美元樹 (DLTR) 2009 Q1 法說會逐字稿

Good day and welcome to the Dollar Tree Stores Incorporated first quarter 2009 earnings release.

As a reminder today's conference is being recorded.

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

Tim Reid, Vice President of Investor Relations.

Please go ahead.

Thank you, Stephen.

Good morning and welcome to the Dollar Tree conference call for the first quarter of fiscal 2009.

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, our Chief Financial Officer will provide a more detailed review of our first quarter financial performance and provide our guidance for the remainder of 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, most recent current report on form 8(K) and our 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'd like to turn the call over to Bob Sasser.

Bob?

Thanks, Tim, and good morning everyone.

I hope everyone has had a chance to see our press release.

This morning we announced earning for the first quarter of $0.66 per diluted share.

This represents a 37.5% increase over last year's $0.48 per diluted share.

As previously announced, total sales for the quarter were $1.2 billion, an increase of 14.2% over the first quarter of fiscal 2008.

And comp store sales increased 9.2% for the quarter.

Operating income grew by $27.9 million, an increase of 40% over first quarter of last year.

And operating margin for the first quarter was 8.1%, an increase of 150 basis points compared with the 6.6% operating margin in the first quarter last year and net income rose 38.4%.

In addition during the first quarter, we repurchased 1.1 million shares of Dollar Tree stock for $42.7 million reflecting our commitment to building value for our long-term shareholders.

We are of obviously pleased with these results.

I am particularly pleased that the financial performance achieved in the first quarter of this year was on top of a very strong first quarter last year and our positive momentum is continuing.

These results speak to the underlying strength and flexibility of our business model.

Dollar Tree can adapt quickly to a changing environment to offer value in all seasons throughout changing cycles and circumstances.

We know that our customers have been under pressure for more than a year.

Last year it was record high fuel prices.

This year it's rising unemployment and concerns over credit.

Our continued strength in this environment is further evidence of Dollar Tree's growing relevance to the customer.

We have a concept that customers love.

We are vigilant about understanding what our customers need, and we do our best to give it to them.

Whether discretionary variety merchandise or non discretionary basics; our stores offer both.

In the first quarter customers continued to rely on Dollar Tree's expanded assortment of basic products.

Sales were strong in food, household consumables, and health and beauty care basics.

However, our success was not confined to consumables.

During the first quarter we continued to see good growth across a broad range of merchandise categories including substantial growth in party, toys, books, stationery, floral, and pet supplies.

And of course, our seasonal business in the first quarter was terrific.

This was a result of great merchandise assortment, timely and effective advertising and in store promotions and outstanding execution at the store level.

Our advertising and sales promotion efforts in the first quarter were a combination of tabloid print ads, in store displays, signing and fliers.

Similar to last year, we ran two tabs and inserted them into the newspapers in selected markets.

In addition to this, we increased our in store promotional activity.

Whether the tab was inserted into the newspaper in their market or not, all stores received printed copies of the tab.

All stores received the merchandise and all stores set the feature displays.

Merchandise displays were focused on relevant categories, seasons and events as we moved through the quarter and we continued with our million dollar brands, stretch your dollar and look what $20 buys and in store campaigns and we had solid results.

Our store teams continue to do their part to consistently deliver on the promise of a clean, bright and fun place to shop.

Seasonal transitions have been well executed with fresh and timely displays of merchandise for every season.

In the first quarter that translated into strong seasonal performance from Valentine's Day through Easter and beyond with excellent sell through.

As a part of our effort to provide more of what our customers want, we continue to offer frozen and refrigerated products in more stores.

During the first quarter 2009 we added freezers and coolers to 96 more Dollar Tree stores.

That brings our total to 1,203 Dollar Tree stores compared with 1,058 stores at the same time last year.

We are on track with our plan to add freezers and coolers to 150 stores for this year and we will have frozen and refrigerated products in about 1,257 stores by year end.

In addition to merchandise initiatives, penetration of debit cards, credit cards, EBT and food stamps continues to grow.

Debit card penetration increased 300 basis points to about 24% of sales.

And based on our credit card penetration increased by 50 basis points in the first quarter to 9.6% of sales.

With our experience we expect the penetration of Visa credit to continue increasing.

Also with our expanded mix of food items, foot stamps and EBT have become a more important component in our business.

We currently accept food stamps in 2,265 qualified stores compared with 1,250 stores last year.

This number will continue to grow as we expand frozen and refrigerated capability to more stores.

Now for some new business, in April we launched a new initiative, Dollar Tree Direct.

It's a redesigned web site featuring an e-commerce platform.

Our new site is an extension of the great value, convenience and fun shopping experience that we've always offered in our stores.

Every online item is an incredible value at only $1 and is sold in case back quantities.

This is another exciting way that we are bringing the value of Dollar Tree to more consumers and it is especially important to customers planning events; small businesses and organizations alike.

We are happy with the initial customer acceptance of our new web site and our e-commerce sales were on plan for the first quarter.

If you have not already done so I invite all of you to check out the new sight at www.dollartree.com.

Buy something if you will.

But in addition, to adding to e-commerce the site is completely redesigned including a new Investor Relations link that we hope you will you find useful.

Turning to store growth, I want to point out that while many retailers have pulled back or stopped store expansion not so at Dollar Tree.

We continue to grow and aggressively open new stores.

During the first quarter this year we opened 79 new stores, relocated and expanded another 25 stores and grew total square footage 6.4%.

We ended the quarter with 3,667 stores and room to grow.

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

Last year we averaged 10,310 square feet.

And the 2009 class is running around that size or slightly smaller.

One of our key initiatives is to increase the productivity of our new stores and while it's very early in the year, the average productivity of the 2009 class has improved so far.

It's higher than last year.

For the full year, we plan to open 210 new Dollar Tree Stores, 25 new Deal$ stores and expand and remodel 90 stores.

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

We continue to refine our Deal$ model and the excitement around this concept is building.

As many of you know the key elements of a Deal$ store are surprising value, convenience and a fun and friendly shopping experience.

Everything is not $1 but everything is a value.

We currently have 146 Deal$ stores with merchandise focused predominantly at $5 and less.

We are especially excited over the availability of new merchandise opportunities at these higher prices and the lift that it can provide an average ticket.

As we refine our assortments, the results are improving.

In the first quarter we had strong comparable store sales increases in our Deal$ stores with excellent seasonal performance and sell through.

We also had double-digit increases in a wide variety of categories including housewares, electronics, hardware, pet supplies, household consumables and toys.

It's clear that Deal$ is on the right track and consumer acceptance of this concept is growing.

Throughout the rest of this year at Deal$, we will continue to refine and improve our key operating metrics.

That means continuing to upgrade our standards and run better, more compelling stores.

We will focus on rationalizing the assortment to the customers' needs, improving our replenishment disciplines, evaluating and testing the pricing strategy, expanding the supply chain and creating merchandise excitement at Deal$.

And we will continue to roll-out new stores in a measured and thoughtful way.

We opened five new Deal$ stores in the first quarter.

We plan to open, add a total of 25 new Deal$ stores over the full year.

Before turning the call over to Kevin, I want to comment on current business trends.

I'm pleased to tell you the underlying strength of our business continues and we are off to a good start to the second quarter.

We transitioned from Easter to our spring luau party promotion in April and on to a very successful Mother's Day in May.

This past weekend we all celebrated Memorial Day and for Dollar Tree, the terrific seasonal execution continued.

We were very pleased with our first quarter performance and so far the second quarter has remained strong.

I will remind you that first quarter comp sales this year had the benefit of the later Easter and late Easters are a plus based on history.

And as we had told you earlier we anticipated and we achieved a $25 million benefit to first quarter this year compared with the first quarter last year when Easter was much earlier.

We do not have a similar calendar shift benefit in future quarters and that is reflected in our guidance.

Now I'd 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 first quarter and he will also provide guidance.

I will then provide summary comments and we will answer any questions you may have.

Kevin?

Thanks, Bob.

As Bob mentioned, our diluted Earnings Per Share increased 37.5% in the first quarter of 2009.

The increase was driven by our strong sales, a 70 basis point improvement in gross profit and an 80 basis point reduction in total SG&A expense compared to the first quarter last year.

Starting with gross profit, several factors contributed to this performance improvement.

As expected, our shift in product mix towards more consumable product continued to negatively impact our merchandise margin.

Food, health and beauty care basics and household consumables increased by about 220 basis points as a percentage of our mix in the first quarter compared with the same period last year.

However, the pressure from the product mix shift was more than offset by improved merchandise margin within nearly all product categories driven by continued improvements in our sourcing.

Second, freight cost decreased as a percent of sales in the first quarter.

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

This trend began to reverse in the fourth quarter of last year and we saw greater benefits in the first quarter with the reductions in diesel prices and our ongoing improvements in operating efficiency.

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

This is a result of an intense focus for more than a year by operations and loss prevention involving additional training and new procedures to minimize shrink.

In addition the increased sales for the quarter provided leverage on expenses for buying, distribution and occupancy.

Moving down the P&L, SG&A expenses were 26.5% of sales for the quarter, a decrease of 80 basis points from the first quarter last year.

Significant leveraging of depreciation expense accounted for the majority of the decrease.

Declines in advertising and discretionary expenses offset increases in incentive compensation, professional expenses, and fees for debit and credit cards which increased as a percent of sales reflecting continued growth and penetration of these forms of tender in our overall sales mix.

Depreciation and amortization was $38.8 million for the quarter versus $41.8 million for the first quarter last year.

This represents a decline of 70 basis points, a significant leveraging of depreciation in the quarter.

We continue to expect depreciation of $160 million to $165 million for the year.

Our operating income increased $27.9 million compared with the first quarter last year.

Our operating margin for the first quarter was 8.1%, a 150 basis points improvement compared to the first quarter of last year.

This was the highest operating margin for a first quarter in five years.

At that time, depreciation was significantly lower.

Our product mix was weighted much more towards discretionary merchandise and we had frozen refrigerated capability in fewer than 50 stores.

Dollar Tree's operating margin remains among the highest in the value retail sector.

The tax rate for the quarter was 37.6%.

In the first quarter last year the tax rate was 36%.

Due to the recognition of certain tax benefits in accordance with FIN 48 which offset a reduction in tax-exempt interest income.

The higher tax rate this year resulted in a decrease in diluted Earnings Per Share of approximately $0.02 compared with the first quarter of 2008.

Cash at quarter end totaled approximately $355 million versus $84 million at the end of the first fiscal quarter of 2008 and a decrease of $9 million since the beginning of fiscal 2009.

As Bob noted during the first quarter we invested $42.7 million to repurchase 1.1 million shares of Dollar Tree stock.

As of the end of the first quarter we have $411 million remaining in our authorization.

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

Long-term debt was unchanged at $250 million and cash net of debt at quarter end was $88 million.

Our inventory at quarter end was 5.4% greater than at the same time last year while selling square footage grew by 6.4%.

Merchandise inventories per selling square footage decreased by 0.9% and inventories for the first quarter continued to improve.

Inventory turns have been increasing for the past four years and we expect this trend to continue for the full year of 2009.

Capital expenditures were $34.1 million in the first quarter 2009 versus $32.7 million in the first quarter last year.

For the full year we continue to expect Capital expenditures in the range of $135 million to $145 million.

Capital expenditures will continue to be focused on new stores, remodels and the expansion of frozen and refrigerated capability to more stores.

As we look at the second quarter and beyond we must be mindful of a couple of issues.

We still face an extremely challenging economy with great pressure on consumers.

Despite hints of improvement in the general economy, unemployment continues to rise placing a very serious burden on families and impacting their buying decisions.

We are seeing continued increases in demand for the faster turning, lower margin consumable products in our mix and we are managing our inventory accordingly.

Of course we have now begun to anniversary the large increases in consumables so while we expect some additional increases in these categories, the rate of change is not expected to be as great as during the past four quarters.

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

We have included all of this in our guidance.

With all of this in mind for the second quarter of 2009, we are forecasting sales in the range of $1.17 billion to $1.20 billion and diluted Earnings Per Share in the range of $0.47 to $0.51.

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

The top end of the range is consistent with our view that the underlying strength of our business has continued, adjusted for the seasonal impact of the Easter calendar shift.

We have raised our guidance for the full Fiscal Year 2009 as well.

We are now forecasting sales in the range of $5.05 billion to $5.15 billion and diluted Earnings Per Share expected to be in the range of $2.75 to $2.90.

Our guidance assumes a tax rate of 37.8% in the second quarter and 37.3% for the full year.

6.5% square footage growth and a diluted share count of 90.8 million for the year.

I'll remind you that the economy is extremely uncertain and therefore our performance could differ materially from our current outlook as conditions change.

With that I will turn the call back over to Bob.

Thanks, Kevin.

And before turning the call over to you for questions I want to leave you with a few summary observations.

We've had a terrific start to 2009 and we are on track to accomplish our goals for this year.

Sales increased 14% and Earnings Per Share were up 38%.

Our gross margin improved by 70 basis points and our operating margin increased by 150 basis points to 8.1.

And I'll just say it again, that's the best first quarter in five years.

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

And most importantly we are providing a better overall shopping experience for our customers.

Our new Deal$ concept is progressing and exciting.

We are opening new stores in new markets and creating merchandise excitement.

Customer acceptance is strong and growing.

While many other retailers have been pulling back, we continue to grow.

We plan to increase our selling square footage by 6.5% this year.

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

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

In the first quarter we invested $42.7 million for share repurchase.

We are confident about the Company's ability to generate significant cash flow and are committed to use that cash flow to build value for our long-term shareholders.

In conclusion Dollar Tree has a long history of solid financial performance through good economic times and bad and the reasons are very basic.

We have a concept that customers love.

There is something special about the $1 price point when everything is $1.

We pay attention to our customers and we do our best to give them what they need and want.

In addition we've built a business model that is strong and flexible.

We can adapt quickly to changes in the environment and we have proven that over the years.

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 at Dollar Tree and they continue to respond in record numbers.

As proud as we all are of the performance during the first quarter, I believe this Company can do better.

We are well-positioned to benefit when the economy improves.

We are strategically located to serve middle America.

Our stores are bright, convenient, and fun to shop and our values will remain relevant as long as people want to save a buck.

We intend to continue to grow and improve in the future in a measured and thoughtful way.

We are now ready for your questions.

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

Thank you.

(Operator Instructions).

And, we will take our first question from Charles Grom with JPMorgan.

Hi, thanks, good morning.

Just gross profit margins up close to 70 basis points and then 120 on a two-year basis.

It sounds like the biggest driver is sourcing and I think IMU.

Can you flush it out for us and I guess what you're thinking on that line item for the next couple of quarters?

Well, as we've talked a little bit about it, Chuck, we obviously saw leverage in several areas on the gross profit side.

We saw the fact that freight obviously was a benefit on an overall basis and that was roughly about 30 basis points of the benefit.

We saw the fact that our sourcing, again, continues to show improvement.

And we also saw through the increase of sales leverage on our occupancy and distribution costs.

So a lot of good things, everything going in the right direction.

Obviously as we talked about freight if the rates are sustained at where they are at we will continue to benefit as we go through Q2 and Q3.

There's probably less benefit as you get out to Q4 when we saw last year those prices start to decrease.

So, and I think from an overall basis on product margin I think we feel good about what we've seen and what is still to come.

We still have to execute at the end of the day, but hopefully some good things still to come there.

Okay.

And just a follow up to that, can you quantify how much the hit was from the consumable mix?

The actually the consumable mix is about.

Well, it creates 220 basis points.

Right.

The creates 220 basis points as a percent of sales.

So that's really less growth than it has been.

And frankly I expect that as we go through the year to become less of a shift because we did begin shifting pretty substantially last year.

And as you go through the year we will begin to anniversary what has already shifted.

So that was a good indication, I believe.

The other thing that I would just point out is that we've always said that we are in control of our margin, that the mix, we follow our customers with the mix.

But we really make money on everything.

So while we make a little less percent on our consumable product it turns faster.

And while we make a little more margin percent on our variety merchandise, it turns a little slower.

So it's really a matter of managing the mix of that following the customers' needs through the year.

But we really make money on all of that and when you can see the sales of the topline grow as we did in the first quarter of this year even with the mix, 220 basis points higher on the consumer products it really does nice things in leveraging the fixed costs throughout the P&L.

And also increasing the destination aspect of our business.

More customers are finding us, our traffic is way up.

We are finding new customers.

Anecdotally I can tell you we are finding new customers all the time.

And it comes from these larger stores with this mix of discretionary and nondiscretionary and really giving them what they need, when they need it.

So that's just a little more color, Chuck, on the consumable.

That's great.

Okay.

And then just one quick last one, could you, you alluded to my next question which was can you quantify how much the traffic was in the quarter on the nine comp?

All of the increase was due to traffic, Chuck.

Every ticket was flat to maybe a little bit down, but the traffic was up substantially.

So that's where the 9.2 comp came from.

Okay.

Great job.

Thank you.

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

Thank you.

Just following up on the impressive topline and traffic trends it sounded like, Bob, had you said Q2 current trends remain strong and it doesn't sound as if you've seen any deceleration from Q1 trends.

And maybe if you can give us a little bit more color, it sounded like a strong start, and just help us think through the quarterly progression to get us to that low to mid single-digit comp?

We understand that obviously it's a tougher comparison, but help us see what you've seen so far and when would you expect things to accelerate?

Well all the things I am going to say are implied in our guidance first of all, but we did start off the quarter were well.

I'm very pleased with how we started; last week was obviously Memorial Day weekend and we had a terrific promotion in our stores were ready with the picnic supplies.

We are selling steaks for a buck and we had grills out front.

A lot of promotion.

A lot of beverage.

A lot of thing that you might expect around Memorial Day.

Mother's Day was terrific.

We had just a really outstanding Mother's Day mid month.

It's early but I will tell you that the early results of May tell me that the underlying strength of the business is there.

And as we look forward we are up against 6.5% comps from last year this quarter.

But as we have looked for and factored in what we are up against and all the things that we've got going for us as we go forward and as we really have become the center of the universe, I don't mean that egotistically.

I just mean if people are looking to balance their budget and millions of Americans are, they are finding us.

Our traffic is up substantially up.

We are seeing new customers and they're coming in and finding great values in our stores.

So, the underlying strength of our business is there.

Anecdotally I see it.

I see the strength in our business for the first few weeks of the quarter.

Now, you can't declare victory on May alone.

But certainly May is encouraging for the quarter.

And I believe the other key factor that I'm looking at is these gasoline prices are up a little bit from where they were but they are still $1.75 to $2 a gallon less than they were the same time last year.

And in my mind that's almost like a stimulus check to middle America, $20 or $30 less they have to put in their gas tank to go shopping is $20 or $30 more they are feeling better about and hopefully spending some in our stores.

So, that's what we are speaking to.

Now, that's where we came up with the low to mid single-digit comps implied in our guidance.

That's how we are seeing the strength of our business.

Okay.

And then, Bob, just following up, the composition it sounds like in this last quarter you saw continued strength in the nonfood and sort of discretionary.

Is that continuing in early Q2?

Yes, we are -- this nondiscretionary, the consumable basics continue to grow.

But it is providing lift across the whole range of categories that we carry.

For example, our party department is always in the top two or three or four departments every day, every week.

So that's certainly discretionary.

But it speaks to the value and it speaks to the interest of the product.

When they come in to buy their HBC, their shampoo and when they buy cleaning supply and buying food and beverage and those things, they are also buying party, they're buying toys, summer toys, with pool toys and all those types of things that we've always done.

It's a lifting.

It's providing a lift in those other categories.

And so we are coming up with a better, a good mix, driving the topline with the great value and the traffic and then providing more and more margin as these general merchandise categories are improving also.

We'll go next to Meredith Adler with Barclays Capital.

Thank you.

I wonder if you could talk a little bit about your view on whether the stimulus helped you last year?

I think I remember that you said it didn't.

But there is some debate out in the market about whether that's going to make for a tougher comparison for you.

Well, Meredith, although it was hard to measure and almost impossible for to us quantify last year, anecdotally I believe the stimulus checks were a positive influence on sales last year in second quarter for Dollar Tree.

We got a share of that and some of it was just the lift that it gave the consumers' psyche basically.

They had a little more money in their pocket and they were willing to go shopping.

I would remind you however as I said earlier that gas prices last year at this time first quarter and going into second quarter were hitting record highs.

And they were rising during this whole period last year.

In Q2, in Q1 last year average gas price was $3.26.

This year it was $1.95.

In Q2 last year the average price went up to $3.93, almost $4 per gallon.

And although they've risen a little bit we are still seeing $2 to $2.25 gas prices.

So, that's a big savings for middle America.

As I said earlier that's almost like getting a stimulus check this year.

So we believe as we face the period of time where the stimulus checks were out there that the underlying strength of our business is consistent.

We see that.

Again as I said we are in the bullseye with merchandise that people need as they try to balance their budget.

We had a strong start to second quarter.

We see that.

We know that.

Our traffic is increasing and we are gaining new customers.

We see that.

Gas price is $2 less than last year.

It's got to be good for middle America.

I saw yesterday where consumer confidence rose a little so that's all good.

So you put all that together and that's how we put together our guidance as we go into second quarter which was really one of the biggest comp increases that we had last year.

Okay.

Great.

And then just another question.

You mentioned about sort of investments in infrastructure and the ways that that's helping productivity.

Maybe you could just be a little more specific about some of those investments and, then how much more opportunity is there to become even more efficient?

I got to tell you, start with -- look in any corner basically and you will find the opportunity.

If you look at our logistics every new store we open now leverages that investment that we made.

We can reach all corners of the 48 states with our existing distribution centers with no more investment and every store we open up just leverages that.

So that's one investment that we made over the years.

Nine distribution centers across the country, the ability to reach all four corners of the US and now we are reaping the benefits from that.

We've invested in retail technology and it's, it really all boils down to visibility of our merchandise and our supply chain.

We now know what we are selling.

We know where we are selling it.

We have the ability to provide more of the things that are selling to a specific store as they sell more, they get more.

That's reflected, you see the improvements that we've had over the past several years in our inventory turnover.

We are approaching four turns right now.

We've increased our turns over the last several years every year.

We expect to increase them this year.

That's the result of the investment that we've made in retail technology.

The retail technology helps our stores become more efficient.

They know what they're selling but they also know when they are selling it during the day.

So it helps them with their scheduling.

And providing more efficient use of our hourly payroll in our stores.

We know when the truck is coming within 15 minutes.

That's our service level.

Nobody else in retailing I know has a 15 minute window on their trucks arriving in the store, but we do.

And the reason we do is so we can better schedule our store labor so that we can be more efficient in unloading the trucks.

So it's just permeated throughout the entire supply chain, through our store operations, through everything that we do, the use of retail technology, the leveraging of our logistics is really reaping the benefits of all that.

Now, what's left, there's a lot left.

We can continue to improve our turns.

We can continue to provide a better first allocation to our stores the first time out of the box which would ensure higher sales, better sell through.

And everything that we are trying to do with that with our new merchandise assortment planning tool that we've just employed.

We are down into the corn flakes now.

We are into the granularity of allocating by category, by SKU by store now.

So the power of that is going to help us increase our sales, satisfy more customers and improve our turnover.

I think there's still ways to make our stores more efficient by smoothing the inventory flow even more.

We are having some great results in our distribution centers as we are providing a smoother flow into the DCs and then a smoother flow into the stores.

So we've had great progress.

There's more to come and there's more opportunity.

The big investments have been made, though.

And so all these enhancements are really smaller investments, in some cases or in some cases, no further investment in order to gain leverage on what we've already done.

We'll go next to Dan Wewer with Raymond James.

Good morning.

Bob, do you think that with your focus on more discretionary product than other value retailers and your focus on more upscale neighborhood strip centers that you are seeing a bigger benefit of consumers trading down than others within this category?

I think so, Dan.

I believe that we are finding some of the, for us, upper, not Saks but we are finding people that would have not shopped with us before that are coming to us and they are finding the value.

They are finding a better shopping experience.

Sometimes we are surprising them with what they do find when they walk into the store.

It's fun, oh my gosh, everything is only $1.

Look at the value.

I still hear those exclamation points from our customers in the store and I do think that that sets us apart from others in our sector.

I think we are when the upper, the customer is trading down I think they're sometimes thrilled by what we offer as opposed to maybe what they expected to find.

So I think we are getting maybe more than our share.

And by the way I believe that is one of the things that has you've always heard me say that Dollar Tree in good times or bad and that is that element that helps us to do well now when things are tough out there and people are trying to balance their budget.

They are buying the food and the HBC and basics more but they are also buying some party.

When thing improve we still have got things to sell.

We have all the toys and fun things, the stationery, and the teachers corner and all the other things that we bring to the party.

And as well as that fun shopping experience.

And then as a follow-up question, on the value of the US dollar, obviously at lot of volatility in both directions.

And if you can just give us an update either in the strengthening of the dollar we had a few months ago or the weakening here in the last few weeks, any impact on your sourcing and margins on your imports?

The, no, the answer is I haven't seen any negative impact on the sourcing from the dollar.

Really the worldwide recession that we are in has helped us to improve our cost component for our foreign sourcing.

Our prices have gotten better or as I've always said too, sometimes we take it in the form of improved margins.

Sometimes we take it in the form of increased value.

But prices overall have been pressured downward in our foreign sourcing.

And I will tell you this too and I know this is sometimes, I just have to keep saying this but even back a year ago when there was fear of cost increases, our sourcing, our foreign sourcing really improved the margin component improved on our foreign sourcing even last year.

And why was that?

It's because of our philosophy of we don't have to have anything.

Remember, we are out there building this assortment to offer the greatest value that we can to the customer.

If an item that we have carried in the past, if the price goes up or to a point that we are not willing to accept that margin we drop the item or we change the factory or we change the vendor but we don't have to have anything.

And that has served us very well with our sourcing as we've gone through times when there's upward pressures on cost and now that the downward pressure is there it's really a lot of fun.

Our merchant group when they returned in January were ecstatic and the most common description I got was, wow, what a fun trip; we've found things that we can sell that we never could have sold before.

So it really does -- has served us well.

I believe, again, if prices, the value of the dollar changes as long as we can see it coming I think we can change our product and continue to offer the great value at the same price points.

We'll go next to Mitch Kaiser with Piper Jaffray.

Hi.

Good morning everyone.

This is Peter calling in for Mitch.

Hi, Peter

I wanted to just get a little color on the debit card.

It was impressive that you guys had a 300 basis points increase in penetration but at the same time balancing out with your ticket being flat to slightly down.

Are you seeing that the debit card penetration is that no longer acting as a driver to increase ticket?

Peter, as we said for the quarter our debit card penetration was up about 300 basis points.

And from an overall ticket perspective what we are seeing is debit is still slightly up versus a year ago.

Where we have seen some pressures on the credit side is the fact that the credit transactions are actually down as a percent of ticket.

So not seeing the pressure on the debit side the debit side is actually still helping.

Where we are seeing the pressure is on the credit side and that probably plays in with the credit market and the way people view it right now.

Mitch, or Peter, excuse me, this is Bob.

I just want to add one other thing, too.

But we are at -- we began a couple of year ago rolling out our frozen and refrigerated.

We went from 50 stores to over 1,200 stores and we did it pretty quickly.

We are now rolling out 150 stores a year on that.

So one of the things that you are seeing in our average ticket when we were rolling out that big program in the bulk of the stores our average ticket was growing to a large degree because we were expanding our assortment with the frozen and refrigerated.

That has become more level set now.

And I believe that's some of the things that we are seeing as our average ticket has flattened out in the first quarter.

Some of that is because we are not pushing it up with that big installation of frozen and refrigerated.

It's a much larger base now that we are rolling out 150 stores on.

So that's one bit of color that I would give to you.

The other thing with gas prices down I think people are driving more.

They are not so tied up in the well, I'm here, I better get everything I need because I can't afford to come back.

If you look at our traffic, up 10% for the quarter, thereabouts.

It proves it out.

We are getting more trips to the store.

Some of that's new customers.

Some of that's existing customer buying more often.

That's what I think we are seeing on the flatness of every ticket.

Now I will take traffic over the average ticket any day, by the way, because I think traffic is something that we can leverage.

Traffic will last.

If I get more customers in the store, turn them into Dollar Tree shoppers then as we go forward we will be well served by that.

Okay.

Thank you very much for that color.

It's helpful.

A separate question I just had was you've talked in the past and I think this is a follow up to an earlier question about utilizing your new POS system to manage the store labor.

It sounds like some of that's already occurring with the inbound shipments of goods.

But is there still some opportunity to match labor to the flow of sales throughout the day or throughout the week?

Well, sure.

We can become more effective and we are -- we are more efficient in our scheduling.

We can become more efficient in our process.

It's the things that we ask our stores to do and we are always working on improving that.

I'm not looking to save hourly payroll to be perfectly honest with you.

I'm looking to provide a better customer experience, a fuller store, a better run store, a cleaner store and all those things.

So, as we are getting the efficiencies, although our percent of hourly payroll if you look back over the past several years we have been able to manage it downward even with minimum wage increases.

Right now we are facing some more minimum wage increases and frankly I'm looking not at taking hours out of the store.

I'm looking at our efficiencies enabling us to manage through that to basically maintain hourly payroll as we go forward.

Again, I believe that it's important to run a store standard that is exciting.

It adds that fun element.

It's exceeding the customers' expectations of what they are going to find when they come into a Dollar Tree store.

And that's what's going to keep us.

We don't want to give that up because that's what sets us apart from everyone else.

And that's also what's going to keep us relevant and keep those new customers as we go forward.

Okay.

Thank you very much and congratulations on a good result.

Thank you very much.

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

Thanks.

So just looking at your outlook if my back of the envelope math is correct here, which is definitely not a sure proposition but if it is, it looks like your guidance implies margins for the year up ten to 30 basis points.

And comps I guess up between 4% and 6% if you look at your total sales number.

I appreciate as much anyone being conservative and you have beat your estimates pretty handily the last bunch of quarters.

But I just want to make sure there's not something in there we need to be aware of particularly on the margin side coming up in the next few quarters that would cause less margin growth in two quarters two through four versus the first quarter or if it's really just being conservative and not sure what the economy might bring?

Mike, I don't know, this is Bob and Kevin can pipe in here but I don't know if we are being conservative or not, I think it's just, we are looking forward.

And as we get further out there's more uncertainty out there as we said earlier.

And we believe that we have to factor in the uncertainty.

There's rising unemployment before us.

I really don't know what that means once you start trying to give an annual forecast and go into fourth quarter and third and fourth quarter.

The car companies are talking about bankruptcy and layoffs and all the things that go with that.

So we've tried to factor in what we know.

What we know is first quarter, what we know is the first few weeks in the second quarter.

What we know is our plans as we go forward and where we think the opportunities are to improve the business.

And then, oh by the way, it's still pretty uncertain out there and unemployment is still rising and so let's factor that in.

So I think we are being prudent.

I don't think you can think there's anything else, but that out there.

We're bullish on our business.

We love our business.

We are excited about it.

I believe we are well-positioned to take advantage of whatever is out there as we go through the rest of the year.

Do you have anything to add, Kevin?

The one thing we had mentioned earlier is the fact that obviously we are getting some benefit from fuel at this point in time.

As we get to Q4 those comparisons become less favorable and may cross back to being unfavorable.

Time will tell I guess.

So obviously that's a big part of our operating costs.

Getting the freight to our 3,700 stores roughly.

So that's another thing that enters into it at the end of the day.

Okay.

That makes sense and as a follow up on the margins, on the gross margin, a pretty substantial, sequential acceleration on the year over year basis versus the last quarter; it's down 20, last quarter up 70 this quarter.

What was the biggest delta?

Is it just leverage on the fixed cost that's in there or is it the mix hurting less or the fuel or the merchandise margins getting that much better?

I'm just wondering what is the big change in the first quarter versus the fourth quarter?

I would tell you that realistically the two items are fuel and leveraging.

When you do a 9% comp sale the leverage it creates is one of those things you just sit around and smile about because it's not something you see real often in retail.

But when you are able to complete a quarter like that it really brings everything to the bottom line pretty (inaudible).

Historically you've needed about a 4% comp top leverage your occupancy costs.

Is that true?

We like 4%.

We've never really thought of it that way but 2% to 3% I think we can certainly get some, provide some leverage and, fourth quarter was 2.2%, first quarter was 9.2%.

So that's I think what you are seeing on the (multiple speakers).

Great.

Thank you very much.

We'll go next to Karen Short, FBR Capital Markets.

Hi, everyone.

Great quarter.

Just following up on, sorry to harp on this guidance, actually maybe focus a little more on the second quarter.

If I try to back out on what I think the benefit was of Easter in the first quarter and this year's first quarter, I'm still looking at like a 30% increase in earnings at least.

And then your guidance for the second quarter implies a much lower rate.

I understand looking at the whole year you want to be conservative, but you have a little more visibility on the second quarter so I guess I'm mostly just wondering on the second quarter, is there anything else that we should be aware of?

Because you still have the benefit of diesel, it seems like not much else would have changed year over year.

We will have some benefit from diesel but I think as you look at it Karen from the standpoint if you look at our guidance I believe it's an increase of roughly 13% to 23% roughly on the range.

And -- which is pretty good growth for anybody.

And it's pretty hard to go beyond those type of numbers in the current environment.

As Bob mentioned there are still things to come with the auto industry and unemployment.

Fuel prices have been edging up and so you always have to look at that.

And so I think those are the kind of things that we think about as we look at it.

And obviously as we mentioned Q2 last year was a 6.5% comp, significantly more than what we saw in Q1 a year ago when it was 2.1%.

So there is a significant step up in what we are going against as well.

I think you have to take all of those things into consideration.

Okay.

And then on your full year guidance, typically you don't seem to give guidance that reflects additional share buybacks but your 90.8 million, I mean it's not a dramatic change, but is that no change, you are assuming no further share buybacks in your guidance?

That's correct.

Okay.

And then the lastly I was wondering if you could give an update on average ticket in terms of the different EBT credit, debit, cash and average ticket at Deal$ as well?

I don't think we've ever broken out all of that, have we Tim?

But I can tell you -- let me tell you about Deal$.

We are excited about it.

I was hoping someone was going to ask about it.

But we are really excited about what we are doing with the Deal$.

And remember we've lifted the restriction of the price point and one of the main reasons we've done that is to offer more value to more customers.

And also we like the benefit that that brings as we can raise the average raise the average ticket.

So our Deal$ SKU factoids our average ticket in all Deal$ stores for the first quarter was $9.08.

And in our new Deal$ stores it was $10.02.

Now you compare that to a Dollar Tree at about $7.75, something like that, so you can see the lift that we are getting in average ticket in our Deal$ stores over our Dollar Tree Stores.

You also hear me talk about the new Deal$ stores versus the existing Deal$ stores.

I've always told you that these new Deal$ stores were the best test of the concept because in the old existing Deal% stores we converted the Deal$ stores to the multi-price point.

And these new Deal$ stores in many cases were in new markets and people don't know what they are.

So I'm excited because of what we are finding in the new markets.

The $10.02 is up over $8.83 last year in average ticket.

We are getting more sales for our merchandise over Dollar.

Average ticket when someone buys an over a dollar item in their back basket, old Deal$ was $14.48, new Deal$, $15.

Transactions with over $1 items in the basket, all Deal$ 44%, new Deal$ 51.5% of the people in these new Deal$ stores had an over $1 item in their basket.

That's versus 29.4% last year.

So what that tells me is they are liking the value.

When they are finding it they are liking it and they are buying it.

The multi-priced items as a percent of sales in all stores 35.8%, our new Deal$ stores, 45.3%, that's versus 21.3% last year.

So you can see the average ticket.

And in these Deal$ stores there's a lot of power in that.

It gives us the opportunity to expand the type of merchandise, the categories that we can sell and we can offer, offer more value to more customers.

I believe it gives us longer range and opportunity to do more volume.

It gives us the ability to operate in more expensive places because we think we can do more volume.

And so there's a lot of good coming from the Deal$ concept as we get more traction and go forward with that.

We will go next to Joseph [Parkhill] with Morgan Stanley.

Hi.

Good morning.

I was wondering if you could talk about the productivity of your new stores getting better this year.

Do you attribute that to better store locations overall, less cannibalization or some other factor?

You have two of them right there.

Better store location, less cannibalization.

I think more focus.

Whenever we focus on something we are able to employ initiatives to provide more, an improvement.

And in this case it's been one of our big initiatives is to open our stores better, faster, more exciting and that's what you are seeing.

The improvement in first quarter.

Now I will tell you this.

Historically our first quarter new stores for whatever reason have been better so we still have to finish the year on this.

I'm not declaring victory but it's certainly better, we are starting off in a really good place.

And I'm pleased with how we've started with our new stores this year.

But we can do better on that.

And looking out into the future are you taking advantage of lower rents out there or are you trying to improve your locations?

In some cases we will get lower rents and many cases we are actually getting the opportunity at locations that we in the past would not have seen.

And that's because as you know the failure in retail, some of the failure in developers and there's a lot of retail space out there.

With that comes some other, it's a little more complicated because some of the space that's available these larger stores that has to be redeveloped.

We are still looking for 10,000 to 12,000 square feet.

And some of these big box operators are 50,000 to 100,000 square feet.

So that's going to have to be redeveloped.

But I'm encouraged by what I'm seeing in the real estate market.

There are more better locations that we are finding and getting access to.

It is redevelopment of some of the larger boxes.

And there is opportunities to get some better rents from time to time just because we are there with a solid Balance Sheet and we are a good bill payer.

Great.

Thank you.

Thank you.

And due to time constraints we will take our final question from David Mann with Johnson Rice.

Thank you, good morning.

Kevin, can you elaborate or parse down a little bit deeper on the gross margin in terms of how much benefit do you think you got from the extra Easter sales in terms of how much of the leverage that generated so we can sort of take that out of our compare with Q2?

Yes, I mean what we have said is we expected about a $25 million benefit because of the Easter calendar shift this year and we said we believe we achieved at least that.

It's hard to put an exact number on that but I think that's, we truly believe that that's really what it amounted to on an overall basis.

So how does that revenue benefit translate into some of that gross margin leverage that you got?

How many basis points do you think that represented?

I don't know that I would boil it down to a basis point, but obviously at lot of the Easter goods are seasonal goods which are at a higher margin to begin with.

So there may be a little bit more benefit than a traditional $1 of sales, but I think that's the way I would tell you to look at it.

Okay.

And then in terms of shrink, is that an item that you would expect to continue to benefit the rest of the year?

And just in the bigger picture how much opportunity do you think you have there over the next couple of years?

Obviously, I would say this year I think we are going to track close to last year, it could be a little below, it could be a little above at the end of the day.

Obviously improved sales help us.

Obviously the economic environment may hurt us a little bit.

So we have to look at those things that kind of play into that mix.

But I would tell you longer term I do believe there is still potential there as we continue to look at our stores and determine procedures and policies and training and things that we can do there.

I think within our industry our shrink compares very favorably.

But I'm a firm believer that there's always improvement to be had.

And at this time I'd like to turn the conference over to Tim Reid for any additional or closing comments.

Thank you for all participating in this conference call.

Mark your calendars the next conference call is scheduled for Wednesday, August 26th, 2009.

Thank you.

This concludes today's conference.

Thank you for your participation.