美元樹 (DLTR) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to this Dollar Tree Store, Incorporated, second quarter 2008 earnings release conference call.

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

At this time, I would like to turn the conference over to Mr.

Tim Reid, Vice President of Investor Relations.

Please go ahead, sir.

Thank you.

Good morning and welcome to the Dollar Tree conference call for the second quarter of fiscal 2008.

My name is Tim Reid.

I am Vice President Investor Relations.

It 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, Vice President, Controller will provide a more detailed review of our second quarter financial performance and provide our guidance for the third quarter and fiscal year 2008.

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 provision under the Private Securities Litigation Reform Act of 1995.

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

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

At the end of our 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, everyone.

Thank you for joining us.

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

We announced earnings for the first quarter of $0.42 per diluted share.

That represents a 27.3% increase over last year's $0.33 per diluted share.

As previously announced, total sales for the quarter were $1.093 billion, an increase of 12.5% over the second quarter of fiscal 2007.

Comp store sales increased 6.5% for the quarter.

That was on top of a 4.4 increase last year and a 4.2% increase the year before.

Our comparable store sales increase was a result of a 3.7% increase in traffic and a 2.7% increase in transaction size.

For the first half of 2008 compared with last year, sales increased 10.2%.

Gross margin was up five basis points.

SG&A was down 12 basis points.

Operating income increased by $16 million, and 17 basis points as a rate of sales.

And net income rose 15%.

Earnings per share increased 26.8% to $0.90 per share.

I believe that our success this quarter demonstrates the growing relevance of Dollar Tree to the consumer.

I think will you hear me talk more about that as we go along.

Customers know they can still find great value at Dollar Tree for just $1, and a convenient and fun shopping experience.

More and more our customers rely on to us deliver on this promise, and new customers are finding us all the time.

Over the past few years, we've grown our store size to accommodate the addition of our more needs-based consumer product to our mostly discretionary product mix.

These products are lower margin but faster turning and drive footsteps into our stores on a more frequent basis.

Specifically, we've added more health and beauty care products, household cleaning supplies, food and beverage and grocery to our discretionary mix of party supplies, seasonal decor, gifts, stationary, and higher margin variety merchandise.

This gives us more leverage to pull as we strive to stay relevant to the customer's needs through both good times and tough times.

Today consumers are under tremendous pressure from high food prices and high gasoline prices and from high energy prices especially.

They have to make it up by saving somewhere, and for millions of consumers, Dollar Tree is becoming a destination as they look to find ways to manage their family budgets.

Going into this past quarter, and observing increased pressure on the customer, we made plans to ensure that our in-stock position on basic products was better than ever.

We added a mid-quarter stretch your dollar promotion that featured more HBC, more household supplies, food, and beverage, and our customers responded enthusiastically.

I believe that our actions -- that the actions tha we took beginning of second quarter were right on target.

It was an appropriate response for the times and validated by our results which reflect increases in both traffic and average ticket for the quarter.

Sales were consistently strong throughout the quarter and across a broad range of product line but the consumer products led the way.

Sales of food and household consumables as well as health and beauty care basics increased more than 3.5% as a share of sales compared with same period last year.

Additionally, we've continued our expansion of frozen and refrigerated product to more stores.

We remain on track with our goal to add freezers and coolers to 150 stores for the full year.

During the second quarter, we added freezers and coolers to 31 more Dollar Tree Stores, bringing our total to 115 additional stores in the first half.

At the end of the second quarter we had freezers and coolers in 1,089 stores compared to 873 stores the same time last year.

The increase in in-store traffic and shopping frequency generated from our consumer basics also helped drive increased sales in our party and seasonal businesses throughout the quarter.

Our merchants continue to provide an exciting assortment and our stores have made quick transitions from season to season throughout the quarter.

Mother's Day gave us a good start to the quarter.

Our build-a-gift promotions and our bath shop promotions were both big hits.

We transitioned quickly from Mother's Day into Luau and Americana, and Picnic themes, or Memorial Day and into the summer and, once again, our annual Memorial Day Steak sale was a success.

There's always something new at Dollar Tree and always at a great value.

This year we went after the Graduation business a little bit this summer with more gifts and document and picture frames and party supplies.

The signage and in-store promotions highlighted this event.

Our graduation headquarters helped drive traffic and contributed to a strong sell-through of these items.

Turning to marketing and promotion, we actually reduced our advertising spend, while we continued to improve the efficiency and effectiveness of our marketing.

We ran a newspaper insert on May 18, in 28 markets, covering about 1200 stores.

That anniversaries the same event last year and is about the same number of stores.

Our primary themes for the summer were "Stretch your Dollar" and "Look What $20 Will Buy," and our window banners and our in-store efforts really resonated with the customers as they looked for ways to balance their budgets.

Frankly, there's a buzz surrounding Dollar Tree.

I know I've seen it, and many newspapers and TV ads, -- really news reports across the country but the news media has taken note of our value.

Dollar Tree has been featured in print and television throughout the country as a place to stretch your dollar in rough times and I think our customers are seeing.

This I think we're getting some positive influence of traffic from just the buzz surround -- that surrounds the value that we offer.

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

First, our debit card usage continues to increase and penetration increased 1% in the second quarter.

Additionally, we saw a lift from our Visa Credit in the second quarter, and we have not yet anniversaried this, so we expect the penetration of Visa Credit to continue increasing throughout 2008.

And last, we currently accept food stamps in 1,461 qualified stores.

This number will continue to grow as we roll out more freezer and frozen and refrigerated products to more stores.

Finally, we feel the federal economic stimulus package also provided some lift to the quarter.

However, the precise impact is very difficult for us to measure.

While we know that sales have benefited, we saw no discernible deviation in our sales cadence throughout the quarter that we can point to as a major impact from the program.

Sales were strong throughout the quarter, and the quarter ended stronger than it began.

Turning now to store growth, during the second quarter this year we opened 50 new stores, relocates and expanded another 19 stores and grew total square footage about 7%.

This brings the total to 133 new stores opened in the first half of this year, 43 expansions and relocations, which is similar to last year in terms of new stores.

We expect to open about 220 new Dollar Tree Stores, 22 new Deal$ stores, and expand and remodel about 90 stores this year.

This is slightly less than the range that I gave you last quarter and is the result of slippage in our store opening schedule.

We ended the quarter with 3,517 stores with plenty of room to grow.

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

And speaking of Deal$, as most of you know we're developing our Deal$ stores as an additional format, lifting the restriction of the $1 price point in order to offer more value and convenience while leveraging the strength and infrastructure of Dollar Tree.

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

It will give us the ability to serve even more customers in more markets.

As we have expanded the concept into new regions the response from customers has been positive.

We've opened 14 new Deal$ stores so far this year that's on top of 23 new Deal$ stores last year and our current store count is 144 stores.

The new Deal$ stores are the best test of the concept and second quarter they outperformed the original stores by nearly every sales metric.

This quarter, across all of Deal$ we saw an increase in sales of product priced over a $1, led by increases in health and beauty care and food, domestics, toys, electronics and pet supplies.

We're especially excited over the availability of new merchandise opportunities at the higher prices and especially excited about the lift that it can provide in average ticket.

We've also sharpened our messaging at Deal$.

We ran a newspaper ad on May 21, covering 80 stores, promoting our Memorial Day Steak sale at Deal$.

In July, we came back and ran another steak sale at Deal$ featuring three six-ounce steaks for $5, a 24-pack of bottled water for $3, both great values.

To support these events all Deal$ stores featured more powerful graphic displays including outdoor banners and window posters, point-of-sale signs and in-store handouts, and the results were terrific.

The second quarter we're seeing measurable improvements in comp store sales, store productivity, and four-wall contribution from our Deal$ stores.

We still got a lot more work ahead but we're seeing a lot of improvements in our Deal$.

We're refining and improving our key operating metrics.

We're refining the assortment, which, really the real key issue, is the assortment of product that we're going to sell.

We're improving our replenishment disciplined, we are evaluating our pricing strategy, and we're expanding the supply chain for our Deal$ store and we are rolling out new stores and in a measured and thoughtful way.

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

First of all, our merchandise margins within product categories are as good as or better than last year, and we are experiencing growth across our entire business, not just the consumer basis.

Consumers, however, are under great pressure to balance their budgets, and they have to save somewhere, and we're take this opportunity to gain market share by giving them more of what they need.

We're gaining new customers every day.

Although the margins are slightly lower, we are driving top-line growth, increasing inventory turns and leveraging costs throughout the P&L resulting in increased operating margin and earnings per share during second quarter.

And that's the same with diesel fuel, nearly $2 higher than the same period last year.

As in the past, we will continue to consider these factors and the guidance that we provide.

Now I will turn the call over to Katie who will give you more detail on these and other financial metrics during the second quarter, and she's also going to give you guidance for the remainder of the year.

Katie.

Thanks, Bob, and good morning.

As Bob mentioned, our earnings per share grew by 27.3% in the second quarter, driven by higher sales and a 10-basis point increase in operating margin.

For the quarter, gross margin was 33.2%, which was 40 basis points below the 33.6% in last year's second quarter.

It is the result of two main factors.

First, a planned shift in product mix towards more consumable product, and second, the impact of higher diesel fuel costs.

These two factors were partially offset by improvements in shrink, lower markdowns, and the benefits to buying, distribution, and occupancy costs associated with the increase in comparable store sales.

Moving down the P&L, SG&A expenses were 27.6% for the quarter, expressed as a percent of sales.

This is a 50 basis point decrease from 28.1% in the second quarter last year.

We leveraged our expenses for payroll, benefits, and incentive compensation and reduced our advertising spend.

These improvements offset higher utilities costs and increased fees for debit and credit cards.

Of course the top line benefits from increased usage of debit cards and Visa credit cards far outweigh the higher fees associated with the higher penetration of these forms of tender in the overall sales mix.

For the second quarter, depreciation and amortization was $39.7 million.

The overall rate as a percent of sales improved 35 basis points, compared with the second quarter last year.

We expect appreciation of 160 to $165 million for the year, which as a rate of sales will be a 20 to 30 basis point decrease from last year.

Our operating margin for the quarter was 5.6%, an increase of 10 basis points from 5.5% in the second quarter last year.

Looking at the balance sheet and statement of cash flow, cash and investments at the end of the second quarter approximated $115 million, an increase of $31 million from the $84 million at the end of the first quarter.

During the third quarter, as always, we expect to use cash for our normal inventory build for the holiday season.

Capital expenditures were $32.7 million in the second quarter of 2008 versus $49.2 million in the second quarter last year.

The majority of capital expenditures in the second quarter this year were for new stores, remodeled and relocated stores, and the addition of frozen and refrigerated equipment to 31 additional stores.

We now expect CapEx in the range of 145 to $155 million for fiscal 2008.

Our inventory grew by 4.3% on a per-store basis in the second quarter, compared with the prior year period.

This is principally due to planned increases in inventory to meet the demands for basic products, to support back-to-school and Halloween promotions and to support the build toward the Christmas selling season.

Inventory turns in the first half were up slightly over last year, and we expect them to increase for the full year.

Now for sales and earnings guidance.

As we look to the remainder of 2008, the macro environment remains every bit as challenging and uncertain as it was going into the second quarter.

We still face an uncertain economy with many pressures on the consumer.

We are factoring this uncertainty into our guidance.

In addition, the retail calendar is unfavorable for the latter part of the year, as Thanksgiving is a week later than last year, resulting in one fewer weekend in the traditional holiday shopping season and five fewer selling days between Thanksgiving and Christmas.

As a result of the economic pressures on the customer, we expect to see a continued increase in demand for the faster turning lower margin consumable product in our mix.

Additionally, we anticipate continued pressure on freight costs from the higher diesel fuel prices.

While sales will continue to provide positive leverage on costs, higher freight costs and the shift in mix will likely continue to put pressure on our gross margin.

This effect is planned to be offset slightly by continued improvements in our shrink results, and we have included this in our guidance.

From an SG&A standpoint, energy prices and utility costs will most likely be higher for the remainder of the year.

Otherwise, we expect to hold the line on expenses in the second half.

The tax rate is expected to be 36.2% in the third quarter and 37% for the full year.

With all of this in mind, for the third quarter of 2008, we are forecasting sales in the range of $1.75 billion to $1.105 billion, and diluted earnings per share in the range of $0.40 to $0.43.

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

For the full year 2008, we estimate sales will be in the range of $4.61 billion to $4.68 billion, based on a low to low mid-single-digit increase in comparable store sales and 7% square footage growth.

Diluted earnings per share are expected to be in the range of $2.33 to $2.43.

This is an increase of $0.10 and $0.04 in diluted earnings per share above the low and high-end of previous guidance for 2008.

Our guidance assumes a share count of approximately 91 million for the balance of the year.

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

Thanks, Katie.

I am going to give everybody a chance to ask some questions in just a minute, but I want to leave you with a few summary observations on the quarter and the half.

We had a strong first half, and we're on track to accomplish our goals.

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

In the second quarter, we focused our merchandise mix more to the consumable categories in order to meet the needs of our customers and the results were terrific as sales for the quarter grew 12.5% and earnings per share were up 27%.

Through all of this fuel and energy prices remain high.

And in the second quarter 2008, diesel averaged $4.60 per gallon.

That's nearly $2 higher than the same period last year.

As expected, this had a significant impact on both our freight cost and our gross margin.

And we expect this to continue throughout the end of the year.

And we've incorporated this into our guidance.

We continue to grow and open new Dollar Tree Stores and our new Deal$ store concept is progressing and exciting.

We're opening new Deal$ stores in new markets, we're honing the merchandise mix and the customer acceptance is strong and is growing.

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

During the first half of this year we increased cash and investments by more than $30 million and we're in a great position entering the third quarter when we are building inventory for the holiday season.

We're dedicated to building value for our long-term shareholders and this means first of all, running the business as effectively as possible and managing our capital in a way that enhances shareholder return.

In these uncertain economic times building cash is consistent with this goal.

I will remind you that that we currently have $454 million remaining in our share repurchase authorization.

As has been our practice we will continue to review share repurchase opportunistically, and we will update you on additional share repurchases at the end of the quarter in which they may occur.

As we look to the second half of the year we don't know exactly how the customer will react to the continuing pressure from high energy prices and economic uncertainty.

We do know that they will find no better place to stretch their dollars than at Dollar Tree.

Our merchandise value and our increased mix of consumer basics make Dollar Tree more relevant now than ever, and we believe that we're positioned squarely in the bull's eye of what customers are looking for.

We had a great first half and we're off to a good start on the third quarter, 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 we ask that you limit your questions to two.

(OPERATOR INSTRUCTIONS).

We'll pause for a moment to assemble our roster.

We'll go first to Mitch Kaiser, Piper Jaffray.

Thanks.

Good morning.

Nice quarter.

I was hoping you could talk a little bit about the "Stretch your Dollar" promotion that you did kind of mid-quarter and maybe an estimate on what that did to comps and maybe profitability, and then are you looking to do something similar towards the back half of the year?

Mitch, the "Stretch your Dollar" promotion was something that we, as we looked forward, as we got through Easter and we looked forward into second quarter and all the pressure on the customers that we saw and the high fuel prices, and they were still rising, we just saw it as an opportunity to, first of all, increase our sales, gain new customers.

Second of all, be more relevant to their needs.

We wanted when they spent their dollar to come into our store with the high gas prices we wanted to make sure that if they expected us to have it, that we had in stock, so we stepped up our in-stock position on our basics.

And we also took a real strong position in some key consumable categories like health and beauty care and household cleaning supplies and some of our grocery, beverage, and food items.

We went out and challenged the merchants to put together a great promotion in those consumable categories.

We backed it up in the stores with signing and banners on the windows, and one of the signs would show "Look What $20 Buys" and it would have 20 items in the consumable categories.

We had another banner that showed "Look What $20 Buys" and with somewhat less consumable products.

We pushed out extra product to support the promotions, and as a result, we really had a strong second quarter.

We drove more sales in the consumer products.

We drove more traffic.

One point I would like to make is our sales overall in the second quarter was pretty much up across the board.

It's just that we drove more sales in those consumer products than -- because that's what the customers needed.

They were under pressure, they were looking for a place to go to stretch their dollars, and I believe it was right on target.

It was really a, on the fly sort of decision to go after it, but we have that ability now, and I think that's what we demonstrated here is that with our larger store with a mix of things that people need and then the discretionary product we do have some levers to pull, and we pulled one on the consumer products in the second quarter, and it really did increase our comp store sales and helped us leverage costs throughout the P&L for the quarter.

Okay.

Then secondly, I take a number of retailers are saying back-to-school started off pretty slow, and I know that inventories, you said on a per-store basis were up 4.3%.

Are you comfortable with that?

I think you commented that Q3 was off to a good start.

Could you just help us reconcile those two dynamics.

Sure, Mitch.

I will give you as much color as I can.

Obviously, we don't report by quarter, but our third quarter has started off strong.

We're not a big back-to-school company.

We don't sell the apparel, first of all so, our business is more stable.

We sell more of the pens and pencils and writing instruments, and the teacher supplies and that kind of thing.

As to our inventory we are up over last year, 4.5% over last year but remember we just came off a 6.5% comp so we're growing our sales faster than our inventory has risen.

Our turns for the first half were hire than last year.

We still expect the turns to be higher for the second half of the year.

So I believe we're just well positioned.

We're where we wanted to be with this.

If sales continue to grow we have the ability to continue to chase, and at the same time we're going to end one a good inventory position at year end.

So real happy about that.

We'll go next to Meredith Adler, Lehman Brothers.

Thanks very much.

We all know that fuel prices -- fuel costs have come down recently.

Wondering how you are planning, if you can to do something to sort of lock in energy prices or whatever you might be doing generally to manage energy because even though it's coming down, fuel prices are still very high.

Yes, you're right.

And they continue -- in our guidance we've included them to remain high.

As far as locking in, there's no -- we haven't been able to lock in on any fuel prices, any diesel fuel prices.

We use third-party carriers for our business, and we have a agreements with, as far as locking it in, in this time of rapidly rising diesel and oil prices, we're subject to it, just like everyone else is.

Our opportunity in managing in these times is on the consumer side, and driving sales.

If we can continue to drive the top line, I believe we can, then we have an opportunity to leverage other costs.

Can't do anything about diesel fuel, but we can certainly manage and leverage -- get leverage on other costs on our P&L with more sales, just as we've done in the second quarter.

The other thing is, that I'm encouraged by is our business is still very, very healthy on the non-consumable categories.

It's almost as if you took our business and just layered in more of the consumable products, increased sales in that way, that's the effect that you saw on the gross margin.

Two-thirds of the decline in gross margin was in mix, because we're selling more of those consumer products.

That's what customers need right now, and we've evolved to the position that we have a store that we can offer both for them.

And so our answer to higher fuel prices is to continue to manage it as best we can, but then to leverage the other costs on our P&L as we drive sales.

Okay, great.

And I have a question.

Last quarter you were kind enough to sort of give us some sense of what your imported product costs were through the end of the year.

Christmas is obviously the most important season, but do you have visibility beyond going into the seasonal items for the new fiscal year?

Are you still seeing that you're able to hold the line on import costs?

We have bought, obviously we've bought through fourth quarter and into first quarter now.

We've made a trip after Easter to fill in some of those first quarter purchases, and in July for the summer, so we have bought, not completely, but we've made commitments into 2009's year.

We are encouraged.

We still believe that -- and we're proving it, by the way, but more than just a belief that we're able to manage our costs, both domestically and on imports.

First of all, our buying power.

I've said in the past has increased, and we have great relationships with our suppliers and this country as well as in Asia.

To give you color, I can't tell you numbers, but I will tell you that we achieved our import margin targets for the purchases that we've extended into 2009.

Really better than what our targets were.

And as far as managing the domestic side of it, we think of it the same way.

We either change the product, or we change the resource, or we drop the item entirely and replace with it something else, and that's how we're able to maintain our margins and to -- in the categories that we do business with.

Even on the consumable product categories, I will just share this with you, it's all about mix, because within the categories our margins are up in those major categories.

We'll go next to Karen Short, FBR.

Hey, everyone.

Thanks for take my call.

Good morning.

Couple questions for you.

I guess I missed it.

Did you actually give what the Visa contribution was to the comp?

We didn't, but it was around 1%.

Okay.

So that cycles obviously tin fourth quarter.

That's right.

I guess, not to be skeptical here, but obviously this is a very skeptical and skiddish market, but you guys had a great comp in the quarter, and congratulations on that.

I guess there would be some concern that the comp that you achieved in the third quarter is not necessarily sustainable going forward.

So if you that have view, given that you didn't really achieve much of -- you didn't get much leverage this quarter on a 6.5 comp, how should we think about the leverage opportunity going forward to the extent that that comp does decelerate?

I know you talked about some opportunities.

Maybe you could elaborate a little more.

Well, the guidance that we gave you we factored in tin creases in fuel prices.

We factored in the uncertain economic times as we looked at the sales and the sales guidance that we gave you.

So that really is the realistic view of where we think in these uncertain times that we've tried to provide you the best guidance going forward as we can.

To just give you color, I believe, first of all, we ended second quarter strong, and we began third quarter strong.

We are relevant to the times.

Customers are looking for ways to stretch their dollar and to manage their budgets, and they can't do anything about the utility costs and higher gas prices so they're looking for ways where they can to save bucks, and more and more we're gaining new customers at Dollar Tree.

So we are -- we're fully confident that we can manage through these uncertain times.

We have great faith in the position that we are in as a company.

We positioned ourselves really right, as I said, right in the middle of the bull's eye of customer sentiment right now.

These larger stores that we've evolved to over the past six, seven years now have the component of discretionary product that customers always love from Dollar Tree, and that's the higher margin.

And now we've added this needs-based product that when times are tough, we can really push that side of our business a little heavier.

A little fly in the air plan, a little stick, a little rudder and you try to keep your balance that way.

So we're very confident in our ability to manage through it.

Diesel fuel is going to be high.

We've forecasted that and we've put in that our guidance.

Energy prices are going to be high.

That's going to put pressure, continued pressure, on the customer.

It has in the past, and it will continue.

We have tried to factor that into our top line guidance.

So, you know, uncertain times.

I, like you, am looking for certain answers in uncertain times, and I can only tell you how we feel here about how we've positioned ourselves, and our ability to manage our margins.

It's not an accident as we go through these tough times where our margins are coming out.

We're running our business according to the current situation, and serving our customers, and we'll come out the other side, I think.

I take our lot more than -- before anyone else.

So that's our feeling here.

Our guidance will -- our guidance is factoring all of that in, and I hope that is helpful.

The other thing I would just add to that, really, the pressure that we're going to see truly is driven primarily by the fuel and the mix.

If you take that out and look at where we're guiding to for the back half of the year, G&A costs, we feel pretty good about where we are with what we've got in the the bank from the first two quarters we do expect to see help in G&A when you look at the year in total.

As a reminder, it is star 1 if you would like to ask a question.

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

Thanks, guys.

So on the comps, I guess one question in two parts.

One is, you said third quarter is starting off strong, so nothing solid from that commentary any different from the second quarter.

The guidance is a bit below that.

Is that just -- you said your outlook is realistic.

Is that some assumption that maybe things do slow a bit in the coming months?

And how much of the calendar shift in the fourth quarter, the later Thanksgiving plays into the full year sales, then I guess full-year margin outlook if there's any de-leverage from the lower sales on that.

Thanks.

Mike, good morning.

Thanks for calling in.

Our second quarter was strong.

You saw the numbers.

Third quarter started off strong.

The guidance that we gave you considers the uncertain times that we're in.

It's just as uncertain now as it was back when we gave second quarter guidance at the end of first quarter, and we factored in the uncertainty of diesel fuel.

We've considered the shift in the calendar, and we considered the impact that the macro pressures may put on the customer, and we've given you our best shot at a guidance that does include all of those things.

We're bullish on our business, but we are negotiating the negotiating the mine field as everyone else is out there.

I think the thought I'd like to leave you with on this though, is that we have a pretty good record of being able to negotiate that mine field and move with the customer sentiment in their needs.

Absolutely.

In the past, I think when you've add calendar shift on Easter, for instance, you've been able to quantify that impact.

Is that Thanksgiving shift not big enough to worry about quantifying it?

We haven't quantified the Christmas shift.

It is the loss of one weekend, is the main loss.

There's five less shopping days between Thanksgiving and Christmas.

I don't have a number in front of me, Mike.

I will tell you this, that just as in Easter, we quantified it, then we went to work on how to mitigate it, and if you remember, we guided -- realistically, we guided, then we actually beat our Easter business pretty well, had a pretty good first quarter because of it.

We have the same kind of plans in place for fourth quarter.

It's in our guidance, and I don't really have a number.

No, and also, Michael, remember, any time that we give guidance, like when we gave the Easter thing, it was the quarter before, it wasn't two quarters ahead.

So what we're doing is kind of giving you an had advanced heads-up on what's in our thinking for fourth quarter.

When we get to that point, when we release our third quarter we'll give you a little more quantification of what we think that week might add up to.

We'll go next to Charles Grom, JPMorgan.

Thanks.

Good morning.

Just a follow-up on the second quarter gross profit margin.

I was wondering, I know will you do this in the Q, but can you get a little bit more granular for us on the mix head wind as well as the diesel cost head wind?

And then conversely what the benefits were from shrink, markdown, and buying and occupancy.

What I'm trying to get at is on a two-year basis, gross profit margin, we're basically flat.

In the first quarter they were up 50 basis points, I'm trying to see if the trend in consumables that you're seeing is going to be sort of a permanent head wind, not only in the third and fourth quarter but beyond.

Just wondering if you could quantify those buckets for us.

We don't go into quite as much detail as what I think you're asking for, but directionally, I would say that certainly the mix was a very big driver of our result in gross margins, and yes we are going to be pressured by that throughout the year and I would say on similar levels, to what we've seen, maybe a little bit more in the fourth quarter versus the third, on the fuel, I think that what we're seeing now is what we're projecting based on what we're seeing in terms of what the rates are expected to be, I'd say second quarter cadence is going to be similar to what we're going to see for the balance of the year.

In terms of shrink, that trend has been a positive trend for us this year.

We've talked about how we've wanted as a company to try to get that thing back below 2% and we have managed to he achieve that this year, and so we've included that in our guidance also for the balance of the year.

And the other cost, as the comp runs higher, we certainly like that answer a lot more than when the comps are lower.

So we've built all those pieces and factored them into the model, and so I would say in order of importance, it's going to be mix, then it's going to be fuel, then there are some help from shrink, and leverage in the other areas.

And we have time for a few more questions.

We'll go to Joan Storms, Wedbush Morgan.

My question has been answered.

Thank you.

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

Yes, thank you.

Good morning.

You commented that you spent less on advertising in the second quarter.

Can you give an idea of what you expect to do in the back half?

Dave, it's going to be about flat to last year in the back half.

Might be down just a little less than as a percent of sales but we're basically going to anniversary the same promotions as we did last year.

Okay, great.

And then in terms of the Deal$ business, I think your commentary over the last couple quarter, sounds like it's performing very well versus expectations from.

From what I remember, you've put in some new management there.

If the question is, over the medium to longer-term outlook there, what needs to be seen for you to really start to ramp that up to say that you feel like you've got where it you want it, and how close are you to doing that?

David, we have got to get our merchandise mix really more focused and targeted, and that's hard work, and that's the heavy lifting of this.

There's a lot of things that have to be done.

That's first and foremost.

Other things that have to be done is the messaging in the store, when everything is a dollar, the messaging is pretty singular and focused.

When it's not dollar, you have to work a little harder to get that value message out there.

So signing and pricing and not pricing and promoting and not promoting and all the things that go with running a multiprice point versus a single price point.

We still have a ways to go to really get that down.

And really the last thing is that it's sort of along with the merchandise mix, but the Deal$ stores, I am contemplating them as being higher volume.

Maybe slightly lower gross margin company, larger -- larger store but a higher top line and higher operating margin as a result, and I think that gives us the opportunity to enter into some of these higher cost, but more densely populated areas with more stores, expand the number of stores and I think we can open and we haven't gotten to that point yet.

We're still working on the mix.

We still haven't gotten to the point where the volume is where I would like it to be and where it can be and where it should be.

And as a result, our operating margin is still -- although's getting better, I've got to tell you, it's the biggest idea we've got.

This is going to be a really good format for us as we look back over time we are going to say this was really a good business to get into.

But we still got -- we still have some work to do on the merchandise, merchandising, the operating metrics of the store.

I will tell you we're making head way, though.

It's getting better all the time.

There's enthusiasm, there's excitement over the Deal$ business.

It's a lot of hard work, but the teams are really taking it on and embracing it even more as we're seeing more improvement from this company.

We'll go next to Karen Short, FBR.

Sorry, I just had a follow-up.

Could you just give some color on what's going on with the tax rate in the third quarter?

Then I guess fourth quarter, you would assume it's coming up a little bit seeing that the third quarter is going to be lower?

Sure.

Generally, if you look back at our tax rate, the third quarter will be the lowest quarter of the year.

When we lay it out for the year we figure out what we believe the tax rate is going to be for the entire year, and for the most part you can expect to see that in the first, second, and fourth quarters.

In third quarter, we file our tax return each year, so to the extent you've got statutes rolling off, that discrete event is going to take place in the third quarter.

That's why that rate ends up lower in the third quarter compared with the others.

We'll go next to Patrick McKeever, MKM partners.

Good morning, everyone.

Good morning, Patrick.

Just a question on -- maybe I better pick up here.

Question on your sourcing costs, especially as it relates to merchandise that you buy in Asia.

I guess everywhere, but in Asia, in particular, with all the stuff we're hearing about inflation in Asia and higher labor costs and raw material costs and so forth.

I know you've said in prior quarters, last quarter, that you've been able to really manage through -- that you were seeing some pressure from vendors, but you were able to manage through by shifting the mix and reducing package -- or changing packaging, those kinds of things.

I just wanted to see if you could make a few general comments on that particular topic.

Sure, Patrick.

It's really key.

It's a good question to keep asking because things are and have been uncertain.

But I will tell you that the answer is still the same.

We're able to manage our margins because we stay in control of the mix.

We don't have a standardized mix that we're replenishing to.

So as costs or pressures to increase costs are there, we either change the product, especially in Asia, because all the product that we bring out of China, almost all of it we make to our order to our specs, and it's up to us on the value that we put into it.

But we either change the product, we change the resource, or sometimes we drop the item.

We drop a high percentage of items every year for two reasons.

Even without the pressure on the cost.

We believe that it's healthy for our business to continually change the product.

It's not the same old stuff the customer saw last season or last year.

So we're always looking to drop something, to add something that is a little bit better.

That also works with the margin because as costs tend to have pressure on costs to go up, again, we either change the product or we'll drop it, and we'll replace with it something else.

We already know the retail.

We're different than anybody else out there.

We already know the retail.

So all of our focus is on the cost and how do I get a price, a cost that delivers the margin that fits our budgets.

Our buyers, again, have -- there's been pressure in China.

All the things that you ready about, they're all real, and they're all there, so it's good to ask that.

But at the end of the day, our buying trip in January, our margin we beat, we met and exceeded our planned margins on that trip, and our most recent buying trip, the one that was finished in July, we were able to meet our target margins, which are better than last year on that trip, so we are in control of it, and we are able to manage those cost pressures.

By the way, it feels like, in China, and I can't quantify this for you, but it just feels like things have settled down a little bit there, too with the Chinese makers.

A lot of uncertainty in China about currency valuation and inflation.

They seem to have begun to get their hands and arms around that a little better, too.

So as a result, it feels like the pressure is not as intense on it in China.

Now, that's just an anecdotal remark from our merchants and our head merchant, but, look, we strive every day.

We know the retail.

It's all about really getting the right cost, and our cost has to fit within our margin.

That's how we do it, that's how we're going to continue to do it.

What you saw, the mix change, though, in second quarter, I look at as just a highly favorable thing, because seven, eight years ago we didn't have that ability.

The stores were small, and almost everything we had was high margin but it was very discretionary.

We've evolved from that to a mix of discretionary product, really higher volume than it ever has been, high margins, and -- but always mix of product that people need, about 40% of our product and our sales.

It will go 38 to 41, something like that, on the consumer products, but some where in that range.

So we have buttons to push, and when customers are under pressure to balance their budgets we're pushing the buttons.

It puts pressure on our gross margin but we're able to leverage those costs through the P&L and we ended up with a little higher operating margin.

As long as the customer is under pressure we are going to keep pushing on those.

Things change, though, the and we'll make sure we stay relevant to what their needs are.

Got it.

Thank you.

We have time for a couple more questions.

We'll go next to John Zolidis, Buckingham Research.

Hi, John.

Good morning this is Jody [Yen] on behalf of John Zolidis.

Two quick questions, can you quantify the occupancy leverage you achieved in the quarter?

We haven't broken that out.

Can you talk a little bit more about this planned shift into more consumables?

Because it seems like tin last four quarters you've actually had gross margin improvement.

Well, yes, we did.

First quarter we had gross margin improvement, and, of course, the end of last year, but again, it's all about the larger store that we've evolved to over the past seven or eight years really has been in order to add more of the things that people need every day into the mix.

The things that people buy more frequently, the things that create traffic into our stores.

So where we've fast forward to 2008, first quarter, second quarter two, thou eight, we're looking at that time customer under tremendous pressure, we're looking at them really buying only the things that they need.

Anyone that you talk to they're talking about, well, they're cutting back on going out to dinner and cutting back on things that they can cut back but they've got to have food and they've got to have health and beauty supplies and they've got to have pens and pencils for the kids.

So we have a mix of product now that we can push, and we're right for the times.

Times are tough and people want needs-based things, we have that.

That was second quarter.

And it's likely going to be third quarter, too, the way we're looking at it, because it doesn't look like the pressure is lifting off the consumer.

But that's how you see the gross margin.

If you look at the operating margin line, we're getting there.

We're just getting there a couple different ways.

You can do it through higher margins in better times and you can -- and less than better times we have the mix.

Might be lower margins but we can drive the top line to leverage the cost to still continue to improve our operating margin.

Thank you very much.

And that does conclude our question-and-answer session.

I will turn the conference back over to Mr.

Reid for any additional or closing remarks.

Okay, thank you very much.

Thank you all for participating in the call.

Our next conference call is scheduled for Tuesday, November 25, 2008.

That's a slight difference from normal obviously because you push it ahead one day because of Thanksgiving holiday, so mark your calendars for Tuesday, November 25, 2008, for the next call.

Thank you.

That concludes today's conference.

You may disconnect at this time.

We do appreciate your participation.