美元樹 (DLTR) 2008 Q4 法說會逐字稿

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

fourth quarter 2008 earnings release.

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

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

Tim Reid, Vice President of Investor Relations.

Please go ahead.

Thank you, Katie.

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

My name is Tim Reid, I'm Vice President of Investor Relations.

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.

Kevin Wampler, Chief Financial Officer, will provide a more detailed review of our fourth quarter financial performance and provide our guidance for 2009.

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

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

Bob?

Thanks, Tim, and good morning, everyone.

Thank you for joining our call.

This morning we announced our earnings for the fourth quarter at $1.15 per diluted share.

This is an increase of 10.6% over last year's reported $1.04 per diluted share.

As previously reported, total sales for the quarter were $1.39 billion.

That's an increase of 6.8% over the fourth quarter of fiscal 2007, and comp store sales increased 2.2% in the quarter.

For the full year, and fiscal 2008, earnings per share were $2.53, an increase of 21% over last year's reported $2.09.

Total sales were $4.64 billion, an increase of 9.5% over fiscal 2007, and comp store sales increased 4.1%.

Operating margin increased to 7.9%, compared to 7.8% in fiscal 2007, and net income rose 14%.

We're very proud of these results.

I'm particularly proud of this year's record performance given the backdrop of the worldwide economic crisis, an unfavorable retail calendar, and record high fuel and energy prices that we we faced.

Even in the negative impact of severe storms that started in the Pacific Northwest and tracked across the northern section of the country, the last 10 shopping days before Christmas was largely offset by the strength in our business in our warm-weather stores, and as the storms passed sales in the affected areas rebounded, revealing the underlying sales strength of our stores.

Even with all of these headwinds sales results for both the fourth quarter and for the full year ended comfortably within our range of guidance, and our earnings results were at the very top end of guidance.

I view this as further evidence of Dollar Tree's relevance to the consumer.

Our business continues to be strong and we're off to a good start in 2009.

We made a very smooth transition in January from Christmas to big-game promotions and our Valentine's results were the best in years.

Dollar Tree's exceptional values and convenient, friendly shopping experience are more important now than ever before.

Our movement over the last several years to larger stores with the capacity to expand our consumable product offering, that is more of the things that people need every day, along with the power of the $1 price point has been validated by our results.

Customers know they can save money and stretch their household budgets at Dollar Tree and they continue to respond in record numbers.

We intend to continue to offer customers what they need and what they want, that includes the continued expansion of frozen and refrigerated product to more stores.

During fiscal 2008, we added freezers and coolers to 135 Dollar Tree stores, and at the end of the year, we had frozen and refrigerated foods in 1,107 Dollar Tree stores compared to 972 Dollar Tree stores at the end of last year.

For fiscal 2009, we plan to continue expansion to at least 150 more stores, and we now have the supply arrangements to add this product to most any geography across the country.

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

Our debit card penetration continued to increase in the fourth quarter.

It was up about 3% over fourth quarter last year.

Credit card penetration also increased in the fourth quarter, up a little less than 1%, and we expect the penetration of Visa credit to continue increasing throughout 2009.

The list in average ticket, however, may not be as large since we anniversaried the rollout of Visa credit at the end of third quarter 2008.

One last comment on tender type, with our increased mix of food items, Food Stamp and EBT have become a more important component in our business.

We currently accept Food Stamps in 2,200 qualified stores compared with 1,154 stores last year, and that number will continue to grow as we roll out more frozen and refrigerated product to more stores.

We continue to grow our market share and aggressively open new stores.

During the fourth quarter this year, we opened 30 new stores and relocated and expanded another seven stores.

So for the full year 2008, we opened 211 new Dollar Tree stores, 20 new Deal$ stores, and we finished the year at 3,591 stores.

We expanded and relocated another 86 stores and grew total square footage 6.7%.

Our new stores averaged 10,310 square feet, that's within our targeted size range with 10,000 to 12,000 square feet being the sweet spot.

To give you a little color on our footprint of our stores, California is now our number 1 state with 267 stores, followed by Texas with 227 stores, and Florida with 217 stores, and we have plenty of room to grow; 37 states have less than 100 stores.

Our plan for 2009 includes 210 new Dollar Tree stores, 25 new Deal$ stores, and 90 relocations.

Longer term, we believe we can operate 5,000 to 7,000 Dollar Tree stores across the country, and our Deal$ multi-price point model has the potential of expanding that number.

Over time, through our Deal$ model, we believe we can serve even more customers and penetrate more markets while leveraging the strength and infrastructure of Dollar Tree.

In the Deal$ stores, we have focused our merchandise mix predominantly at $5 and less, and we're especially excited over the availability of new merchandise opportunities at these higher prices, and the lift it can provide in average ticket.

We have been expanding Deal$ into new markets.

We have opened 43 new Deal$ stores in the past 18 months, including 20 during 2008, and we intend to open 25 new Deal$ stores this year, 2009.

Over the past year, we have made measurable progress with Deal$, but there is still much to do in developing the model.

Our goals in 2009 will be to refine and improve our key operating metrics at Deal$.

We will focus on refining the merchandise assortment, improving our replenishment disciplines, evaluating the pricing strategy, expanding the supply chain, and creating merchandise excitement, and we'll continue to roll out new stores in a measured and thoughtful way.

Our focus on multi-price point retailing is on perfecting the Deal$ model.

As most, or many of you know, we have also been testing the addition of merchandise sales for more than $1, in $29 Tree stores.

We called it Oops!

And the strategy was Oops!

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

We tested this in 29 stores for the past year, and while we sold some merchandise the results were not compelling.

As a result, the Oops!

strategy is now completed.

We have concluded that our over $1 multi-price point strategy will be the Deal$ stores.

All items offered at Dollar Tree stores will remain $1.

Dollar Tree is a powerful concept that customers love.

It has proven to be resilient, increasingly relevant to the times, and especially relevant to this down economy.

The Dollar Tree brand is established and known by the customer as the one national chain where everything is $1 and it will remain so.

Our focus is clear, under the Dollar Tree banner, everything is a dollar.

Deal$ is our multi-priced brand, and at Deal$ we've lifted the restriction of the $1 price point and we'll leverage our infrastructure to offer customers value on even more categories.

I want to turn now to a few comments on infrastructure, beginning with logistics.

Logistics efficiency was more important than ever as we faced unreasonably high fuel costs in 2008.

I'm very proud of the performance of our logistics team in this environment.

They found ways to save costs, increasing cube utilization of our trailers.

They were able to increase less than trailer-load consolidation.

Back hauls increased more than 10% and DC productivity increased almost 15% over the prior year.

It was a great performance in a challenging environment.

Inventory turns continue to increase, and we have the capacity with our current network to handle $6.7 billion in volume with no additional investment.

So every new store that we now open makes our network more efficient.

Dollar Tree continues to invest in appropriate technology.

Our already solid and scalable infrastructure was further strengthened last year as our technology team opened a new, larger data center without interruption.

And a special note in 2008, along with the merchants, launched a new assortment planning tool and integrated it into the buying process.

This is a major upgrade that closely links the buying to the selling at store levels.

The result will be more efficient merchandise allocations, an increased customer experience and improved sell through and inventory turn.

Now I would like to turn the call over to Kevin Wampler, our Chief Financial Officer, who will give you more detail on these and other financial metrics during the fourth quarter and provide guidance for 2009.

I will return with summary comments and we will then address your questions.

Kevin?

Thanks, Bob.

It's good to be with you here today, and I'm very excited to be part of the Dollar Tree team.

Turning to our fourth quarter financial performance, as Bob mentioned, our earnings per share for the quarter were $1.15.

This was a 10.6% increase over last year's $1.04.

It was at the top of our quarterly guidance range.

For the quarter, gross margin was 35.6%, which was 20 basis points below the 35.8% in last year's fourth quarter, and was actually better than anticipated in our guidance.

There were several factors impacting gross margin during the quarter.

First, as we expected, our planned shift in product mix towards more consumable product had a negative impact on margin.

Sales of food, health and beauty care basics and household consumables increased by 340 basis points as a share of sales in the fourth quarter, compared with the same period last year.

This was partially offset by improved merchandise margins within most product categories.

In addition, freight costs decreased as a percent of sales in the fourth quarter.

As most of you know, diesel fuel cost had been a significant drag on gross margin for most of the year.

This began to reverse in the fourth quarter with the reduction in diesel prices and our ongoing improvements in operating efficiency.

In addition, expenses for buying, distribution, and occupancy decreased slightly as a percent of sales relative to the fourth quarter last year.

SG&A expenses were 23.7% of sales for the quarter, a 20-basis-point decrease from the fourth quarter last year.

Lower depreciation, advertising, and discretionary expenses offset increases in incentive compensation, benefits and increased fees for debit and credit cards which reflect the continued growth and penetration of these forms of tender in our overall sales mix.

Depreciation and amortization declined 20 basis points in the fourth quarter and totaled $41.8 million.

For the full year, depreciation was $161.7 million, a 30-basis-point decrease from last year.

Operating income increased $11 million compared with the fourth quarter last year, and our operating margin was 11.9%, unchanged from the fourth quarter last year.

For the full year, operating income increased $35 million and our operating margin was 7.9%, versus 7.8% last year.

This increase was achieved despite the impact of product mix, the extremely high fuel prices for most of the year, and the challenging economy in which we have all been operating.

Dollar Tree's operating margin remains the highest our sector.

The tax rate for the quarter was 36% versus 37.2% in the fourth quarter last year, which it included an increase in tax reserves in accordance with FIN 48.

Also in the fourth quarter of 2008, we settled several state tax audits allowing us to release income tax reserves and accrue less interest expense on tax uncertainties during the quarter.

For the full fiscal year, the tax rate was 36.1%, versus 37.1% last year.

Looking at the balance sheet and our statement of cash flow, cash at year end totaled approximately $364 million, an increase of $283 million versus the end of last year.

Our inventory at the end of the year grew by 5.4% compared with the prior year with selling square footage growth of 6.7%.

Therefore, inventory per selling square foot decreased 1.2% as of January 31, 2009.

Inventory turns for the year also increased for the fourth consecutive year.

Capital expenditures were $27 million in the fourth quarter of 2008 versus $36 million in the fourth quarter last year.

For the full year 2008, capital expenditures were $131 million compared with $189 million last year.

The majority of capital expenditures this year were for new stores, remodeled and relocated stores, and the addition of frozen and refrigerated capabilities to 135 stores.

As we look to 2009, we must be mindful of a couple of issues.

We face an extremely challenging economy with more pressure on the consumer than any time in years.

Rising unemployment places a very serious burden on families and will impact their buying decisions.

Respect to the continued increases in demand for the faster-turning, lower-margin consumable product in our mix and we intend to manage our inventory accordingly.

On a positive side, Easter is three weeks later this year.

That should be a tailwind compared to the early Easter of 2008.

Additionally, we believe that the declines in diesel prices over the past quarter, if sustained, will continue to ease the pressure on freight costs.

We have included all of this in our guidance.

With all of this in mind, for the first quarter of 2009, we are forecasting sales in the range of $1.13 billion to $1.16 billion, and diluted earnings per share in the range of $0.49 to $0.54.

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

For the full fiscal year of 2009, we are forecasting sales in the range of $4.96 billion to $5.09 billion, based on a low to mid-single-digit increase in comparable store sales and 6.5% square footage growth.

Diluted earnings per share is expected to be in the range of $2.55 to $2.75.

Our guidance assumes a tax rate of 37.8% in the first quarter, and 37.3% for the full year and a diluted share count of 91.7 million shares for the year.

I'll remind you that this guidance represents our best estimate as of today.

I need not remind you that the economy is extremely uncertain and, therefore, our performance could differ materially from our current outlook as conditions change.

For fiscal year 2009, we are planning capital expenditures to be in the range of $135 million to $145 million.

Capital expenditures will again will focused on new stores and remodels, as we are planning 210 new Dollar Tree stores, plus 25 new Deal$ multi-price stores, and 90 remodels, along with the addition of frozen and refrigerated capabilities to another 150 stores.

Depreciation and amortization is estimated to be in the range of $160 million to $165 million.

We anticipate that depreciation expense as a percent of sales will continue to decline in 2009.

With that, I'll turn the call back over to Bob.

Thanks, Kevin.

I want to leave everyone with a few summary observations.

For more than a year the retail environment has been especially challenging.

Pressure on costs, especially fuel and energy, were the most intense they have ever been.

But through it all, Dollar Tree, where everything is $1, has continued to grow and strengthen.

In 2008, we generated positive comp store sales in every quarter, grew revenue by 9.5%, increased earnings per share by 21%, and improved our operating margin.

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

While many of other retailers have been pulling back, we continue to open new Dollar Tree stores, and our Deal$ stores are very exciting.

We have the capital available to support our growth plans while generating substantial free cash.

Our prudent cash management strategy in 2008 has put us in a strong position going into 2009 with much more flexibility than last year.

As we enter 2009, we know that our customers are under intense pressure.

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

We believe we are positioned squarely in the bulls eye of what customers are looking for, and we are focused on selling them what they want to buy.

Our merchandise value, and our increased mix of consumer basics make Dollar Tree more relevant now than ever, and we are determined to do everything we can to be a part of the solution to the daily challenge of balancing household budgets.

We're dedicated to building value for our long-term shareholders.

That means solid execution of our business plan, and managing our capital in a way that enhances shareholder return.

Many of you have asked about share repurchase.

In 2007, we repurchased $473 million of Dollar Tree stock.

In 2008, in the face of economic uncertainty, we believed that it was prudent to build cash, and we did not repurchase shares, a very sound strategy for the uncertain times.

We currently have $454 million remaining in our share repurchase authorization.

As has been our practice, we will continue to review share repurchase opportunistically as a potential tool for building value for our long-term shareholders.

We had a great year in 2008, and we're determined to do even better this year.

We're off to a good start in 2009 with a very well-executed Valentine season and our stores are ready with a terrific presentation for the Spring and Easter.

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.

Thank you.

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

(Operator Instructions).

We'll go first to Adrianne Shapira with Goldman Sachs.

Thank you.

Bob, I'm just wondering in the beginning of the call, you had talked about, obviously, there is a weather impact, calendar, and it sounded as if there was a rebound in comps post the weather impact, and you talked about a good start in '09 with some impressive -- the best Valentine's Day in years.

Can you elaborate in terms of what we're seeing in terms of the underlying comp trend, maybe explain a little bit in terms of the comp performance during the quarter?

Sure, Adrianne.

We don't report the monthly, but I'll give you some color on that.

We came into the quarter knowing that there was a calendar shift and we planned for it.

As everyone knows -- November, Thanksgiving moved to -- a week later, so it basically moved out Thanksgiving to Christmas sales, we lost a week of sales, Christmas selling in November.

We knew that, and we planned for it, and we thought that was about a $25 million bogey.

We also thought some of that was going to move into December, so it wasn't going to be lost and we had plans to overcome that.

What we didn't know was that the succession of winter storms from mid-December through Christmas was going to impact our Northern stores as -- as it did.

Holiday sales were very strong despite the weather, but as these storms swept across from the Pacific Northwest all the way to the East, you could track the sales and the comps across the Northern part along with the storm.

We think that the weather, the severe weather -- by the way, when the sales were being negatively impacted in the North, our sales in the South in the warmer-weather stores were doing just fine, according to plan, maybe even a little better in some places.

The stores as the weather passed through rebounded.

The underlying strength of the comp was there.

We think the weather, it's an estimate, the weather cost us $20 million to $25 million of sales in the fourth quarter.

But we still posted a respectable 2.2% comp, and as the weather passed, so did our comps rebound.

We're only three weeks into the new year, so too early to declare a victory, but we're off to a good start.

We had a terrific Valentine's season.

I was very proud of our stores with the transition from Christmas and then the big game in January and then Valentine's.

If you had a chance to go to any of our stores, you would have seen Valentine balloons covering the ceilings the week before Valentine's Day.

Our stores did a terrific job and we had a really good, strong result for our Valentine's season.

That sounds great, Bob, just so -- to be clear, the weather, $25 million, and then the calendar shift, another $25 million, so the two together, that 2.2% gets you back to the closer 5% to 6% you had been running?

You can't really add it up all like that, Adrianne.

Again, I'm just giving you the color, but we think the weather impacted us $20 million to $25 million in fourth quarter.

The calendar shift we knew about, and when Thanksgiving -- it does this every few years -- Thanksgiving moved to the last week of November, obviously, we were going to feel it in November, leading up into the Thanksgiving shift, things were running right along.

Even through November they ran according to our plan, because we knew about it.

Some of that $25 million that but due to the calendar shift, again, we got it in December, we planned to get it back in December, and we probably did.

So one plus one doesn't equal two on these.

What I look at with great confidence is the rebound as I saw the weather pass through the cold-weather markets.

I look at the sales in the markets that were not adversely affected by weather and I look at the rebound as the weather passed through in the fourth quarter.

Right.

And just my follow-up question, as it relates to the margin, as you think of that going forward you expect continued negative mix shift from the lower-margin categories.

Talk about what you expect when you lap that in the second quarter, you are just going to answer anniversary it, that sort of big step up.

So help us think about what you would anticipate once you anniversary that step up?

Well, it is all in our guidance, and we do see a continued mix shift.

More consumer products.

Our consumer products is growing faster than our general merchandise products.

Everything s growing, but eh consumer products are growing faster.

People are under pressure.

I think they are going to be under even more pressure going forward, and I think they are going to continue -- new customers are finding us all the time, and I think we are going to continue to get new customers to buy the HBC products that we sell that are such a great value, the food products and all the things, and the cleaning supplies that people need every day.

So we're going to -- as I said in my prepared statements, we're going to sell them what they want.

We make money on that stuff too.

It turns faster.

It does increase traffic, it's more frequently purchased.

It's all good stuff as far as increasing market share and improving the strength of our business.

We have -- we've guided with the mix shift as we see it for the first quarter and for the year.

Great.

Best of luck.

Thank you.

We'll go next to Meredith Adler with Barclays.

Thank you very much.

I would like to follow-on Adrianne's question about fourth quarter sales.

There is a mix shift in the fourth quarter.

I believe it is more discretionary seasonal merchandise which as you said is going slower.

Are you willing to give us a sense of what the comps were for the consumables in the fourth quarter?

No, Adrianne, we don't break it out to that degree.

The mix shift, as Kevin said, though in the fourth quarter was 300 --

340.

340 basis points.

It is roughly in the 60/40, 40% consumables, 60% general merchandise, we call it.

It was a little more than that in fourth quarter, and it did grow over the last year.

And then I would just like to talk a little bit about your sourcing opportunities.

I'm hearing things -- I think costs must be coming down in China, but there are also a lot of factories closing.

How do you think that's going to impact Dollar Tree?

Well, we're excited.

I hate to say it this way, but the economic downturn, there are pressures on your business, and then there are opportunities that come from that, and we're seeing with the downturn in the worldwide economy, we're seeing more people wanting to do more business in China, as well as all over the world.

The Chinese factories are, their sales are down, so they are looking to do more business.

That translates into better costs for Dollar Tree, which as I said before, we look at it in really two ways, one, some of it we take in the form of margin, some of it we take in the form of value, to drive more of the top line.

I just returned from China a few weeks ago, and we're working on next year's Christmas and beyond, and prices were very favorable for us on the products that we -- the categories that we source from China, and not only that, we're starting to see products that we used to be able to sell for the margins that want that we had dropped, maybe, over the years.

We're adding some of those back.

We're going to have our Christmas houses again this year, which we were unable to have for the last few years.

Some of this translates into more value, which enables us to give our customers more value, drive more top line growth and some of it translates into a little better margin on our imports.

(Operator Instructions) And we'll go next to Charles Grom with JPMorgan.

Thanks, good morning.

Just running some quick math here, it looks like your guidance implies operating margin erosion of about 5 basis points, maybe flat for the year.

A couple questions.

One, is my math correct?

And, two, just wondering what your underlying assumptions are for gross profit margins and SG&A?

Well, Charles, as we looked at the year, obviously, it is early.

There are a lot of unknowns out there with regard to the economy and fuel prices and the things -- all of the things I talked about earlier and the things we put into our guidance.

You know, I think looking at it, we gave some pretty good comp guidance.

There are not a lot of retailers out there that are guiding to low to mid-single-digit-type comp increases.

So I think we feel pretty good about that and the relevance of our business in the current environment.

But it -- we are concerned about the various pressures that could come about from things that are yet to come.

So that's all baked in there at the end of the day, and while we haven't really spoken in the past, directly to these percentages for the year at this point our guidance is what it is, and we'll let you infer what you believe that percentage is.

But we feel pretty good about it, and everything that is going on out there.

Okay.

And just -- my follow-up would be, just on depreciation, given that you are growing stores, say, 6%, 7%, where are D&A dollars expected to be more or less flat?

And, I guess, why were they more or less flat this year as well?

Just surprised the depreciation is not rising more given your square footage growth.

Obviously, we have opened a lot of stores over the last few years, and we depreciate the stores over the initial term of the lease which is five years.

So you have a lot of stores that are dropping off on the back side.

And with us opening 210 stores this year, and another 25 Deal$ there's just a natural progression that says that it's not going to grow at the same manner given the size of our overall store base currently.

Okay.

Thanks very much.

Makes sense.

And we'll go next to Mike Baker with Deutsche Bank.

Thanks.

So my two questions are, so very good comp this year, obviously, and operating margins, I think were up 9 basis points.

You got into a similar comp next year, and margin about flat.

I guess the question is in this kind of environment, where the mix is going to skew towards consumables, is your margin about as high as it can get given the current environment?

And then my second question would be on some of the comp drivers that you have had in 2008, things like rolling out food, EBT, credit cards, et cetera.

Does that provide the same tailwind in 2009 as it did in 2008?

Thanks.

Mike, I can give you color on the margin.

Is it as high as it can get?

Probably not.

Again, we try to include in our guidance all of the things that we don't know, we try to give ourselves some credit for that.

The -- we are rolling out fewer frozen and refrigerated departments because we now have it in a lot of the stores.

That piece of the business is slowing down, the -- and that is amongst the lowest margin product that we have.

We are, as someone mentioned earlier, I think Adrianne mentioned earlier, that we are lapping -- anniversarying some of the expansion of the consumer product, so that -- those two things there should be sort of an uplift on our margin.

On the other hand, we don't know where fuel is going to be.

We don't know what this economy brings to us, and we're trying to consider that into the -- as we try to make long-term guidance in an environment that changes so rapidly, we're trying to be credible, I guess, in our guidance, in factoring those things in.

So there's some upward opportunities.

We certainly are taking advantage of all of the ones that we can and see, and then there is the unknown out there, and that's what you are seeing in our guidance.

Okay.

Fair enough.

Thank you.

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

Thanks.

Kevin, you may have given this number out and I may have missed it, but when you look at the impact of fuel cost and how diluted margin for all of FY '08, could you remind us what that dilution level was?

I don't know that we have spoken to the dilution level.

You know, obviously we got some benefit in Q4 from the fuel cost coming down, and we looked at it, and the costs a year ago in Q4 was about $3.35, the cost in the Q4 this year was about $2.54.

So, obviously, some pretty significant drops.

I think probably what is as important if not more important in the long term is some of the things we have talked about, the efficiencies we're trying to drive through our logistics system.

And, because, obviously, we can't control the price of fuel itself, but what we can do is continue to work on our efficiencies around cubing our trucks, controlling stem miles, and leveraging the network in and of itself.

And the logistics team has done a really good of this, a very difficult environment his past year and we expect that to continue.

So I think that's the way we really look at it.

I was just recalling in -- I believe in the third quarter conference call before you joined the Company, I believe they indicated it was 40 or a little bit higher, and I think in the second quarter of '08, the pressure on gross margin from fuel was around 20 or so, so it would be safe to say for the year, it negatively impacted margin by about 20 when you think about the benefit in the fourth quarter and the pressures in the second and third?

You know, it's probably in the ballpark.

I think that's a reasonable estimate.

So when you think about, I mean, you are right, no one knows where fuel prices are going, but if you were to take current pricing, why would fuel not benefit margins by 20 to 40 basis points in '09?

Well, it's -- it's -- it's just too big of a leap to make that fuel is going to stay where it is.

We included, again -- we can give you a best-case scenario, oh, my gosh, fuel is down, it's going to keep going down, but we didn't do that.

We took what we thought was the most likely.

If fuel keeps going down, obviously, we're going to benefit from it, but I don't know that anybody on our side can quantify that as far as past what's going on right now.

No.

And, Bob, I know in the --

I just don't -- we just don't know it.

I know in the last couple of years, you have been attempting to run SG&A so that it would run flat as a percent of sales if comps were up around 2%.

Do you think that that type of threshold is achievable in 2009?

Yes, I think so, and we -- look, we are focused on SG&A and we ought -- it's part of our D&A for one thing, and, secondly, more so than ever with the rising cost that you saw across retail last year, and you take -- we faced all of those same costs, everybody else did.

Fuel was up, there was pressure on cost on merchandise.

There was pressure on cost on bags.

There was pressure on everything, and we still increased our margins last year.

We were able to lower our SG&A.

We are doing that because -- couple of reasons, number 1, we employ technology where we can to take costs out.

We're really focused on our processes.

We have initiatives underway that would pull binders throughout the organization on how to take cost out of the business through process efficiencies, through buying better.

A lot of the things that we do now, not -- non-merchandise that we sell buying, but the product that we buy to use in our stores.

We're using reverse options.

We're using all of the means that we can to leverage the size of our buy, and to improve the flow, and the efficiency to take costs out.

We do face minimum wage increases in 2009.

That's mostly going to impact us in the second half of the year.

We believe that we can offset much of that through improved efficiencies, productivity in our stores, and between the productivity increases in our stores and the -- and the initiatives that we have underway to smooth the product flow to our store stores, we believe we can not only run a better store, but we can do it a better rate.

So we believe, yes, we believe we can continue to take costs out of the business, and we have proven that we have in the past, and I think we will again in '09.

We'll take our next question from David Mann with Johnson Rice.

Yes.

Thank you.

First, can you quantify the dollars that you expect from the Easter benefit and the comp benefit in the quarter?

I think last year we said it hit us for about $25 million when it was early, it was about as early as it could possibly be.

So you could probably take that and [dodge] that forward into this year as far as an opportunity.

Where it benefits us -- by the way, just for benefit of rehashing this, but the -- a later Easter helps us in our Easter sales because it helps -- it gives us longer to help us sell our Easter product, but it also gets us past that bad weather that you sometimes have in March.

When Easter is in March like it was in 2008 you are always subject to something bad happening with the weather.

When Easter is in April, you pretty much get past that.

What we see with these late Easters is a lift not only in our improved Easter sell-through but also a lift in our summer seasonal toys and other spring and summer product as well as everything else.

So we think -- you could say probably a $25 million benefit to this year.

That's what we pointed to, I think, last year when it went the other way.

Okay.

And then, secondly, it sounds like you continue to be incrementally more positive on the Deal$ concept, so can you talk a little bit on the operating metrics of Deal$ how those stores now perform relative to Dollar Tree openings?

No.

We have never broken Deal$ out separately, I have only ever spoken in terms of color and how we think about it.

So I'll attempt do do that now.

The average ticket in our fourth quarter for our Deal$ stores was about $9.72, and -- overall.

The new Deal$ stores which I have said, by the way is the best proof of the model is when we open a new store in the new area especially.

Our new Deal$ stores average ticket was $10.61 in the quarter.

If you look at the average ticket when we had an item that was multi-priced we call it, an item that wasn't $1 in it, the total was $15.65 in our Deal$ stores, average ticket.

The new Deal$ store is a little higher than that at a little over $16.

Our average ticket without the multi-price, $5.43, so you can see the average -- the multi-price is really raising that average ticket.

Transactions with multi-price, our total transaction, about 42% now.

Last year in fourth quarter, that was less than 28%.

So there's a big movement up on the transactions -- number of transactions -- percent of transactions that include multi-priced items.

Multi-priced dollars totals about -- a little less than 34% with the new Deal$ store it's about 36%.

And our average unit retail is still about $3, new stores, old stores.

And that comes, I believe, from the focus that we have on the price point of about -- around $5.

Going forward, we still got a lot of work to do on this.

I am very excited about it, I am very enthusiastic about it.

It is a brand new model, though, and new models take time to perfect.

The sales productivity is improving, the comp store trends have accelerated in the Deal$ stores.

Our labor management in '08 was better, and we have improved efficiencies in the stores.

Our shrink has improved in the Deal$ stores.

So a lot of things are improving in our Deal$ stores, but for 2009, we have got some things -- some work to do.

First of all, by 2009 -- number 1 focus is to stabilize our basic assortments and our replenishment of those basic assortments, define and stabilize those basic assortments, number 1.

Number 2, we're going to improve and clarify our price message to our customer, both the image and the actual "here is how much it is" message in our stores.

We have got some opportunities there.

And, third, and this is a big, broad "mom and apple pie," but creating more merchandise excitement in our Deal$ stores.

I believe in the last year or so we have made some great headway on operational standards and on operational metrics, but we need more merchandise excitement in these stores, and our merchants are absolutely out there beating the bushes, and focused on bringing more merchandise energy and merchandise excitement and reason to come to these Deal$ stores.

So that's why I'm excited about it.

It's not because the model is there.

The best use of dollars at Dollar Tree today is opening up a Dollar Tree, where everything is $1.

It's the highest return in our corporation.

As you heard Kevin say, it's the highest returns in our sector.

Nothing beats a Dollar Tree.

We're bringing this Deal$ model for couple of reasons.

Number one, we think we can develop it into a brand that we can go into some higher-cost markets with, because we believe we can develop a higher total sales store format with the Deal$ model, and leverage more fixed costs in these more expensive markets.

That's one part of the strategy, and the other part of the strategy is just to expand the Company and market share across the country as we put the Deal$ model alongside the Dollar Tree model.

And we'll take our next question from Patrick McKeever with MKM Partners.

Thanks, good morning, everyone.

Good morning, Patrick.

Just wondering, I guess, along those same lines, Bob, if you could talk a little bit more about the decision to scrap the Oops!

test.

I mean, what were you seeing there?

Was it simply that sales of those products that were over $1 within the store were not as good as sales of other products?

Or did the Oops!, just having the Oops!

merchandise, the above $1 merchandise in the store, did that actually hurt performance for the stores overall where the test was taking place?

Patrick, the sales on the over $1 item was almost incidental we found.

And we sold some stuff, but it was not a compelling offering.

When you looked at the sales on that, versus what we could do at the $1 price point, it wasn't compelling.

Number 2, it wasn't accretive to margin.

The idea that because you sell something for more than $1 you can make more margin is not valid.

The things that we were selling that happened to be not $1 were the things that you would expect to sell.

It was bundled packs of toilet paper, and it was bundled packs of paper towels, and large bottles of laundry detergent and those kind of things.

All of the things we're doing in our Deal$ store, by the way.

So it wasn't accretive to margin.

It wasn't accretive to sales, and it was distracting to the customer.

They allowed us to do it.

They never really embraced it.

And we tried this.

By the way, we tested this in every shape or form across, really more than a year.

We changed stores, we did a lot of things.

I think we gave it its due, but those are really the three things.

It was distracting the concept.

And the other thing is -- and thank you for giving me the chance to say this, because if you look back at 2008, I don't think any retailer in America can say they didn't see a more challenging environment to do business with from pressures from costs, and pressures from -- pressures to increase cost on merchandise, and increase costs on everything that you use, energy, and diesel fuel.

And Dollar Tree, where everything is $1, stood up really well during that time when all of those pressures were brought to bear, and all of the uncertainty, and we increased our market share, and we increased our bottom line, and we did a lot of good things.

So what we have now is a very clear strategy and philosophy about going to business.

First of all it's Dollar Tree, and at Dollar Tree everything is $1 or less.

We sell greeting cards for two for $1, and we have candy bars and things like that But at Dollar Tree everything is $1.

It's clear.

The customer understand it.

They love it.

They respond to it.

The earnings are terrific.

At Deal$ everything is not $1, everything is a value, and we have lifted that dollar restriction to bring more categories to the customer, and to offer even more value to more customers as we go across the country.

So our strategy, I think, by dropping the Oops!

-- it was the right thing to do to try it, it wasn't the right thing to do to continue.

We have a multi-price point strategy.

It's called Deal$.

Got it.

And then you mentioned that California and Florida were two of your three biggest states at this juncture, and I was just wondering if you are seeing -- just given the fact that unemployment in California is, I think, pretty close to 10%, and then Florida has all of that -- both states do, but Florida has the -- has a tough economy as well with all of the housing issues.

Do you see any different -- is there any notable difference in performance for your stores in those markets in particular versus your stores elsewhere?

I mean, are you doing even better in places where the economy is even a little bit tougher than it might be elsewhere?

Patrick, we have always done well in Florida.

We love it.

It's one of our oldest states.

We have been in almost longer than we have anywhere else with a lot of stores.

We have good people down there.

We have good stores down there.

We would like to open up even more stores, frankly.

I was out with the real estate team two weeks ago, down in south Florida, because we're finding the opportunity to get into some real estate now that was too expensive before.

Se we're really looking to continue the growth.

As far as the impact of the bad economy in Florida, I don't know that it's any different than the rest of the country.

California tends to always be a little more challenging in operating.

I'll share that with you, just the nature of doing business in California is a little more complex.

We have been there since 1998, 1999, so we know how to do it.

But when you look at some of the costs as you get in to the Bay area, really high volumes, but you also have the highest opportunities and business -- complexities in the business, and for the past year, I would say that the West Coast did not lead our country comps in the past year.

Our next question comes from Mitch Kaiser with Piper Jaffray.

Hi, everyone, it's Peter Keith calling in for Mitch.

Thanks for taking the question.

I don't believe in this quarter you called out shrink as a positive driver to gross margin, so that would be the first quarter, and after the last three, where it was not a benefit.

Is there anything that changed in the quarter?

Or it is simply just anniversarying some improvement from last year?

Yes, I think it's more the later in the sense of improvement, versus going against improved numbers from a year ago.

Nothing has really changed.

Obviously, we recorded the best shrink in the history of the Company last year, which is, obviously, a testament to the process and procedures that our operations teams and our asset-protection teams have put into place and are executing to, so very proud of that.

It is going to -- in the current environment there has been talk in the media that shrink could become more of an issue, but I think that's just talk.

Our goal is to continue with the programs we have put into place to control it, and hopefully get better.

At a minimum we need to hold where we're at, and hopefully at the end of the day get better.

Okay.

Thank you.

And then also related to gross margin, you did comment that product margin had improved, now, I was wondering if you could just provide us with a little more color on that.

If that was driven by better buying or lower markdowns?

What was behind that, and how should we think about that going forward?

Well, going forward, I think that the -- the down worldwide economy equals opportunities to reduce cost on -- on products, so going forward, we are seeing pressure downward on costs, which is good for us.

Pressure upward whether on margin or value for us.

For the past year, though, we really did -- our merchants and our logistics team, as I said, did a really nice job of managing through all of those pressures.

Our merchandise margins from China actually grew last year over the year before.

So even in the toughest of times, they were able to negotiate the product, to change the factories in some cases.

You've heard me say before, we changed the product not the price, so as price pressures go up, we changed the product, always offering more value for the dollar.

As costs go down, we take some of it into margin, we take some of it into more value for the customer, and opportunity to drive more market share.

We have time for one or two more questions.

We'll take our next question from Karen Short with FBR Capital Markets.

Hey, there.

A couple of questions just on automatic replenishment and, I guess, your planograms.

I guess my question is your competitors in the dollar store space are planogrammed, and given the higher frequency associated with the consumables and the fact that you're not planogrammed does that start to challenge your business model with the frequency?

I mean, I know some of your items or many of your items are on auto-replenishment, but I just wondered if you could help me understand and triangulate a little bit, and then I have a follow-up?

Yes, we look at it as a positive, an advantage.

We look at planograms and Dollar Tree, we don't do planograms.

We don't do planograms in Dollar Tree because we want the flexibility as things change if we get a better buy on another brand of whatever the item is, we want to be able to buy it and get it into stores now.

If you go to a planogrammed company it takes them months to change their planograms and to actually change an item in their product mix.

We're fast, we're flexible.

We're nimble.

You give us an opportunity to buy something, we'll buy it and have it in the store next week, and we see that as a huge advantage over our competitors, especially, my price is always $1.

If I get a better price for the customer, I can do it, I don't have to get rid of everything that's in the pipeline for an old planogram.

Now automatic replenishment, how do we do that?

It works exactly the same way as it does at the planogram places.

We make a lot of the same assumptions.

We know what sales are in the store by category or even sales of a like item, if it's not the same item.

We set up our replenishment with a thought process on how many facings we're going to put in a store based on what the sales potential is of the store.

We know what the lead times are on the product, and then we put it out there, and we replenish based on sales, and if stores sell more, they get more.

And if stores sell less they don't get anymore.

And if, by the way -- we -- we find a better toothpaste, or a better soap, we buy it, and we'll put it out there sometimes alongside the existing while the other item runs out, but auto-replenishment working really good for us.

We started off with a few items.

I guess we're up to probably 1,000 items now that we -- auto replenishment.

That doesn't mean we have the same 1,000 items on January 1, that we have on December 31, those items still change over the course of the year.

Okay.

Thanks.

Just wondering -- I know Dollar General, kind of changed their hours to extend hours of their stores, I'm wondering if you are putting any thought towards doing that or if you have recently?

And also just wondering if you could give us an update any potential changes in your advertising plans for '09?

We have store-by-store looked at our hours, and we have changed hours over the past -- in the fourth quarter, and, again, going forward.

And we have found some opportunities where we could open earlier or stay open later or both.

So that's sort of a moving target.

Dynamic target.

Advertising, we're going to spend about the same percentage we did in the past year.

Most of our advertising is going to be focused on in-store efforts, building end cap.

Buying the merchandise the way we want to see it presented, take the impact to the customer, building the features, the end caps, the tables, the side stacks in the store.

And then print opportunities, a little bit of electronic, but mostly print opportunities that -- tabloids I'm talking about -- that we'll have in all of the stores, and from time to time we'll actually distribute them via mail or via newspaper.

It depends on the market.

And then for grand openings, we do some things around grand openings, try to open up our stores in a better way, get visibility in the markets that we're in.

If you look at the percent of advertising to sales, though, it is going to be about the same.

We have time for one more question from Joe Feldman with Telsey Advisory Group.

Great.

Hi, guys.

Thanks for taking the question.

As far as the tax rate goes, how should we think about that in '09, because, honestly, it came in a bit lower than we had expected for the fourth quarter, and I understand you mentioned that there were some state resolutions that helped bring it down a little bit.

But I guess what should we think about for '09?

Yes, as we looked at '09, we gave guidance here of 37.8% for Q1, and 37.3% for the year, and you are right in Q4 we did see some benefit from resolving some state audits and bringing those reserves off of the books, which was good.

I will tell you for the most part that we're pretty caught up with those kind of things, so I wouldn't expect a lot of big benefits from things like that going forward.

So that's why you'll see the rate potentially increase back to a little over 37% this year that we just started.

Okay, that's helpful, thanks.

And then also with regard to the rollout of -- acceptance of Food Stamps, what kind of lift do you guys generally see in the store, and as you have rolled it out, I would imagine you went to those stores that needed it most first, are you seeing less of a lift as you roll it out to the rest of the chain?

Well, we have increased the number of stores that it's in.

It's almost double where it was a year ago to 2,200 stores.

But it is a very, very small piece of our business at the end of the day.

So I don't know that we really quantify what kind of lift it creates, but it's an area that we think we can -- it's another tender type, we can continue to be relevant to our consumer, and, hopefully, bring some more people in the door at the end of the day, but I don't know that we have really quantified it as far as a lift perspective.

This does conclude our question-and-answer session.

At this time, I'll turn it back to Mr.

Reid for any closing remarks.

Thank you all very much for participating in the call.

Our next conference call is scheduled for Wednesday, May 27, 2009 when we'll discuss our first quarter 2009 results.

And for information on any presentations that we're giving, please consult our website, www.dollartree.com.

It has a schedule of presentations, it's pretty dynamic in changes as we get closer.

Thank you.

This does conclude today's conference call.

We thank you for your participation.