops, we know it is not $1, but the value was so good we couldn't passes it up so we're passing the savings on to you and buy it now it won't last long.

We rolled that out into 25 stores.

One of the things I wanted to find out was our customer acceptance on that, would our customers accept the fact we had 25 feet of product that wasn't $1 even if we were telling them up front.

The answer to that is they did accept it.

The customer acceptance, we have very little confusion.

We had very little --very few comments really from our customers that they didn't like it.

What we found was that the value was good, they bought it.

It didn't bother them that there was product in the store that wasn't $1 as long as we priced it and signed it and really kept it segregated, they didn't see any problem with that.

We're going forward with testing 25 more stores.

We haven't rolled that out yet.

That will be sometime in the third quarter that we're rolling out the 25 additional stores, and in addition to testing customer acceptance broadly, and testing the execution of ability to execute in the stores, we're also going to be advertising on this next 25 stores, and see if we can drive some bigger sales through this test.

It is, so far, it's been -- the answer to our questions have been positive, and there has been so far good acceptance by the customers and good sales on the items that show the great value.

We'll know more as we roll out the next 25 through the best part of the year and we do some advertising.

Okay.

Would you be willing to quantify any type of benefit you're getting on ticket and then if you like the results of the next 25, what might -- how should we be thinking about what a plan to further expand the program might look like?

Is it something that you would potentially do in big waves or would you scale that as we go forward or how should we think about that?

As far as quantifying, it is really too small and too early and too soon to say much about it.

I will tell that you the results have been good.

Again, I was really looking to see what our customers -- fit because we had things for more than $1 on the shelves, and they didn't, and frankly they accepted it and they bought it as long as the item was a value, so the learning so far basically has been that let's go forward and let's test 25 more stores.

It is really so early on that I can't tell you where that's going to go.

We're going to test these stores the next step -- right in the best part of the year going into third and fourth quarter, and we're going to advertise it, and we're going to see how much business we can drive through the 25 stores.

Looking past that, obviously one of the things I am looking for now is our ability to execute this, too, across a broader range, and I think we're learning a lot about that, being able to roll it out across more stores.

I think we can do that.

The outlook going forward into next year is, it is going to be determine how well we do in these next 25 stores, though.

While I am excited about it, I really can't tell you that it is going to be 1,000 stores or 200 stores or five stores or really where we're going past the 25 because I really want to see what we can do in these markets, these new markets.

I will let you know more.

We'll know more next time.

Okay.

Okay.

It is something that you could scale pretty quickly if you wanted to, then?

I believe.

It scaled very quickly and feel some impact assuming it was good, feel some impact in next year.

Okay.

Thanks, guys.

Good luck.

We'll take our next question from Stacy Turnof of Merrill Lynch.

I had a comment on rent and working on your lease time.

I know one of the big initiatives was for you to start to negotiate out much further, and I was wondering where you were in that process.

Well, Stacy, when we're in real estate committee and most of the deals that get presented are roughly five-year terms and what we tried to do is nail down the terms at five years, and then we tell our dealmakers to go back and see what sort of economics we can get if we were to go either to a seven or ten-year term which either is a function of lower rent and/or lower cam charges, or increased construction allowances.

I would say this is an initiative we started in the last half of last year.

It is probably a little too early to tell.

We are having some impact on that, and I think it is a front of mind of the deal makers now.

Great.

And then my second question is any -- could you maybe quantify how the gap is narrowing between Deal$ and the core Dollar Tree store, and when do you actually feel like it is going to start to be on par?

From a margin standpoint, the Deal$ stores continue to improve and come closer to the Dollar Trees, but they're not there yet.

The new Deal$ stores, we've only opened a few so far, five new stores so far this year, but the new Deal$ stores, where we're opening with instead of a converting of an old concept into the new concept where we're opening as a new Deal$ store and a new concept, those are performing better than the ones that we converted.

The margin is continuing to rise.

It is not there yet.

I think it is going to take us a little more time.

We're sort of finding our way, too, with the mix of product in these new stores, and as far as the sales, we have some stores that are really doing great and some that aren't doing as as well, so we still have to work through some of those answers, and of course we're trying new products and new mix and new merchandise and new standards and things, so there is so many moving parts on that right now that I believe I still say that our best test is as we go into third quarter and start opening up more of these new deal stores, I believe we're going to see more clearly what this concept can do.

I am looking for it to be a model that as a higher volume model.

I am looking for it, a model that we could use in higher-cost regions of the country because we can with the higher volume of leverage some fixed costs, and I am looking for the margin to approach or be something consistent with the Dollar Tree margins.

Great.

Thank you.

It has only been a short while since we opened any new stores or relocated.

We did a handful I think towards the end of first quarter and a little bit in second quarter, and I guess what I would say is that we're very encouraged and very encouraged especially about the new relocations that we did recently.

Thank you.

We'll take our next question from Dan Wewer with Raymond James.

Hi, Bob, the information on the ticket size at Deal$ was helpful.

Can you tell us how that translates into sales per square foot, how those stores are performing now prior to you adding the price points above $1?

Dan, we haven't broken that out publicly.

Frankly we don't -- we haven't shared any of that kind of information.

I am able to give you some of the numbers I have given you as a matter of color on the direction that the Deal$ stores are going but we haven't broken sales per square foot out.

On the new stores you noted the margins are performing better than the Deal$ stores that you had converted.

Remind me, are the new Deal$ stores going to be smaller, more in the 11,000 square foot prototype you used for Dollar Tree?

The new Deal$ stores are pretty consistent with the size of Dollar Tree, 11,000, 12,000 square feet.

The new Deal$ stores and the old Deal$ stores frankly we've got some of the old -- the stores that is we acquired range from probably 7,000 square feet up to --

17,000 square feet, so the Deal$ stores we required, there was a pretty broad range of sizes there.

The new ones we're opening, though, we're looking for the same, 11,000, 12,000 square foot size.

We believe that should be the right size for the Deal$ stores.

Okay.

Let me ask the question this way.

If you were to look at the profit, the new store profit model on the new Deal$ stores, the way you talked about Dollar Tree in the past, sales per square foot, operating margin, return on cash investment, do you think these new Deal$ stores will be generating even higher returns than Dollar Tree because of the expanded price point selection?

At some point, yes.

That's what we're looking for as a model that is a model that has the ability to grow, that has the ability to serve markets that we maybe can't get to with Dollar Trees, a model that delivers contributions that we need from the competition.

It is just too early to say what that is.

We acquired.

We integrated.

Now we've begun to open some new stores.

It is really too early to start proclaiming victory either way.

I am excited about the concept.

There is a concept.

This model fits a need out there across the country, and we I believe have the best chance of improving that model, but we still got a lot of work to do, and I don't have enough new stores yet to really tell you that where we are in that process.

We'll take our next question from David Berman with Berman Capital.

Hi, guys.

I was wondering if you could share with us a little bit deeper about your thoughts on the consumer, the impact that -- what you're reading about macro wise having on your business and secondly if you can talk about the repurchase program?

Thank you very much.

The impact from the consumer on our business with the recent opportunities out there in the housing market I guess you're pointing to and all the problems of late.

We really have -- aren't seeing that impact on our customer.

I believe, and I have said this for some time now, the biggest potential impact on our customer had to do with fuel prices and energy prices and mostly in times of rapidly increasing fuel and energy prices, and mostly in times of rapidly increasing fuel and energy prices.

So the problems that we see in the economy, the problems with the home sales, the problems with foreclosures, we really haven't seen.

I can't relate that to my customer and my business directly.

I haven't seen it yet.

Thank you.

The repurchase?

Well, we have about $198 million remaining under the authorization of $500 million that was approved last November, I guess in hindsight we're kind of burning through that pretty quick, but we've been opportunistic, I would say, in relation, especially in the certain recent market correction, but at the end of the day, we're just not that smart about guessing market timing, so you will have to stay tuned for any future activity.

Why are you being so aggressive, Kent?

I believe the stock is trading at a discount, and we have a variety of financial models and how we evaluate the stock price, and our models would suggest that anything below 45, $47 range is attractive.

Okay.

Thanks a lot.

We'll take our next question from Patrick McKeever with Avondale Partners.

Thanks very much.

Good morning, everyone.

Thinking just over the next few years about where the gross margin rate could go, do you think it could go back to that historical level around 36%?

It was to consistent there a few years back.

Is there why the greatest opportunity is in driving operating margin back to your goal which I think is right around 10%?

Certainly there is SG&A opportunity as well, but as maybe as same-store sales moderate a little bit is the greater opportunity on the gross margin line?

I think at the end of the day we want to get back to 10%, and while to cut expenses is nice, you're not going to get there as quick as if you focus your improvement on the gross margin line, so obviously the biggest portion of that is going to come in the merchandise margin arena, primarily on improved markup, but then there is other areas we can impact, we continue to see leverage on our distribution and occupancy costs.

We're not adding a substantial amount of distribution capacity in the near term, so that's one area.

We do feel pressure from the occupancy line because inherently there is built-in inflation factors on an annual basis to resident and cam charges, but I think part of what we're trying to do is take a look at lease terms and drive better economics in order to drive some of the rent down that we get charged, and that also helps while not in the gross margin line, the related store depreciation if you can spread that over a longer period of time from five to seven to say even up to 10 years, that's going to give us some relief on the overall operating margins.

And how about private label?

How does that factor into the potential gross margin opportunity out there?

Has that been growing as a percent of sales recently?

Can it grow further?

Patrick, private label is something that we have early on over the past several years begin to continue to develop our own product available only at Dollar Tree, and it doesn't have Dollar Tree's name on it.

It says things like Max Gray socks.

Those are our private labels.

That percent of growth has grown in the past year, and it has grown as our import percent has grown back towards that 39 to 40% range that we used to have, so going forward there is more opportunity in private label that exists in some of our long lead time basics, it exists in our seasonal business, and the branding of things like our April bath and showers, if you go in our stores now you will see pretty big and expanding bath shop displays across the chain, and that's all private abel, all products our buyers have developed.

I don't know how to answer your question except that's a focus as we go go forward for a couple of reasons.

One, to drive sales and value because you can't find it anywhere else.

Only at Dollar Tree.

Also, to help improve our margin, our merchandise markup as we go forward private label fits that strategy.

Okay.

No.

That's great.

Very helpful.

Thank you, Bob.

Thank you.

We'll go next to Jeff Sonnek with Friedman Billings Ramsey.

Thanks, guys.

Great quarter.

Can you update us on some of these metro market tests you have out there and do you have any of these Deal$ stores in those types of markets that you might be able to talk a little bit more about?

Jeff, the Readers Digest version of the Metro markets are some of our highest performing sales per square foot stores, and we like the Metro markets.

We like where there is a lot of people, and as you point out, the Deal$ strategy, we have in the third quarter several stores.

We are venturing out of the Midwest and into the Northeast with several stores, so stay tuned for that.

We don't have them open yet but sometime in the third quarter we'll have a few Deal$ stores opened in some of these very dense, highly populated markets in the Northeast.

I think that's a strategy.

I believe these Deal$ stores can provide higher sales volume which will give us better leverage on operating expenses in these Metro markets.

The sales are there for Dollar Tree.

The cost of getting them is a little higher, though, as you know.

And then can you give us an update on the frozen refrigerated program?

I think historically you talked about a same-store lift in the 6 to 800 basis point range, when that gets rolled out, if that's still consistent?

The sales --

It is actually -- I would say that when we originally got involved in the program, we expected the 6% lift on the consumable side of the business, and 1 to 2% on the non-consumable side of the business which is the higher margin portion of our stores.

The good news is that at least in the initial year of rollout we're seeing increases higher than that, so that's probably one of the reasons why we accelerated the rollout last year and why we're coming up with 300 as opposed to 250 this year.

It is giving us a nice lift.

It is giving us a lift in traffic.

It is giving us a lift in ticket, so it has been very good.

Are the Deal$ -- are those Deal$ stores now in the comp base towards the end of this summer?

Yes, they are.

Great.

Thanks, guys.

We'll take our next question from Joan Storms with Wedbush Morgan.

Hi.

Good morning.

Good morning.

A couple of quick questions.

I was wondering if you could comment a little bit more on the advertising, your shift going from less electronic and more print and also for housekeeping, if you could give us some idea of number of store openings and closes you expect for the third quarter?

Joan, the advertising of the centered around our pre-Memorial Day ad, and last year we ran the same event that covered about 600 stores.

This year, we expanded the event to cover over 1,100 stores this year, actually had the tabloid inserted in the newspaper or mailed out.

Now, all the stores had the tab, and they had the merchandise, so it was really a chain-wide event.

We took money away from electronic.

We put it more into print.

We expanded the number of stores that we mailed or inserted the circular for, and we had really good results with a good trade.

Adding onto that, are there any anticipation for second half, any changes in advertising that you might be doing?

Would that be similar?

There would be a little more in second half.

I will share them with you after we run them.

We don't tell people where we're going to run, but we are planning to do a little more advertising in the second half than last year, and taking off on the good results that we've had with the print and tieing the merchandise and the items and the in-store selling with the advertising, the vehicle, the print vehicle and getting that out in front of our people, our customers, we've had good results, so you will see more of that as we go into the second half.

Joan, your question on I guess house keeping in terms of our store cadence opening for third quarter, I would expect that third quarter is going to be a big quarter.

It will be over 100 new stores that will open along with relocations probably in the 42 to 45 range, so it is a lot of stores.

We'll probably end up closing roughly about 8 to 10 stores, I think.

Okay.

Perfect.

Thank you very much.

Yep.

We'll take our next question from Charles Grom with JPMorgan.

Hi.

Good morning.

This is Paul Trussell for Charles Grom.

The question on the Deal$ stores, can you provide a little bit more color around --

Hello?

Hello?

Looks like his line was cut off.

We'll go next to David Cumberland.

David?

One moment.

Your line is now open, Mr.

Cumberland.

Can you hear me now?

I can hear you now, David.

Great.

First question, did the initial Q2 EPS guidance or the prior '07 guidance include the $0.02 of legal costs?

No.

My other question, can you comment on if the retail calendar shift had an impact on your comps in the second quarter or on your comps outlook for Q3 or the second half?

Not really.

I think you may be referring to the back-to-school shift and sales tax holidays and the like, and obviously I still keep in touch with people on the specialty apparel side, and I think it has more of an impact to their business than it does to ours.

Thank you.

We'll take our next question from William Keller, FTN Midwest.

Good morning, everyone.

Good morning.

Just describe a little bit if you're seeing anything on your toy sales or really any general merchandise coming from China regarding some of the rather unfavorable press press as of late?

Thank you.

There is a lot of press and a lot of activity over that issue.

I can't tell you that I have seen any direct response by our customers in our stores.

Our product being $1 type goods, very basic kinds of products and some are seasonal at this point.

We have -- we do take that very seriously, though, and we have had a testing program for several years that everything that we bring out of China has to meet a federal regulation or standard we have third party testing on that, and we've actually stepped up our testing so that we're -- we always require the product before it leaves China to have a past testing result.

We're now testing a couple of kinds in the process early on, and the manufacturing of the product and just as the product is about finished being manufacturing, so we've stepped up our diligence on it.

We're very sensitive to it for our customers, and I can't tell you that I've seen any negative response from our customers.

Great.

Thank you very much.

We do have our question back from Charles Grom with J.P.

Morgan.

Hello?

Good morning.

Lost you.

This is Paul Trussell for Charles Grom.

Bob, could you provide us a little bit of further commentary on the new Deal$ stores you all are opening?

I know that there are changes from the stores that you acquired in regards to the exterior as well as the category allocations.

Paul, the new Deal$ stores are the vision of what we think the customer is looking for and one of the things that you'll see in the new Deal$ store as opposed to the stores that we acquired is that we have shrunk the footage, square footage we allot to our frozen and refrigerated product and also to our grocery product.

The existing Deal$ stores have these coffin coolers.

We have taken those out of the new stores and we're putting in the stand-up wall units like we use in Dollar Tree.

We're able to make better use of the square footage in the store by doing this, and the categories that we've expanded include some of the ones that we are so I believe very good at Dollar Tree and that would be our seasonal business, our party business, as well as some of the business that we've consumer products and health and beauty care and our cleaning supplies, so as you walk into a new Deal$ store, you would see a little different look on the front of the store, and as you walked into the store, you're going to walk into a more general merchandise selection, more of the seasonal selection that we offer, and I think the overall appeal of the store from what we found from our customers is that they liked it and it was easier to shop and it was fun to shop, and at every corner almost there was something new and something exciting and something that exceeded their expectations of what they can get, and sometimes it is $1 and sometimes it is $5, but always exceeding the expectations of our customers.

We had for back-to-school we had kids athletic shoes for $5 in our stores, and those are the kind of surprising value that is we can offer deals that we in the the past had access to the product but we just had to pass it up because although it is a great value for $5, I couldn't still sell it for $1, and so our Dollar Tree buyers would have had to pass that up.

We're taking advantage of that in Deal$, and it seems to be thrilling our customer.

Thank you.

Very helpful.

Second question, I know you also mentioned that May and July were the better performing months.

Could you just talk a little bit about the rationale for the weakness in June?

Well, I didn't say there was a weakness in June, Paul.

I said that the best two months of the quarter were beginning and the third month of the quarter, and that has more to do with the holidays that are available in May with Mother's Day and Memorial Day and then in July with the Fourth of July and leading into back-to-school.

June was not weak.

It was just not -- if you have three months, one has to be number one and one has to be number three.

Ladies and gentlemen we have time for one final question today.

It does come from Adrianne Shapira with Goldman Sachs.

Thank you.

Bob, you just mentioned you're not seeing the macro impact on your consumer, but some of your competition are being pressured.

I am wondering as a result they're seeing inventory build and they're having to move markdown more aggressively to move things out.

As a result, are you seeing any more competitive aggressiveness due to these markdowns seems as if more people are drifting down to your price point.

Adrianne, maybe I just don't -- maybe I don't see, it but I cannot for the life of me I have look and had asked and I have been out in the stores, and we've done some research, and we just can't see the combat impact of the macro economy right now on our consumer, and as I have looked around at the competition I don't know if you're referring to the other guys with dollar in their name or if you're referring to just the discount industry in general, but our price point, $1, is very honest.

It is a value proposition with our customer.

It is simple.

It is straight forward, and now that we've added more of the things that people shop more frequently we're seeing increased traffic and as anything right now we're seeing maybe people gravitate to us because of our value, because of our price point, and now that we sell more of the things you need, we could be the place to go to.

The thing that concerns me if you're asking the question is as always I have always said that the biggest impact on Dollar Tree is the rapid rise in either fuel costs or energy prices.

Those are the things we have in the past for a short-term struggled because of the pressure that it puts on the consumer many of which, probably 20% of which are living that lowest economic level paycheck to paycheck.

Thank you.

We actually have time for one final question.

It is Christine Augustine with Bear Stearns.

Thank you.

I was wondering if you were seeing any regional variation in sales in the second quarter and then last quarter you talked about tying incentive compensation for the field organization and the buying team to get your team focused on operating margin improvement?

Did you see any results from that?

Is it sort of too early?

When could we maybe start to see some improvement there?

Thank you.

Well, we had the incentive compensation from the Deal$ as far as through across the whole field now, we took first part of the year to do that is as well as buying team.

Everyone had a component of gross margin as part of their intent active of the bonus plan now.

As far as seeing the results, I really don't think I can tell you that it is going to be one quarter over the next.

It is more of a movement towards, but I fully believe that by incenting people for the results we desire that they will be able to achieve these results.

I would expect improved gross margin based on incenting people to do that.

It is just the right thing to do.

We just had our field management meeting last week here, had over 500 people from all across the country here, and that was one of the topics we talked about.

Our field is enthusiastic about it.

They're understanding the components of gross margin better now than ever.

We're able to give them more information now on now that they can track their stores now better than ever, and that's going to pay back.

I just know that I can't tell you a number that that's going to happen.

It is going to be more of an improvement over time.

As far as regional comps, while we typically don't give that information out, I think we have been pretty open to say that we've had some challenges out in California, and that from central California, northern California, they are lagging shall we say balance the Company, but the good news is we're starting to see some improvement out there.

Great.

Thank you very much.

Mr.

Reid, this does conclude the question and answer session.

I will turn the call back over to you for closing remarks.

Thank you very much and thanks to all of you for participating in the call, thanks especially for your long-term interest in the Dollar Tree story.

Our next conference call is scheduled for November 28, 2007 when we'll discuss third quarter results.

Thank you again.

This does conclude today's conference call.

We appreciate your participation.

You may disconnect at this time.