美元樹 (DLTR) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to the Dollar Tree Stores, Inc., fourth quarter 2007 earnings release conference call.

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

At this time for opening remarks and introductions I would like to turn it over to your host, Mr.

Tim Reid, Vice President of Investor Relations.

Please go ahead, sir.

Darryl, thank you very much, and thank you all for being here on the call this morning.

Welcome to the Dollar Tree conference call for the fourth quarter fiscal 2007.

My name's Tim Reid, and I'm the 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 insights on our performance in the quarter and recent developments in our business.

Katie Mallas, who is our Vice President, Controller, will provide a more detailed review of our fourth quarter financial performance and also provide our guidance for the first quarter and for the full fiscal year 2008.

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

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

Now I would like to turn the call over to Bob Sasser.

Bob?

Thanks, Tim, and good morning to everyone.

I hope you've had a chance to see our press release this morning.

We announced earnings for the fourth quarter of $1.04 per diluted share.

This is an increase of 8% over last year's reported $0.96 per diluted share, and as a reminder, fourth quarter last year had 14 weeks, reflecting the 53-week retail calendar.

On a comparable 13-week basis, this year's results represent a 17% increase over estimated earnings of $0.89 and the comparable 13 weeks in the fourth quarter last year.

This was achieved on total sales for the quarter of $1.3 billion, which is an increase of 5% over the comparable 13 weeks of the fourth quarter fiscal 2006, and as previously reported, comp store sales declined 0.8% in the quarter compared with a 5.5% increase in comp store sales in the fourth quarter and fiscal 2006.

For the full year and fiscal 2007, we achieved earnings per diluted share of $2.09, a 13% increase from the previous year, and sales totaled $4.24 billion, an increase of 7% from fiscal 2006, which had the benefit of the extra week.

On an equal 52-week basis, our earnings per share increased 17% in 2007, and sales were up 9%, including a comp store sales increase of 2.7% for the year.

To highlight a few of the operating metrics, I will point first of all, to our gross margin, which improved 10 basis points in fourth quarter this year, over the reported 14-week quarter last year.

That extra week contributed nearly 40 basis points to last year's fourth quarter margin.

This is the third straight quarter of gross margin improvement and we ended the year up 20 basis points over last year.

Of special note are our high -- are our delivery costs, which remained essentially flat as a percentage of sales, while fuel prices averaged $0.80 higher than in fourth quarter last year.

Our logistics team was still able to offset these increases through improved processes and leverage of the network.

Second, despite lower comp store sales, our SG&A rate in 2007 was 23.9%, which is essentially unchanged from the fourth quarter in 2006.

Again, we continue to find ways to manage expenses in the face of potentially rising costs and we believe that we can continue to do so for the long haul.

Third, I'm very pleased with the continued improvements in inventory management.

At year end with 192 more stores than last year, and stocking up for an earlier Easter, by the way, March 23rd this year versus April 8th last year, only a month away for Easter.

So with 192 more stores and stocking up for an earlier Easter, average inventory per store was flat to last year.

Turns for the full year were up 25 basis points over 2006, while our in-stock position on basics was better than ever.

And there's still room for improvement in our turns.

Overall, with earnings results toward the high end of our range of guidance, we're obviously pleased with much that we see in fourth quarter performance.

We continue to have great confidence in our ability to manage our margin, to manage our expenses, and to manage our inventory for continued profitability and for the long haul.

But it was a challenging retail environment in fourth quarter.

We saw pressure on the customer from general economic uncertainty and especially the pressure on the customer from high fuel prices.

And in fourth quarter, that translated into reduced traffic.

Overall, our traffic was down 1.2% for the quarter.

To give you some color on the quarter, customers started shopping late last year.

The holiday season started slowly, especially November, and it ended with a rush.

Our stores were ready for the late Christmas rush and we had a strong sale -- had strong sales of Christmas party supplies, gift bags, wrap, all the usual holiday items that we sell so much of.

Our average ticket was up, but it wasn't up enough to make up for the shortfall in traffic.

Seasonal food sales were strong, with good performance in items for holiday gatherings, including salty snacks and beverages and candy.

Overall, we had an acceptable sell-through of seasonal product and markdowns were within our plan.

Our stores made a quick and clean transition from the Christmas holidays to Valentine's Day, which contributed to our improving sales trend after Christmas.

As we move forward past Christmas 2007 and into 2008, our expanded assortment of high value basics continues to contribute to sales growth and represents an opportunity to increase traffic.

As most of you know, one of our key initiatives over the past several years has been to increase the selection of consumer basics to our merchandise mix and this strategy is serving us well.

We have added more of the merchandise that people need everyday and that is more frequently purchased.

We continue to improve our product selection and our replenishment methods and we're providing a better in-stock position on these basic items.

So when the customers are out shopping, we have what they need.

Because of the value we offer, we have become a destination for categories, such as basic cleaning supplies, health and beauty care and paper goods.

We are more relevant today than ever because we offer a lot of value on things that people need every day and for just a little bit of money, just $1.

This is more important than ever to our customers, who are under pressure from the high gas prices and the high fuel, heating prices and the energy costs.

As we've increased our offering of basic everyday products, we've continued our expansion of frozen and refrigerated products to more stores.

During the fourth quarter, for example, we added freezers and coolers to 39 Dollar Tree Stores.

And for the full year we added freezers and coolers to a total of 340 stores.

This is 90 stores more than our original estimate for the year.

We accelerated expansion because of the strong customer response to the product.

At the end of the year, we had freezers and coolers in 972 [corrected by company after call] stores compared to 632 stores at the same time last year.

For fiscal 2008, we plan to continue our expansion of freezers and coolers to at least 150 more stores and that number could grow.

Our customers are now finding the things they need every day and it's giving them more reasons to shop Dollar Tree more frequently.

In addition to these merchandise initiatives, the expansion of our payment-type acceptance contributed positively to fourth quarter results.

We currently accept food stamps in about 1,000 qualified stores.

The penetration of debit card usage continued to grow in the fourth quarter, but it is becoming less of a growth because it's been there for about 18 months now.

And we rolled Visa credit card acceptance to all of our stores nationwide on October 31st, just in time for the holiday season.

While this was new for the fourth quarter and we expect it to grow over time, we saw a lift from Visa credit, particularly in terms of transaction size.

We expect penetration of Visa credit to continue increasing throughout 2008.

We continued to aggressively open new stores.

During the fourth quarter this year, we opened 27 new stores and we relocated and expanded another nine stores.

So for the full year 2007, we opened 240 new stores.

We expanded and relocated another 102 stores and we grew total square footage about 8%.

Our new stores averaged just under 11,000 square feet, which is within our targeted size range.

Similar to 2006, we opened 56% of our new stores in the first half of the year.

And we ended the fiscal -- the end of the year fiscal 2007 with 3,411 stores and room to grow.

We believe that we can operate 5,000 to 7,000 Dollar Tree Stores across the country and our Deal$ multiprice point strategy has a potential of expanding that number.

Have I an update for you on Deal$.

As most of you know, we're using these 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 strength and infrastructure of Dollar Tree.

The key elements of a Deal$ store are surprising value, convenience, and a fun and friendly shopping experience.

Customer acceptance of the concept has been good.

We are especially excited over the availability of new merchandise opportunities at the higher prices and a lift that it gives us in average ticket.

Our average unit retail on items more than $1 was $3, reflecting our strategy to focus on items at $5 and less.

And the average transaction, when the customer bought an item -- an over $1 item, was about $17.

That's higher than in previous quarters this year, probably due to normal seasonal factors.

When compared to our Dollar Tree Stores, the average transaction of about $7.70 in the fourth quarter, this lift in transaction size is very compelling.

Our best test of the concept, I've said before, is in the opening of new Deal$ stores and new markets.

And in 2007, we opened 23 new deal stores.

We relocated four existing Deal$ stores and we've expanded the concept into new regions, including opening our first Deal$ store in the northeast, with very good results.

And the fourth quarter, the new Deal$ stores outperformed existing Deal$ stores by nearly every sales metric, including average ticket, percentage of the basket contained items more than $1, and multiprice as a percent of total sales.

This is consistent with our expectations and it's very encouraging.

Again, we're excited about the Deal$ concept.

We recognize the growth opportunity this concept represents.

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

It offers an opportunity to serve even more customers in more markets.

And we're committed to refining this concept.

Now I would like to turn the call over to Katie Mallas, Vice President and Controller, who will give you more detail on the fourth quarter and provide guidance for 2008.

Katie?

Thanks, Bob.

And good morning, everyone.

As Bob mentioned, our earnings per share for the quarter were $1.04, which was near the upper end of the guidance and represents an 8.3% increase over last year's $0.96 , which included a $0.07 boost from the extra week.

The improvement in diluted earnings per share for the quarter was driven primarily by an increase in our merchandise margin, a level SG&A expense rate and the benefit from our share repurchases.

These factors more than offset any pressure on occupancy costs from the 0.8% comparable store sales decrease.

In 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 guidance for the first quarter and fiscal year 2008.

For the quarter, gross margin rate was 35.8%, a 10-basis point improvement over the 35.7% in last year's fourth quarter.

Last year, fiscal 2006, we saw a 37-basis point reduction in occupancy costs attributable to the 53rd week and the increase in comparable store sales.

Several factors contributed to this performance improvement.

First, we had improved merchandise margin this quarter.

This was the result of the higher percentage of high margin general merchandise in our product mix and continued improvements in our sourcing.

Second, our freight cost was essentially unchanged as a percent of sales, despite higher fuel prices relative to last year.

Diesel increased $0.80 per gallon on average versus the fourth quarter last year.

We succeeded in offsetting these increased through improved operating efficiencies, including better trailer utilization and better routing, which reduced the stem miles.

Third, our shrink rate for the quarter was slightly less than last year.

Fourth, the negative impact from the planned shift towards more consumables continues to diminish, partly due to higher margins on our consumable products.

These improvements more than offset increases in occupancy costs related principally to the extra week last year and lower comp store sales.

If you remember, last year, we reported that the extra week contributed nearly 40 basis points to gross margin in the fourth quarter of 2006.

Moving down the P&L, SG&A expenses were 23.9% of sales for the quarter, essentially unchanged from the fourth quarter last year.

Reductions in incentive compensation, advertising, and insurance, offset increases in field payroll and increased fees for debit and credit cards from our recent rollout of Visa credit card and continued growth in penetration of debit cards in our overall sales mix.

For the fourth quarter, depreciation and amortization was $41.3 million.

For the year, depreciation and amortization expense was $159 million, which as a rate of sales, was down 20 basis points from last year.

Tax rate for the quarter was 37.2% versus 36.4% for last year.

The higher rate reflects a reduction in tax exempt interest income due to our share repurchases and an increase in tax reserves in accordance with FIN 48, which more than offset a net decrease in our state tax rate.

For the full fiscal year the tax rate was 37.1% versus 36.6% last year.

Looking at the balance sheet and the statement of the cash flows, during the fourth quarter 2007, we repurchased 3.4 million shares on the open market for $95 million.

In addition, we paid down $85 million of long-term debt.

This returned our long-term debt outstanding to $250 million.

We recently enhanced our long-term debt structure, replacing our previous $450 million revolving credit facility, with the $300 million revolving credit facility and a $250 million term loan.

The new structure provides greater flexibility and a more favorable LIBOR spread than our previous structure.

Cash and investments reflect share repurchase activity of $473 million and approximated $81 million at the end of 2007 versus the $307 million at the end of last year.

In early October, the Board of Directors authorized the repurchase of an additional $500 million of the company stock.

We now have approximately $454 million of remaining authorization.

Our share repurchase program reflects our commitment to building value for our long-term shareholders and our confidence in the company's ability to continue to generate significant cash flow.

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

Our inventory turns increased about 25 basis points in 2007.

Inventory per store finished the year essentially unchanged from last year, despite slightly lower than expected fourth quarter sales and the increased merchandise flow for an earlier Easter season.

Capital expenditures were $32 million in the fourth quarter versus $35 million in the fourth quarter last year.

For the full year 2007, capital expenditures were $185 million, which is about $10 million more than last year.

The majority of capital expenditures this year were for new stores, remodeled and relocated stores, the addition of frozen and refrigerated products to approximately 340 stores, and the expansions of our Briar Creek distribution center and our home office and data center in Chesapeake, Virginia.

The Briar Creek expansion was completed on schedule in October.

Now for forward guidance.

As we look to 2008 we must be mindful of a couple of issues.

First, we still face an uncertain economy with many precious on the consumer.

Second, the retail calendar is unfavorable.

Easter is the earliest ever and Thanksgiving is about a week later than it was last year.

With these issues in mind, for the first quarter, we are forecasting sales in the range of $1.1 billion to $1.35 billion, and diluted EPS in the range of $0.37 to $0.40.

This implies slightly negative to flat comparable store sales results, including the potential negative impact of an earlier Easter.

As a reminder, this year Easter falls on March 23rd, two weeks earlier than last year, which we believe could potentially result in $25 million of lost volume when compared to the first quarter of 2007.

On a sales base of about $1 billion, this translates into about 2.5 percentage points of downward pressure on comp store sales for the quarter.

For the full fiscal year 2008, we estimate sales will be in the range of $4.49 billion to $4.62 billion, based on flat to 2% positive comparable store sales and approximately 9% square footage growth.

Based on these estimates, we are forecasting diluted earnings per share in the range of $2.17 to $2.35, which includes no impact from share repurchase activity in 2008.

For your information, we have currently about 90 million shares outstanding.

For fiscal 2008, we are planning capital expenditures to be in the range of about $155 million to $165 million.

Capital expenditures will again be focused on new stores and remodels, as we are planning 245 new Dollar Tree Stores, plus 30 new Deal$ multiprice stores, and 100 remodels, and the addition of frozen and refrigerated capability to 150 stores.

Depreciation and amortization is estimated to be in the range of $160 million to $165 million, primarily reflecting the increase in our store base and the receipts expansions to our Briar Creek distribution center and our corporate headquarters.

We anticipate the depreciation expense as a percent of sales will continue to decline in 2008.

With that, I will turn the call back

Thanks, Katie.

Before opening it up to questions to you, I want to leave you with a few summary observations.

In fourth quarter, while sales grew by 5%, earnings per share increased 17% on an equivalent 13-week basis.

Gross margin improved for the quarter and for the year.

We held the line on expenses, as SG&A was unchanged in the fourth quarter.

With more stores and volume, our logistics network continues to become more efficient, offsetting increases in diesel fuel, which averaged $3.35 in fourth quarter last year versus $2.55 previous year's quarter.

Inventory turns have increased in each of the past 10 quarters and rose by 25 basis points for the year just ended.

Our new deals concept is progressing and it's exciting.

We're opening new stores in new markets.

Customer acceptance is strong and the gross margin is improving.

And 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 more than 12.8 million shares, for $473 million in 2007, without increasing our long-term debt.

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

Looking forward, our efforts in 2008 will be focused on five key priorities.

First priority is growing our top line through surprising merchandise values and merchandise excitement to our customers, continuing to maximize our gross margins through increasing the mix of direct imports and reducing our shrink and maintaining tight control of our expenses.

Our second priority is to optimize our real estate network, opening stores on schedule, on time, improving the site selection process, improving new store productivity with bigger and more impactful grand openings and continuing to lower our construction costs.

Our third priority is the commitment to developing our Deal$ concept.

This year we will further develop, improve and expand Deal$, opening 30 new Deal$ stores, expanding the size and skill base of our Deal$ team, developing a more compelling assortment of high value merchandise for the Deal$ customer and refining and continued testing of the oops concept in our Dollar Tree Stores.

Our fourth priority is the continued development of our people.

We're driving successful talent management throughout our organization to improve succession planning, training and development and further reduce fuel management turnover.

And building on our positive culture at Dollar Tree, Dollar Tree must be an exciting and fun place to work.

And finally, we're dedicated to building value for our long-term shareholders.

This means running the business as effectively as possible and managing our capital in a way that enhances shareholder return.

Yes, we face the challenges of rising fuel prices and economic uncertainty, but I believe we're up to the challenge.

We're well positioned with bright, friendly and convenient stores.

Our value offering and especially our increased mix of consumer basics makes us more relevant than ever to the customer.

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.

The question and answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS) We'll take our first question with Dan Wewer with Raymond James.

Please go ahead.

Bob, your inventory turns bottomed in 2004 and have improved for three consecutive years, yet you're indicating turns could further increase.

What type of investments and replenishment, or planning, or inventory allocation are going to be needed going forward to continue improvement in your inventory productivity?

Dan, a lot of the improvements, the learning we're doing as we have installed our POS systems and done our SKU level inventories in our stores and put in our replenishment and allocation systems and really updated our staff, we've also learned how to use these systems better and we're doing a better job of flowing the product and working with the buying group.

So there's still room to improve our turns through allocation of our product into the stores and we're also still looking at the potential sales.

I don't think we found the high end of some of the items, the new merchandise that we've added, that's really faster turn in merchandise, so as we learn more about that, that's going to help us improve our turns.

As far as future investments, we've already made recently an investment in assortment planning, which my mantra around here has been to tie the buying to the selling and that's the piece that we're just putting in right now.

It's the piece that helps us build the assortments so that -- and we're building them by store so that then we can tie the allocation to the plan, and a store, for example, that sold 10,000 rolls of wrapping paper last year now will have the ability to allocate to them based on what their last year's sales were specifically versus in general.

So that's going to help us increase our turns greatly.

The, the big dollar investments in our systems are behind us, though.

And a lot of them are fully depreciated now.

With the POS systems, we -- that was fully depreciated last year.

The systems we're buying now, like the planning -- the assortment planning system, I think all in all was a few million dollars, $3 million or $4 million, in that range.

Might be a little less, but even that's a lot behind us by now.

We're just getting a bigger payback on the investments already made.

We are getting a big payback on the investments.

We're seeing improvement in our ability to understand the rhythm of the flow of our product.

There's a learning process in this, too.

And it's the allocators doing the allocations based on sales and inventory, but it's also the buying group toward of tying -- holding hands with the allocators to buy the right amount to bring it in at the right time to flow the product more efficiently.

For example, our inventory ended the last year flat to the year before with 192 more stores, but if you looked at our store inventory, it's actually a little higher.

There's less inventory in our DCs because it's coming in and our distribution centers are really distribution centers, not warehouses.

And as a follow-up question, on the Visa rollout, how do you determine if that is cannibalizing your debit card business?

And then also, is the increase in the average ticket from Visa going to be more significant in the fourth quarter than it would be in other periods during the year?

Thanks.

Really we don't see any cannibalization in debit, and we see an increase in credit and we actually see a slight increase also in debit.

Where it's really taking from in terms of the transactions is checks and cash.

And so with the higher discount rate, it's still a very favorable trade-off, I would assume.

Absolutely.

Absolutely.

It's worth -- first of all, it better serves our customers and we were one of the last hold-outs I guess, people not taking debit and then credit.

So it really does.

Our customers really do like it, and credit, especially, has a positive impact on the average ticket.

They don't have to have the cash in their pocket.

They are not surprised when they have to have cash.

They can pull out their credit card or their debit card and pay for it.

We'll take almost any form of payment now.

Thanks, and good luck.

Thank you.

We'll take our next question with Scott Mushkin with Banc of America.

Please go ahead.

It's Bakley Smith filling in for Scott.

Congratulations on a nice quarter.

Just had a question on Deal$.

You moved from -- I think I had 23 openings this year, or about 25 or so in fiscal '07, and you've moved that to 30 for '08.

Not a huge increase.

What would it take for you to move that higher into the 75 to 100 on annual basis range?

Well, we need a little more time because we are continuing to refine the assortment and to refine the customer offering and what we stand for in the minds of the customer.

So there's still work to be done there.

Assortment planning is a key initiative in the Deal$ stores this year and going forward.

So we still got some improvements that we need to get done.

The margin, while it has come up, the merchandise mark-up margin, the merchandise margin, while it is increased, it improved over the past year, still anywhere from three to four points less than a Dollar Tree store, so there's still improvement that I want to get in that.

And then of course the third thing is just the market strategy.

We're working real hard to understand the dynamics of the Deal$ customer versus the Dollar Tree customer and to put together these markets.

So availability of real estate and the markets that we choose to compete in at this point is something that we're trying to learn, too.

Okay, and I know you have -- I know it's a small number of stores, but do you see any difference in the customer behavior given the stresses everyone's talking about?

I mean do you see, because of the higher price, any kind of tell-tale signs of more sensitivity, less?

I -- it is a smaller base, but I would surmise intuitively that we're feeling the same kinds of issues in Deal$ that we are in Dollar Tree.

I think just from what I read and it sounds like retail in general sort of complaining about traffic being down at Christmas.

Okay, and if I could one quick one, just any thoughts on input inflation?

I don't believe you touched on it in your prepared comments, but both on the sourcing in Asia side and on the commodity side?

You talk about inflation?

Cost inflation.

Yes.

Well, look, it's -- we've improved our gross margin for the year, for the last three quarters and for the year.

Our merchandise margins continue to go up, and how are we able to do it?

First of all, we've grown.

We've grown in size.

As we continue to grow in size, it gives us larger buying power and I will tell you that larger buying power translates into lower costs.

And I also want to tell you that margin at Dollar Tree is really all about the mix of the product and not as much driven by an individual item.

And that's, I believe, a key differentiating factor from Dollar Tree to other retailers, or many other retailers.

Our model is very flexible.

We're not locked into specific items.

We don't have to have anything.

We don't have planograms, and that gives us the flexibility to move quickly from item too item.

We build our assortments with really two requirements: first of all, to offer the greatest value to the customer, and then at a cost that delivers the desired merchandise margin.

So while you hear of cost precious and you think intuitively they should translate into lower merchandise margins, in reality, that's not been the case.

Our history shows that we are consistently able to manage through these cycles, by changing the product or changing the source.

We decide what to sell.

We're in control of our mix, and as a result in control of our margins, and our history shows that we've been able to do that.

Our merchandise margin, again, in fourth quarter, was up.

Okay.

Thanks very much.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) We'll take our next question with Meredith Adler with Lehman Brothers.

Please go ahead.

Hey, guys.

Hi, Meredith.

I would like to just focus a little bit on the last question and just talk about the way you're buying more consumable items, which I assume a lot of which you buy domestically.

Have you now and you've been able to buy that product better as you've gotten bigger?

Well, Meredith, it's some yes and some no.

There are some commodity products that have risen in costs faster than we're happy about, but again, we continue to fall back on our philosophy of, number one, offering the best value for a dollar to the customer and then at a margin that we're willing to, a cost that we're willing to pay.

So we've changed product.

We will continue to change product, and that has served us well for all these years.

The proof is in the pudding, and when you look at the fact that we do have a mix now of probably 40% consumer products in our store, but our merchandise margins have continued to go up for the past three quarters.

So we're able to do it because of our strategy of not being -- we don't have to have anything.

We are very deft and nimble at moving from one item to the next and we replace an item if it goes out of the realm of being profitable or a value to the customer, then we replace it with something else.

Okay.

And then a question about fuel costs.

I don't know whether you're doing any hedging.

Is that something you will be thinking about doing?

We have done no hedging.

I -- it's something that we continue to look at, but we have not done any hedging in the past.

Our fuel -- Meredith, just to give you a little more color on that, has -- we've talked about freight costs, level even with the diesel prices going up.

Really three key reasons in fourth quarter.

Number one, our operating efficiency.

Our people are getting better at cubing out trucks.

They got more freight on the trucks.

And improvements in routing and don't underplay the leverage from our logistics network that continues to help us reduce stem mileage.

The every store -- we don't have to open up a new distribution center now to serve any of our stores, so every new store that we open up now is on the route to somewhere.

So it actually is leveraging that asset that we have.

It reduces stem miles to the stores and we are also doing more back hauling now than ever.

So getting better at what we do, improving operating efficiencies and leveraging that logistics network is serving us well.

And we'll take our next question with Ralph Jean with Wachovia.

Please go ahead.

Great, thanks.

Bob, one of the things that's been a real thorn in most retailer's side in the past is increased shipping container rates from Asia.

Some of the press recently has indicated that traffic is definitely down at some of those key ports.

Just wondering when those contracts come up in May, if you think you can get a favorable renewal rate there.

Well, Ralph, it looks like they might be a little higher than this year.

We of course have to finalize the -- we're -- we always do this, but we're always planning for them to be higher, and then Steve does his magic and really does a nice job of negotiating the rates in the current environment, but pressure is up on shipping rates for next year.

Is that due to supply of shipping forwarders, or is it -- just seems like everybody's planning for inventories to be down and therefore the traffic should be down.

Well, and I think it -- the supply and demand will always work out in the end.

Right now there's a lot of negotiation and a lot of it -- rates are going to be higher next year and then when it comes right down to it, if there's capacity, then the rates don't go up.

Yes.

If there's less capacity, then the rates do go up.

And we've, over the years, been able to manage it within a pretty tight range.

And I think we'll be able to do so this coming year.

But it is -- pressure is upward on shipping rates.

Okay.

That's something we're dealing with.

Anything -- any update on the CFO search?

Still looking.

We got a lot of great candidates that we're talking to out there.

In the meantime, I feel very confident in the current staff and the finance department and they are doing a terrific job, and I'm just let's save the salary right now.

That's really -- everybody else has got a CFO, so we will, too, but we are in no rush.

We're really looking for the best fit for our company and someone that can help us provide great leadership going forward.

Great.

Thanks, Bob.

Thank you.

And we'll take our next question with Karen Short with FBR.

Please go ahead.

Hey, everyone.

Thanks for taking my call.

Couple questions, just on geography.

Were you seeing any patterns on weakness by geography?

And I guess if you were, did you see any patterns with the mix of basic consumer versus discretionary in those markets?

The only thing that really comes to mind, and I don't think it's that big a thing, but the west seemed to be subject to traffic woes earlier than the east, and, again, maybe they felt the pinch out there with the fuel prices earlier than we have in the east and some of the other things, but other than that, geography, one of the things that, just to give you some color, we were expecting maybe that in the southeast, and Florida in particular, that we would feel a pinch, and frankly Florida's been a bright spot.

So we haven't felt a lot of the things that we -- in Florida, that we've seen across the country in general.

So it's not, it's not a science yet.

It's really, I think what we're seeing out there is an overall pressure on the customer.

These rapidly rising fuel prices are the things that it's -- once they stabilize, even if they are high, it seems like the impact is mitigated because people somehow figure out how to put it into their budget.

It's when they are rapidly rising that creates the most uncertainty for us anyway.

Okay, and then just a follow-up.

I mean I think in the past you've talked about needing a 2% to 3% comp to leverage your overall O&A.

Do you see that number maybe coming down a little bit?

I think you still got to say 2%, 2% to 3%, like 4%.

4%'s better than 3%.

Right.

So it's got to be in the 2% to 3% range, though.

Okay, great, thanks.

Thank you.

We'll take our next question with Christine Augustine with Bear, Stearns.

Please go ahead.

Thank you.

I was wondering why you thought you might have some sales loss in the first quarter because of the Easter shift, because isn't most of what you're selling around that holiday candy and things that people will still buy irrespective of what's going on with the weather, so I was just kind of curious about that guidance?

And then my second question is what sort of benefits did you see -- what magnitude, I guess, in the quarter from reduced compensation incentives?

I think that was a program you changed a while back, so if you could give an update there.

Thank you.

Christine.

Well, first of all, that's a good question on the Easter because, again, it's not as intuitive as it sounds.

But Easter is the earliest this year than it can ever be, I'm told.

I haven't gone out and tested it, but that's the earliest it can ever be, March the 23rd.

That's only a month away.

So one of the things is you find is people don't really start thinking about it yet, and so all of a sudden it's Easter and then there's a rush.

But we actually are planning to sell about the same Easter product that we would sell anyway.

So it's not the decline in the direct Easter product, the jelly beans and the Easter baskets and all that.

It's the traffic that's associated with the Easter business that drives the sales and all the other categories.

And when it's early in the year, you've got less days of the Easter traffic, fewer days of the Easter traffic, and you're also subject to bad weather.

March the 23rd is likely to have a snowstorm in the northeast, as February.

So you are subject to the bad weather.

But it's not the direct Easter goods that you're going to see a $25 million decrease in.

It's the traffic and the effect that that has on the customer and our stores and buying all the other things, including the early spring things and the summer products, summer toys and those kinds of things.

When you have a late Easter, less problem with the weather, longer selling period, and people are out buying more of the summer seasonal product when the traffic's in the stores, they are buying more of everything.

The second question was surrounding, oh, incentive comp.

We changed our in incentive comp this year to align it to the goals that we had.

Frankly, last year, if you look at it in comparison, last year was higher because we had a catch-up on incentive comp last year.

So by comparison, you'll see a reduction as compared to last year in incentive comp, when in fact we have -- we're paying out some pretty good incentive bonuses this year because we had a pretty good year.

But we did change the way we incented people.

We've aligned our buying group more to the things that they control and incentive them to drive margins, and they're doing it, and to drive sales and they're doing it.

And we've aligned our stores more on the sales -- comp sales, but also contribution margins for their store and their scan margin is rising.

So I'm feeling really good about the result that we're seeing in our operating, in our margins and the expense lines because of the changes we've made in incentive comp.

Thank you.

And we'll take our next question from Adrianne Shapira with Goldman Sachs.

Please go ahead.

Thank you.

Bob, I was just wondering if you could talk again to that better buying.

Clearly very impressive margin expansion.

And we're just wondering, in this environment as others are clearly perhaps trying to be much more conservative of their inventory planning, perhaps manufacturers sitting on more merchandise, what opportunistic buys are you seeing out there?

Is it greater than usual and are the margins on those buys even better as you highlight that better buying seems to be filtering through the numbers?

Thanks.

Yes, there is a lot -- there appears to be a lot more opportunistic buys out there right now because of the obvious reasons.

There's been some failure in retail in general and some store closings and some pullback on expansion, and what comes with that is cancellation of orders and that, we sit -- we stand ready to help out all the vendors with merchandise excesses.

We have cash to spend and we're here to do it.

So we're seeing some great opportunities to pick up deals in the market.

The margins are all over the board.

I mean sometimes you look at opportunistic buying as a way to improve your margins.

Sometimes you look at it as a way to drive your sales.

And sometimes we get some things that are just such great values and we may have to pay $0.80 for it, but it's such a great value at $1, you would never see it.

So we may choose to participate in that.

On the other hand, we, a lot of times, find things that, it's a great value, but we can buy it for on the other end of the spectrum, too.

So it's all a balancing act on the margins.

At the end of the day, our intention is to continue to drive our improvements in merchandise margin.

Great.

And can you give a sense in terms of categories where some of the buys are coming across the board?

Gosh, we've found books, we've found coloring books, we've found toys.

We've -- in the beverage category, there's a lot of soft drinks that are new, noncarbonated beverages out there that are introduced, and we'll take advantage of the -- some of the excess capacity that's created on that, and we've gotten some of the hottest beverage that's out there, we've got it, we're selling at $1 and others are selling it for more than that.

So it really is across a pretty broad spectrum.

We find apparel items from time to time, especially in the cold weather months, we had gloves and hats and scarves and things that you really just couldn't expect to buy for $1.

So it really adds that extra flair, I guess, and that exceeding the customer's expectation, when we can offer these things, but it's across the board.

We haven't found any flat panel TVs yet that we can sell.

There are realistic items we'll never be into, but across the board, general merchandise.

Great, and if we could just switch into the cost controls obviously impressive this quarter as you just mentioned, historically you needed sort of a 2% to 4% comp.

Given that we're heading to the first quarter and you're expecting lighter than that and you won't be anniversarying sort of the comp opportunities that you just left, can you just talk about how we should be thinking about expenses in the near term?

Is -- should we be expecting sort of continued deleverage in the first half?

In the first quarter, there will be pressures, especially in G&A, because of that.

We'll see a little bit of pressure as well in gross margin, and we've got some good news going on, as we've been discussing in the merchandising line, but we've got pressure coming at us, especially on the diesel fuel front and made a lot of improvements.

But it's still going to be a challenging environment from that perspective, and as we've discussed with the comp, looking at what that does to our occupancy rate, the first quarter, especially, is going to be a challenge.

And Adrianne, everything that Katie just said, of course, is implicit in the guidance that we put out, so that's just a little background color on the numbers that we already put out for you.

Great.

And we'll take our next question with Joe Feldman with Telsey Advisory Group.

Please go ahead.

I wanted to follow up on the deals.

The 30 new stores that you're going to open this year, are those going to be more markets or existing markets?

And also, how close will they be to the Dollar Tree Stores?

There will be some deals in new markets, some in existing markets -- deals markets.

And as far as close to Dollar Trees, we've got Dollar Trees on 48 states, so there's always going to be probably a Dollar Tree within the 10-mile, if not five-mile.

So, but we are going to be -- the northeast is a market that we're moving into, some in the southeast, as well as the midwest.

Got it, thanks.

And then the one little follow-up I have on that then is, with the Deal$ stores that are in close proximity currently to a Dollar Tree, like call it within the five-mile range, have you noticed any cannibalization between those two concepts?

It's something we're still looking at.

So far, we haven't seen so much cannibalization of Dollar Tree when we opened up the Deal$.

It's something I'm sensitive to.

It's something we've got to learn more about as we continue.

We've just now, again, just in fourth quarter, started rolling some of these Deal$ out into new Deal$ markets, but existing Dollar Tree markets.

So more to come.

I don't know the answer on it.

We're -- it's something we want to manage.

Great, thanks.

And good luck on the quarter, guys.

Thank you.

We have time for just a couple of more questions.

We'll go next with Mr.

David Mann with Johnson Rice.

Please go ahead.

Thank you, good morning.

On the China inflation issue, can you just talk a little bit more about the specific price increases you might be seeing on some product?

And also, you talked theoretically about flexibility in terms of moving away from products where you have high inflation.

Can you just talk a little more specifically, are you having to move or change the mix to offset or get away from higher costs?

Well, , David, we've always been -- it's really not hypothetical.

We really do that.

It's one of the things that does set us apart from other retailers, the fact that we are not just absolutely tied to having -- we don't have to have a product.

We can move to the next vendor or the next product.

It's all relative to value, so we do.

We move a lot.

We always have moved a lot.

There's a couple other things you're seeing in the merchandise margin, and you ask about the pressure on foreign sourcing.

We've moved some things from domestic to foreign over the past few years.

In 2006, our foreign sourcing was in the 35% to 40% range and last year, it was slightly above 40%.

The increase was really driven by -- back to our systems, improved inventory visibility in 2006, with the data, what we owned and what we sell.

And we focused on selling through merchandise that we already owned, and that meant that in 2007 we were open to buy for more of the high margin imports, and we saw some of that benefit in our merchandise margins.

Going forward, we expect our percentage of imports to continue to grow in '08, but still in the low 40% range.

But overall, it's in the domestic product.

We see the opportunity.

People come to us and they need a price increase and sometimes we say, well, we can't take a price increase.

I -- I'm not -- my dollar price is still my retail.

So we work with them many times in ways to mitigate their cost increase.

Sometimes if I can take the product closer to their source, closer to their factory, we'll do that.

We'll take it in bulk put-ups, less packaging, if that helps them.

We'll pick it up ourselves.

If we can do it more efficiently than they do, we do more back haul than ever.

So we're really over the past 20 years, have developed a real sensitivity on how to take costs out of the product, how to work with the vendors to deliver it faster, better, cheaper.

And at the same time, we stand ready to move on.

We don't have to have any one product in our store.

Our stores aren't plan planogram, so if I'm buying from a vendor A shampoo and the price, the value's not there anymore, I replace it quickly with a vendor B shampoo, and the customer, they come in, well, where's vendor A, we don't have it anymore, but look what we got, vendor B.

And that's part of what we do.

The customer's ever-changing mix, the thrill of the hunt, the expectation is that you're going to find shampoo.

You may be really excited if it's a P&G item, but buy it now because it won't last long.

We've built a business around doing that and we continue to do it.

So it may not be intuitive that -- in the face of rising costs or rising prices.

All that you hear -- by the way, your vendors are never going to say prices are going down, so if you're calling the vendors and asking them, are prices going up?

Yes, prices are going up.

Has Dollar Tree-- yes, Dollar Tree, they are paying more.

Well, the proof is really in the results, and frankly, our strategy of not having to have anything has served us and will continue to serve us, and it's amazing when you say no -- when you can say no, it's amazing how resourceful people get in finding ways to improve the value for you or reduce the price or take the cost out some way, some how.

So that's what we do.

And we have gotten pretty darn good at it.

So I would expect that going forward, we'll be able to manage our merchandise margins very well.

I expect that we can continue to improve our merchandise margins in '08.

In the face of rising -- I'm going on a little bit here, but it's the same idea.

On expenses, on items that we buy, for example, that we use in our business, we've gained more visibility of what that is, and as a result, we know what we're buying.

We sort of pool that together and leverage the size of the buy.

We're putting more items out to bid.

We're using reverse auctions on expense items, something that we learned with our store buildout, where we went to auctions, reverse auctions on fixtures.

We're using that same technology and process now on our expense items in-house, things like the paper we use in the printers and the cartridges, and all the things we use.

So we're seeing some opportunities actually to drive down some costs using technology, using our buying power, and now the next big opportunity is in processes.

I'm excited about process improvements as it relates to reducing our costs going forward.

We are very transaction-intensive at Dollar Tree.

Everything's $1.

$4.5 billion is 4.5 billion items.

It's that kind of a business, very transaction-intensive.

And we have great opportunity to improve our processes to

Well, thanks for the detail.

If I could ask one follow-up.

Okay.

On the Visa experience you had in the fourth quarter, can you quantify what you think that meant to your comp store sales?

And then do you still feel like in 2008 you've talked about perhaps as much as a 2% benefit to comps from Visa, do you still think that that's a reasonable target for 2008?

Sure.

On the fourth quarter, it helped the comp probably in the range of .5% to 1% is our estimate.

In terms of 2008, I'm not sure that it's as high as 2%, but it's continuing to ramp up.

We know that we still have some more room, and we do see the help in the transaction.

So we do anticipate some benefit for 2008, but I couldn't tell you that it will be that big.

And just to clarify, David, we never said 2% in '08.

People came to those conclusions based on some of the metrics that we had from past Visa, but we'll just see how it plays out.

We got a lift in the fourth quarter, though.

Very good.

Thank you.

Thanks, David.

And we'll take our final question with Mr.

Patrick McKeever with MKM Partners.

Please go ahead.

Thanks.

Good morning, everyone.

On diesel fuel costs, Bob, you said that -- I think you said diesel was up about $0.80 on average in the fourth quarter.

Yes.

It's now up about $1 versus last year.

Are you budgeting in a bigger spread in 2008 than that $0.80 in the fourth quarter?

Patrick, we budgeted in the federal government's estimate of what the number's going to be and it is -- we did budget it up for 2008.

Now, I don't know where it's going to go.

Obviously, we're going to be subject to the market and what happens there.

Okay, and then on the -- just the longer-term operating margin outlook, I mean your guidance I guess at the midpoint of the range anyway for EPS implies a little bit of a decline in operating margin from 2007.

You said, I guess that you need a -- continue to need a 2% to 3% comp to leverage your expenses.

Maybe you could give some feel for where operating margin might be, on a quarterly basis, would you expect it to be up in the second half, down in the first half, that kind of thing?

I would say that the first half, again, especially in the first quarter, we will see more pressure in the front.

Overall for the year, though, there's lots of ups and downs, but within the range of guidance, I would say similar in terms of SG&A [corrected by company after call] for the year.

Kind of flattish?

Kind of flattish, yes.

And then I know I'm only supposed to ask two, but since I'm the last caller I'll try to get one last one in.

You mentioned in the sales release for the fourth quarter that business had picked up late in the quarter.

Any comment on how things are going sales-wise so far in the first quarter?

I really can't comment on first quarter, but going back to the fourth quarter, it did pick up late.

We -- November was, started slow, and December started slow and ended with a bang, and then of course January was pretty good.

Valentine's Day being most of the drive, and January, so we had a good Valentine's Day.

Okay, great.

Thanks, everyone.

Thanks, Bob.

Thank you, Patrick.

Thank you all for participating on the call.

The next conference call is scheduled for May 28th, 2008, when we will report results from the first quarter of '08.

Thanks again.

Once again, ladies and gentlemen, this will conclude today's conference.

We thank you for your participation.

You may now disconnect.

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