美元樹 (DLTR) 2009 Q2 法說會逐字稿

Good day and welcome to the Dollar Tree, Inc second quarter 2009 earnings release.

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

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

Tim Reid, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Brandi.

Good morning and welcome to the Dollar Tree conference call for the second 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 then provide a more detailed review of our second 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, our most recent current report on Form 8-K, our most recent quarterly report on Form 10-Q, and annual report on 10-K, all of which are on file with the SEC.

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

At the end of our planned remarks we will open the call to your questions, which we ask that you limit to one question and one follow-up question, if necessary.

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

Bob?

Thanks, Tim.

Good morning, everyone, and thank you for your interest in Dollar Tree.

This morning we announced earnings for the second quarter of $0.63 per diluted share.

That represents a 50% increase over last year's $0.42 per share.

Operating margin for the quarter was 7.3%, an increase of 170 basis points over the second quarter of last year.

Operating income was $89 million, an increase of nearly $28 million or 45% over a strong second quarter performance last year.

Net income rose 51% to nearly $57 million.

As previously announced total sales $1.223 billion, an increase of 11.9% over the second quarter of fiscal 2008, and comp store sales increased 6.8% for the quarter.

This is on top of a 6.5% increase last year, and a 4.4% increase the year before.

For the first half of 2009, compared with last year, sales were $2.4 billion, an increase of 13%, gross margin was 34.5%, an increase of 100 basis points.

SG&A as a percentage of sales was 26.8%, an improvement of 60 basis points.

Operating income increased by $56 million to 7.7% of sales, an increase of 160 basis points.

Net income rose 44% to $117 million, in the first six months and earnings per share increased 43% to $1.29 per share.

This is on top of a 27% gain in the earnings per share in the first half last year.

I'm very pleased with our results for the second quarter, and I'm especially pleased in light of the comparisons to what was a very strong second quarter last year.

Our stores and our concept are more relevant than ever.

Through good times and tough times customers know they can save money at Dollar Tree and they're responding in record numbers.

Our long time customers are shopping us more frequently and new customers are finding us all the time.

Our success is driven by the value of our merchandise, and the quality of our shopping experience.

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

Some of our top performing categories included health and beauty care basics, household basics and food.

But that's not all.

In addition to the growth in consumer basics, things people need every day, our discretionary business is also growing.

Party supplies, books, floral, lawn and garden supplies delivered strong growth and our seasonal businesses continue to drive sales energy and merchandise excitement.

None of this happens by accident.

We make a coordinated effort to wow the customer every time they visit our stores.

We have an extremely hard working and diligent staff of merchants who travel the world to provide an exciting assortment of high value merchandise.

Our store teams do their part to consistently provide customers with a clean, bright and fun place to shop.

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

In the second quarter that translated into strong seasonal performance for Mother's Day, Father's Day and graduation through summer and early back to school with excellent results.

Sales were consistently strong throughout the quarter.

Our inventory productivity has been increasing.

By leveraging our investments and logistics and technology, our store teams and our planning, allocation and replenishment organization have been highly effective and flexing our inventory to meet increasing customer demand, improving our in stock of basics, developing smarter allocation of seasonal products consistent with sales trends, and consistently increasing our inventory turns over the past four years, a trend which continued with another increase in inventory turns in the second quarter.

In our ongoing effort to provide more of what customers want, we continue to expand our offering of frozen and refrigerated product to more stores.

During the second quarter we added freezers and coolers to 39 more Dollar Tree stores.

That brings our total to 1,235 freeze compared with 1,089 stores at the same time last year.

We are now on track to add freezers and coolers to an additional 160 stores by year end for the year.

That's 10 more than our original plan.

Some of you have asked for an update on payment types, we currently accept debit cards, Visa credit, Discover credit and Electronic Benefits Transfer, or EBT, in all of our stores, and we accept food stamps, or SNAP, as it is now referred to, in 65% of our stores.

SNAP is an acronym for Supplemental Nutrition Assistance Program.

In the second quarter, debit card penetration increased 130 basis points, and credit card penetration increased by 50 basis points.

And I will point out while the initiatives were completed in 2006 and 2007, respectively, their usage in our stores continues to increase.

With our expanded mix of food items, SNAP has become a more important component in our business.

We accept food stamps, or SNAP, in about 2,400 qualified stores.

This compares with 1,570 stores last year.

This number will continue to grow as we roll out refrigeration and qualifying product to more stores.

Turning to store growth, Dollar Tree continues to expand and aggressively open new stores.

During the second quarter this year we opened 60 new stores, we relocated and expanded another 16 stores, and total square footage grew by 6.4%.

We're slightly ahead of our opening plan through the first half with 139 new stores and 41 expansions and relocations.

For the full year we now plan to open 220 new Dollar Trees, 20 Deal stores and we will relocate and expand about 75 existing stores for a total of 315 store projects.

As a reminder, this is a few more new stores than planned, and a few less relocations.

The result is slightly more square footage growth than our original guidance.

This year's class should average approximately 10,000 square feet, which is similar to the 2008 class and within our targeted size range.

We ended the quarter with 3,717 stores, a net increase of 200 stores compared with this point last year.

Over the longer term we believe we can operate 5,000 to 7,000 Dollar Tree stores across the country and the Deal's model will expand this number.

While on the subject of growth, in addition to new Dollar Tree stores, we have two relatively new early stage growth engines to talk about.

They are Deals and Dollar Tree Direct.

Beginning with Deals, the excitement at Deals is building and we continue to refine this model.

Deals is positioned to fill a unique void in the retail landscape.

It's a small box general merchandise variety store concept that offers customers a compelling assortment of merchandise at great prices in a convenient, bright, friendly and fun shopping environment.

At Deals, not everything is a dollar but everything is a value.

We want customers to enjoy the experience of shopping at Deals just as they do at a Dollar Tree store.

We currently have 150 Deals stores with merchandise focused predominantly but not limited to $5 and less.

As we refine our assortments, we are seeing positive customer response across a broad range of categories.

Top categories for the quarter included domestics, health and beauty care, hardware, candy and household supplies.

Customer acceptance in these categories has been especially exciting.

Many of the best items will never be seen in the Dollar Tree as they do not fit the $1 price point.

For example we are having solid sell through on sheets and sheet sets.

Our bath towel business at Deals is just terrific.

In houseware we're selling cookware sets and flatware sets.

The prices aren't a dollar but the values are outstanding and customers are responding.

Throughout the rest of this year at Deals, the merchants are focused on rationalizing the assortment to fulfill the customers' needs.

They're focused op improving our replenishment disciplines, expanding the supply chain and evaluating and testing our pricing strategy.

Our stores are working to create impactful presentations of merchandise, strengthening our price message and creating merchandise excitement.

As a team, we will continue to refine and improve key operating metrics.

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

And we will continue to refine our real estate model and roll out new stores in a measured and thoughtful way.

We opened ten new Deals store in the first half of the year and we plan to open about ten more new Deals stores in the second half.

This is a few less than our original plan due entirely to timing of the chosen sites.

We're extremely excited about the growth potential of the Deals concept and the opportunity that it goes out to serve even more customers across the country.

While on the subject of growth engines, last quarter we announced the launch of Dollar Tree Direct, our enhanced ecommerce platform.

Dollar Tree Direct is a big idea whose time has come.

It's another way for us to offer incredible Dollar Tree values to more customers.

Every online item is a value at only $1, and is sold in case pack quantities.

Dollar Tree Direct is especially important to organizations and small businesses, or individual customers planning events.

Anyone who needs larger quantity and wants a great price should go to Dollar Tree Direct.

During the second quarter, we expanded the selection available on Dollar Tree Direct, we expanded the payment options available to online customers by adding Bill Me Later, we began to reach out to millions of customers via email blast, and we produced our first Deals Direct catalog and distributed it at all Deals stores.

Customer acceptance has been positive.

We are just getting started.

We will give you updates on the progress of Dollar Tree Direct, including Deals Direct, as we continue to grow and develop this initiative.

In the meantime I encourage you to check out the new web site at www.DollarTree.com.

You will find that just like our brick-and-mortar stores, there is is also something new at DollarTree.com and everything is a great value.

Now I will turn the call over to Kevin Wampler who will give you more detail on these and other financial metrics during the second quarter and provide guidance for the remainder of the year.

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

Thanks Bob, and good morning.

As Bob mentioned our diluted earnings per share increased 50% in the second quarter to $0.63.

The increase was driven by our strong sales, a 130 basis point improvement in gross profit, and a 40 basis point reduction in total SG&A compared to the second quarter last year.

Starting with gross profit several factors contributed to the significantly improved performance.

First, freight costs decreased as a percent of sales in the second quarter, a trend we noted in the first quarter, as well.

The Company started to see the benefit of better ocean freight rates in Q2.

Additionally, as most of you know, diesel fuel costs were a significant drag on our gross margin for most of last year.

This is reversed in 2009, with the reduction in diesel prices and our ongoing improvements in operating efficiency.

Second, we achieved improved merchandise margins within nearly all product categories driven by continued improvements in our sourcing.

These improvements more than offset the negative pressure from our continued shift in product mix, as food, health and beauty care basics, and household consumables increased as a percentage of our mix, once again, in the second quarter compared with the same period last year.

In addition the comp sales increase of 6.8% provided leverage on expenses for buying, distribution, and occupancy.

SG&A expenses were 27.2% of sales for the quarter, which is a 40 basis point improvement from the second quarter last year.

This was driven primarily by leveraging of expenses for depreciation, payroll and utilities, partially offset by increases in incentive compensation and professional expenses.

Depreciation and amortization was $39.1 million for the second quarter versus $39.8 million in the second quarter last year.

This represent a decline of 40 basis points as a percent of sales.

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

Operating income increased $27.6 million compared with the second quarter of last year.

Our operating margin for the quarter was 7.3%, a 170 basis point improvement compared to the second quarter last year.

This was the highest operating margin for a second quarter in six years.

And 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 30 stores.

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

The tax rate for the quarter was 35.3%.

In the second quarter last year, the tax rate was 37%.

The lower tax rate this quarter reflects a reduction in the tax expense of $2.3 million resulting from an immaterial correction of deferred tax assets partially offset by reductions in tax exempt interest income and work opportunity tax credits as a percentage of income before income taxes.

As we look at the balance sheet, cash at quarter end totaled $358 million versus $115 million at the end of the second quarter of 2008.

Cash net of debt was $91 million at the end of the second quarter.

During the quarter we invested $42.5 million to repurchase 1 million shares of Dollar Tree stock.

This brings the total repurchases to 2.1 million shares at a cost of $85.3 million, through the first half of the year.

As of the end of the second quarter we had $368 million remaining in our authorization.

As has been our practice, we will continue to view 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.

Our inventory at quarter end was 3.5% higher than at the same time last year, and selling square footage grew by 6.4%.

Merchandise inventories per selling square foot therefore decreased 2.9%, and inventory turns increased once again in the second quarter.

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

Capital expenditures were $33.9 million in the second quarter of 2009 versus $32.7 million in the second quarter last year.

For the full year we continue to expect capital expenditures in the range of $135 million to $145 million with the focus on new stores, remodels and the expansion of frozen and refrigerated capability to more stores.

Now I'll turn to sales and EPS guidance for the third quarter and the rest of the year.

As we look forward to the remainder of the year we must be mindful of a couple of issues.

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

Overall there seems to be some stabilization.

Unemployment is at a 27 year high, placing a very serious burden on families and impacting their buying decisions.

We are factoring this uncertainty into our guidance.

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

Additionally, we believe that diesel fuel prices will continue to be a benefit through the third quarter.

However, our guidance model assumes this begins to reverse somewhat in the fourth quarter.

From a SG&A stand point, professional fees will most likely be a higher, at least through the third quarter.

Our third quarter sales and EPS guidance then is we are forecasting sales in the range of $1.19 billion to $1.23 billion, diluted earnings per share in the range of $0.58 to $0.64, which would be an increase of 23% to 36% compared to the third quarter last year.

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

We have raised our guidance for the full fiscal year 2009, as well.

We are now forecasting sales in the range of $5.09 billion to $5.19 billion, and diluted earnings per share expected to be in the range of $3.10 to $3.25.

This would represent an increase of between 23% and 28% over our record EPS of $2.53 in fiscal 2008.

Our guidance assumes a tax rate of 37.1% in the third quarter and 37% even for the full year, 6.5% square footage growth and a diluted share count of 90.4 million shares for the year.

I'll remind you, however, 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.

It's certainly been a great first half at Dollar Tree.

After growing our earnings per share by 21% in 2008, our momentum increased in the first half of 2009, sales grew 13% and earnings per share were up 43%.

Our gross margin improved by 100 basis points and our operating margin increased by 160 basis points to 7.7%.

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

Our new Deals concept is progressing and exciting.

We are opening new stores and new markets, building store teams, strengthening the merchandise organization, and creating merchandise excitement in our Deals stores.

Customer enthusiasm continues to build.

We now have a world class web site that I invite you to visit, and a new and developing ecommerce business that gives us the opportunity to continue to expand our business, serve customers and grow our market share.

While many other retailers have pulled back, we are growing and opening new stores, and we are on track with our 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.

And we are committed to use our cash flow to build value for our long-term shareholders by running the business as effectively as possible and managing our capital in a way that enhances shareholder return.

In the fist half of 2009 we invested $85 million for share repurchase, and increased our cash with no change in long-term debt.

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

Our merchandise value and our increased mix of consumer basics make Dollar Tree more relevant now than ever and we are determined to continue to improve.

I'm very proud of our Company's second quarter and fist half performance and I'm excited about our future because I think we are in a position to do even better.

We have room for a lot more Dollar Tree stores and the infrastructure and capital to make them a reality.

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 get the most for their dollar.

With our compelling mix of low price and high value consumer basics, we are relevant in tough economic times, and when customers have a few extra dollars in their pocket, our assortment of fun, compelling, seasonally correct discretionary product can't be beat.

And after all, it's still only a dollar.

We are well positioned to benefit when the economy improves.

The Deals format is young and fresh, it's improving operationally, and proving its merit to the customers.

Deals expands our potential for growth in more merchandise categories, expands our appeal to more customers, and provides a platform for entry into more markets.

Dollar Tree Direct and Deals Direct are exciting and in the early stages.

We've just begun to harvest the potential of ecommerce retailing.

It is an exciting time at Dollar Tree.

We had a great first half, our merchandise values are better than ever, and we look forward to an exciting fall season.

Wait until you see what is coming.

We are now ready for your questions.

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

Thank you.

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

(Operator Instructions) We will go first to Adrianne Shapira with Goldman Sachs.

Good morning, thank you, great job.

Kevin, maybe help us think about third quarter guidance.

It seems as if the low to mid single digit comps would suggest a two year deceleration, and that's obviously not what we've been seeing.

So is there anything you see that prompts this change or is this just a healthy dose of conservatism?

As I look at it, we are projecting an earning per share increase of 23% to 36%, which feels pretty good in the grand scheme of things given where the economy is at and what is going on out there.

Obviously we're going against a 6.2% comp in the third quarter, so, again, it's a good tough comparison.

We had a great third quarter a year ago.

We believe we've got some exciting product out there that will hopefully continue the momentum.

But as we look at it, we don't know exactly what is going to happen in the economy.

We've seen oil prices start to rise a little bit.

There's just enough uncertainty that while we think our guidance is pretty good for the times, we have to take those things into consideration.

Sure.

Understood.

Maybe a follow up on that.

Bob, as you mentioned, I think the concern out there is if discretionary spend comes back that maybe the Dollar Stores perhaps lose some relevance.

Obviously the results are not suggesting this.

So maybe if you could walk us through what is happening there qualitatively on the discretionary side in terms of mix shift, the traffic trends, ticket trends to help us understand what is going on in the basket and why, if discretionary spend does come back, Dollar Tree should participate.

Thank you.

Adrianne, I believe that as compared to any of our competitors we are the best positioned when it comes to discretionary spend.

We built the business for the first ten years on mainly mostly discretionary product.

Our party business is still dynamic, right now.

Even in tough economic times, it's right up there, one of our top performing departments, and it's because it's such great value and it's only a dollar.

Our roots are in the toy business.

We understand the toy business, we understand creating value for the dollar.

And it's only a dollar, so when times are tough we are selling toys because it's only a dollar, and when times are better people have a little more jingle in their pocket and they buy more of the things that they may not necessarily need but it's just such a compelling value and it's only a dollar.

So I believe we are positioned very well.

As to the color on the quarter, all of our sales increase in second quarter is driven by increased traffic.

I view that as just a huge positive.

We are getting more shops from our current customers, people that have been with us for a long time.

We're seeing new customers in our stores.

We are attracting people that in the past would not have shopped us or had not shopped us and they're trying us out and they're liking us.

So our traffic is up substantially.

When they're in the stores and they're buying HBC, and they are buying household supplies and toilet paper and paper towels and all the things that you got to have to live every day, and trying to balance their budget, they are also buying, we are seeing great improvement lifts in our party business, we are seeing our toy sales, some items in our toy business that are really vibrant.

Again, that discretionary product at Dollar Tree is still only a dollar and it really does survive the test of time.

We also think that our shopping experience sets us apart from others in the business.

Most of it is driven just by the fact that everything is a dollar and that's thrilling to a customer.

It's intriguing to a customer, it's a little bit disarming.

So good times, bad times, everybody loves a value, you love going somewhere where it's friendly and where it's fun and you never know what you're going to find.

So that surprising value that you find at Dollar Tree and the thrilling shopping experience I think will transcend any economic times.

I think that answered most of the color on the question.

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

Thanks, good morning, and congratulations.

I was hoping maybe you could talk a little bit about the store opportunity.

I was at ICSC in May and it certainly seemed like your booth was vibrant.

How should we think about the opportunity and then the rent dynamics with landlords?

Is it a situation where you think you could accelerate store growth into next year, because it seems like you have ample cash to do that.

Mitch, you are right, and thank you for the question.

We do have the capital to do it.

We have the opportunity, the business model, we have all the things in place to grow a little faster, open a few more stores.

But we've always, as you know, been very choosy, picky over the store sites that we do choose to rent.

We do rent most of them, we don't build them ourselves, most of the time it's second use space, some new projects.

But we are seeing opportunities at, number one, better retail space than we normally might have seen because some of that better space is coming into our sweet spot of what we are willing to pay.

That's allowing us to get into some improved developments, it's also allowing us to get into some more densely populated areas that are typically higher cost.

So we are taking advantage of what we are seeing in that type of space.

As far as numbers, we stand prepared to do more but some of the space that has become available is bigger than we need.

Obviously it needs to go through some redevelopment.

And it's being done, it's being redeveloped slowly, and over time I think we're going to find even more opportunities in space out there.

But it is going to take us a little time, and the landlords and developers a little bit of time, to reparse that space and to redevelop it for our use.

But you are right, our booth is one of the busiest.

We are out there, we're growing, Mitch, we are growing and we are growing as quickly as we feel that we can grow profitably.

We are very selective on our sites, and I think that's how you get the best sites.

One thing I'm very proud of is we are ahead of our historical store openings this year.

We've got more stores open earlier in the year, and that's exciting.

It looks like we are ahead of the curve on our store openings, and I'm excited about what that's going to bring to us.

Okay.

It's the philosophy then to look for better space or cheaper real estate, or just how would you characterize that?

Better space at cheaper real estate would be the optimal but how should we think about that?

We forecasted or we guided at the beginning of the year what our square footage growth was and what our store count growth was going to be, and that's really what we are focused at.

But we are always looking for more opportunities.

And as there has been failures in other retailers out there, we have seen the opportunity at better space at lower prices.

Still not cheap prices but lower than what it might have been.

So we are taking advantage of some of that.

As far as a lot of the space, though, that's available, things like the Circuit City boxes, the Mervyn's boxes, some of those things are going through a process of being redeveloped into smaller spaces because we don't need spaces that large.

We are looking for that 8,000 to 12,000, really that 10,000 square foot space with street presence in the best centers in the shopping hubs that we can find.

So it's not cheap real estate, it's well located real estate that we are after, real estate that we know where our customers, that broad middle class customer either lives or works.

We do look for spaces that are in shopping areas.

We like the idea that there are other retailers around.

We do some free standers but not as many.

We typically look to co-locate with other retailers.

That's the model, and then the availability, we do see more availability and more landlords with availability to rent, but it may take some time for that to turn into more space for Dollar Tree.

We will take our next question from Charles Grom with JPMorgan.

Thanks, good morning.

Kevin, wondering if we could just dig into the gross profit margin line a little bit.

You talked about freight being a key contributor, and obviously that's driven by diesel costs.

But with the ocean rates coming in in second quarter, just wondering if you could dissect how much of the freight benefit was the lower diesel cost versus the ocean rates.

Sure, Chuck.

As we looked at it, and the logistics team has done a nice job with working on the ocean rates, really got that done in May and we're starting to see some of the benefits here in the second quarter.

Basically what we've got is the freight benefit is about half related to diesel and about half related to ocean freight.

From a diesel perspective, what we've got is a year ago in Q2 rates were basically $4.60 a gallon, whereas this year they are basically $2.82.

So really a pretty significant difference from that, as well.

And I think what is just as important to us is the process and efficiency improvements that we've been working on.

Again, the logistics team is really worked on, as we've talked about in the past, keeping up the trucks better, working on stem miles and using more backhauls to come back to the DCs with, and we are seeing gains from that.

That has definitely proven to be a big win for us from a process standpoint.

Those are the kinds of things, just beyond the prices, that we really think are important because we don't control the prices but we obviously can control the processes around it.

Okay.

Just to clarify that, obviously diesel is going to be a benefit in the third quarter but you would suspect that the ocean rates would continue to benefit beyond the third correct, correct?

That is correct.

Thanks, and just one for you, Bob.

You talked a little bit to back to school and some of the categories.

Just wondering if you could give a little bit of color or elaborate on the back to school trends, how your business is doing in August across the various categories.

I can't comment on August but I can tell you our early back to school started up well in both our Dollar Tree and Deals stores.

Our offering of school supplies and our Teachers Corner really got off to a good start.

In our Deals stores we started selling backpacks for $5 as soon as they hit the sales floor.

So we are excited about a strong back to school season.

It really goes through Labor Day.

A lot of schools don't open until after Labor Day.

Especially this year with a later Labor Day, it gives you a longer selling period, frankly, for back to school.

As far as guidance, we don't do the interim updates but we did raise our second half guidance, Chuck, and that should give you some confidence in how things are going, what we think about the business.

Our current sale trends are implied in our new guidance.

(Operator Instructions) Next to Joseph Parkhill with Morgan Stanley.

Good morning and congratulation.

I was just wondering, while your traffic gains are obviously impressive, it seems like your ticket hasn't increased in over three quarters despite an increase in usage of credit cards and debit cards.

I would also imagine that improved merchandise is starting to roll in due to some benefits of depletion.

So I was wondering in your mind what you think it would take to drive the ticket higher.

We are always working on driving the ticket higher through the way we display our product, putting like product together, trying to give customers the idea of when they buy this, why not pick up that.

We have our people in stores suggestive selling, our cashiers have drive items, we use clip strips and side panels and stackouts.

We really do a terrific job of what we call our five star end counters which include all of those components in trying to get related sales together.

I see, if you'll bear with me a little bit, the traffic, we are seeing a lot of new customers, we're seeing a lot more frequent shopping from our existing customers.

So that has an effect of leveling out the average ticket because they are coming more often, because they are coming and buying some of the things that you consume more frequently.

So this is a real positive from the standpoint that I'm getting more chances to sell them by more frequent shops.

And we are also seeing new customers come into the fold.

And new customers typically come in for trial.

They may try a few things first because they may not be sure but they are so jazzed about it they got to buy the stuff.

And then if they like it, then they may come back, and I think over time we will see converting these new customers into more long-term customers, and also we will see the effect of that and an increased average ticket.

That makes sense, thank you.

And then also just as far as your balance sheet, it looks like you are keeping $350 million on the balance sheet.

So the first question is, is there a reason to keep that much there?

And number two, should we think about share repurchases in the future?

Or it's just the cash generated in the quarter if you want to keep cash at that level.

Joe, as we look at share repurchase, we've always viewed it opportunistically.

You look back prior to last year, I think the Company had repurchased almost $1 billion of stock over about a three year period of time.

Last year, with the most uncertain and challenging economy ever, the company made the decision to hold tight and build some cash.

And I know there is a lot of companies out there that would much rather be in our position than the position they are in based upon some of those facts.

So we feel good about that realistically, we definitely feel it was the right decision at that point in time.

We have bought $85 million worth of stock back this year.

We've got $368 million authorized yet.

So it's still available to us.

We always view it as a potential use of our free cash as we go forward.

I look at $358 million today, it doesn't feel like too much, necessarily.

$91million net of our debt.

All in all, it doesn't feel like too much in the overall environment.

It's maybe stabilizing a little bit but there is still a lot of uncertainty out there, so that's the way we view it as this point.

As a reminder, please limit yourself to one question and one follow up.

We will go next to Meredith Adler with Barclays.

Hey, guys, thanks and congratulations.

Most of my questions have been asked but I was wondering if you could talk a little bit about what is going on in terms of importing, the procurement side of things, both in terms of cost and maybe diversification of where you are buying product.

Meredith, we still buy about 40% of our product from imports and most of that's coming from China.

As far as changes in that, we do buy in other places in the world.

Again, mostly Asia.

But the phenomenon in China is it's not that you are moving out of China, it's that you're moving from southern China factories to factories more in the interior and maybe even towards northern China because that's where the labor is and that's where the factory movement is for the type of product that we are looking for.

Right now it's very favorable for us out of China.

Prices are really good.

We are seeing values that we are able to bring back some items into our mix that over the past year or two, with some pricing on some of the items we've had to either change the item or drop the item and replace it, and some of that's coming back.

Some of the product that we typically would have seen a size that you might have seen in our store, we are able to up size or up the count, in reality giving more value to our customers for the dollar.

Because that really is the art of what we do.

We know the retail.

So it's always about how much value can we offer for the $1 price point, at the margin that we are willing to accept.

We are always in control of our margins, but right now what we are seeing is being able to invest a lot more into the product to get better product for our customers to drive even more value so when that product starts hitting the shelves we are going to be even better positioned.

It's a very favorable time for us now in China.

What's happening, any changes in your relationship with domestic vendors, what is that environment looking like?

I think we have great relationships with our domestic vendors.

And again 40% is imports, so 60% is domestic.

And of course with our expanded assortment of the basic consumer products that we now sell and a lot of name brands and maybe not name brands but our brands made here in this country, our domestic suppliers are extremely important to us.

We are always trying to find ways to improve the flow of product into our DCs in our store.

Our philosophy has always been to take the product as close to the source as possible and then use our people and our method and our infrastructure to deliver that product to our stores in the most efficient way.

We've always looked for the best first cost, we don't ask for advertising funds, key market funds, co-op funds, allowances for this, allowance for that.

We try to work with all the manufactures and make it simple, taking all that stuff out.

How can we work with you to make this product at the most efficient way so we can get the best cost possible and pass that along to our customers in the form of value for the dollar price point.

So I think, just as we've grown our categories that we now offer to our customers, our domestic business and our relationships with our domestic suppliers has strengthened, and I would like to continue to strengthen those relationships.

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

Good morning, Bob.

Wanted to ask you about longer term changes and merchandise mix.

Recognize the strategy of growing your everyday basic needs is really working well in this environment.

But over the years you've also said you don't want to be like Family Dollar, Dollar General, you still want to be a store of more wants rather than needs.

With that in mind, at what point would you guesstimate that your mix begins to level off?

Dan, we talk about it like flying an airplane, a little stick, a little rudder, depending on the times.

What we have right now is a mix of both discretionary and non-discretionary products.

So when times are tough we follow our customers and what they're looking for.

Like right now with economic times tough and unemployment high and people trying to balance their budgets, customers are buying more of the basic consumer products and we are really going after that.

If they want to buy it, we want to sell it to them, and we are supplying all that we can.

That share has grown over the past couple of years.

Actually it's grown over several years because five to ten years ago we didn't have hardly any of that product.

Only with the introduction of our new larger store have we begun to expand into those categories.

Right now it is a time where we are pushing hard and giving the customers that consumer basics because they want it, and as times maybe change, as times get a little better -- and by the way, I will tell you that while they are in the stores buying those consumer basics right now, our other variety general merchandise discretionary categories are still growing.

As a matter of fact, some of them are growing double digits.

We have some vibrant general merchandise discretionary product in our stores right now and it's selling because it's only a buck, and that does set us apart from other companies.

When times improve, when the economic environment improves and people have more jingle in their pockets, more money to spend discretionary dollars, we have a larger mix of that product, and as that product begins to sell faster, we have the ability, we have the visibility of it now with our POS system, and we have the availability with our replenishment systems and our allocations systems to get more of that product into the hands of the stores that are selling the most of it.

So, again, it's a little bit you're flying the airplane and it's a little stick, it's a little rudder, and you react to what the customers' needs are today.

As I look forward, I do expect the environment to improve, we are all hopeful of that.

We will react accordingly, and as our business changes we've always been very good at staying relevant to what the customers' needs are.

Always testing a lot of product, always testing a lot of categories.

We will try things now that, okay, I don't know how to make money on this but let's test it in a small way and then we'll figure out how to buy it and make money on it.

We do a lot of those things.

You always see new things in Dollar Tree.

Just find one and walk in, I bet you'll find something, "I didn't know they were doing that." That's how we stay relevant to our customers.

Bob, just as a follow up, your inventory's turning a little more than 25% faster than it did three years ago.

Do you have a sense how much of that is coming from just a change in the mix towards consumables?

Perhaps have you looked at just the turns on your discretionary categories to see how that's evolving?

Our discretionary categories turn slower than our nondiscretionary, in general.

There are items that are exceptions to the rule, but the things that people consume more frequently do turn faster.

A lot of that we just introduced in the last several years, so that has been helpful in turns.

To answer your question, we really know the turns of all our product by category now.

Our POS systems and our unit systems and our retail merchandise systems, we have visibility of what we own, where we own it, how much is in the DC, how much is in the store, how much is in the pipeline.

We have control of all those things.

Overall turns are up, in general over all categories in our business.

Our faster turning product is faster turning, it's hard to say it's faster turning than it was five or ten years ago because we keep adding more of it.

Things like frozen refrigerator, we are still in the process of rolling out so it's not really a good comparison.

But I've got to tell you, that between the visibility and the systems we have invested in, and now the team of people that we have that are using these systems, and they've gone up the learning curve and they really understand the pulse of this business, and they're landing the product closer to the sale, and the stores that can sell it better than we ever have, and that's really the key to what you are seeing right now on improving our turns.

You will go in our back rooms and sometimes you go in at the day before the truck arrives, they're just empty.

That's a good thing.

In some of our stores we replenish a couple of times a week and you see the same phenomenon.

Truck is in, it's out on the sales floor and then back room is only a few cases of what you need until you get to the next truck.

That's our goal, not all stores are exactly that perfect but that is our goal.

I congratulate our buying and our allocations team and use of these systems that we've put in over the past, say, seven to ten years.

We have time for just a few more questions.

We'll take our next question from Allen Ripken with Banc of America.

Yes, thank you very much.

Relative to your corporate comp of a 6.8% increase, can you maybe provide some color on the performance of the stores where you are only accepting food stamps where you only have a refrigerator or freezer, and even those stores where both initiatives are now in the store?

That's a hard one just sitting right here for me to answer specifically.

I can tell you anecdotally that in the total comp the stores that we are introducing now, the 160 stores that we added this year or will have added this year, for example, really don't move the comp that much.

If you look back, though, at the class of '08, '07, '06, as we rolled out the frozen and refrigerated, we are very happy with what that has done with our business in comping year-over-year, and also what it does to the ancillary sales of the other products in the store.

Because the key is, that when we introduced the frozen refrigeration, sales go up but traffic goes up because people are buying it more frequently and shopping more frequently.

When they are in there we do see a rise in the sales of all the other general merchandise businesses.

So our comps in our frozen stores for the second quarter were 6.5%.

And our non-frozen stores were about the same, pretty close.

A little higher in the non-frozen stores.

So traffic was higher in the frozen stores than in the non-frozen stores.

In general, that's the color, that's about all I can share with you that I know right now.

One follow up if I may.

Within the discretionary category, what has been the trend on a sequential basis with respect to merchandise margins?

And would there be any reason for us to believe that this trend would not continue into Q4 when discretionary products become a larger proportion of your overall revenue base?

Q4 is always traditionally one of our highest merchandise scan margin quarters because of the holidays and because of all the high margin seasonal product that we sell.

Which we've already bought, we already know what that is.

But to answer your question in general, our merchandise margins, we've always been able to manage them within a pretty tight range by department.

What you've seen over the past couple of years is the introduction of more of the consumer products over the mix shift has affected the overall margin over the past couple of years.

But we are going into a high margin part of the year as not third quarter but fourth quarter.

It is the highest scan margin with all the Christmas ornaments and all the gifts and gift bags and wrapping and all the fun things we do.

Not all of that but a lot of that is the discretionary imported higher margin product that we carry.

We feel good about margin.

As we give you our guidance, it's implicit in there.

You've heard me say before, we feel very good about the ability to manage our margin.

If you look back at last year, one of the toughest years in retail history, 2008, you think back about fuel prices that went up to, a barrel of oil went to $147 a barrel last year mid year.

And you heard Kevin talking abut what that did to diesel prices, it went up to $5 a gallon.

In 2008, Dollar Tree, where everything is a dollar, still had record sales year, a record earnings year, and so we have always been very confident in being able to manage our margin in even the toughest of times.

It's frankly gotten a little better margin wise this year from a merchandise standpoint.

We will go next to Adam Findler with Deutsche Bank.

Actually all my questions have been answered, thank you.

We will go next to David Mann with Johnson Rice.

Thank you.

Great job, guys.

Question on the timing of Halloween, can you give a sense on a relative basis this year's holiday on Saturday, how you think that will play out.

We think it's going be great.

I don't think it's going to be a huge windfall but Saturday is a good time to have Halloween.

That gives us some good shopping days up until that time.

We didn't plan it to be tremendously larger because of that.

We planned Halloween up this year because we think we've got a better assortment.

Then, secondly, when you look at your mix of payment types, and you take into account the difference in average ticket by payment type and the mix of merchandise that's bought, which of the payment types is most profitable for you, and is there much variation between the types?

Cash is the most profitable.

Unfortunately customers want to use those other ways.

But the debit card would be the least costly, I would say, between debit and credit.

And that takes into account any mix differences and any average ticket differences as well?

Yes, I think so.

I really do believe so.

The credit cards, we are getting some good result and it's growing.

Our customer, though, uses debit cards, and I think the credit, while it will continue to grow, may not be as big of an impact at a Dollar Tree as it might be at a Best Buy.

Where would food stamps fall in that list?

Food stamps are really growing.

They are very small right now because it's driven by the product that you sell.

So we've begun taking food stamps as we introduced this qualifying product into our stores.

But it's growing and in some stores it is tremendously important to us.

But overall it's still a very small percentage of our sales, but it's important.

It's growing.

And I will tell you this, too, it's important to our customers that we sell this.

One of the things we are really driving for is trying to provide the things the low income customer needs, the recipient of this SNAP opportunity.

We sell things for a buck, they like buying it from us so we've accelerated our initiatives trying to work with the agencies to try to qualify more stores as quickly as we can.

We will take our final question from Patrick McKeever with MKM Partners.

Thanks.

Hi everyone.

Just a related question on food stamps.

What is the average ticket look like on a food stamp transaction?

Has there been any change there as some of the economic stimulus funds have gone into that program, incremental funds?

Thanks.

The average ticket, Patrick, is above average, I'm told.

But as far as the stimulus impact, it's hard for us to tell because, again, we are in the midst of rolling out more frozen refrigerated stores and broadening our food selections in these stores.

So when you look at it, it's really hard to tell if its the stimulus package, although I believe it could be some of that, but it's hard to discern the difference between stimulus package and just the rollout of the program at Dollar Tree.

A second bigger picture question, and that is just wondering if you could size up the competitive environment, just given the forthcoming IPO from Dollar General.

I know it doesn't change that much, doesn't change the fundamentals too much, but they are growing aggressively, just a continued growth in the States and outside the States.

Who do you think you are taking market share from and what are the greatest opportunities for Dollar Tree?

Dollar General, they've been around a long time, it's not new.

The IPO is maybe new.

But the Dollar General stores have been there a long time.

I've always admired them, they've always been a good store for years and years.

They've always done a nice job.

They had a few issues there for a couple of years maybe and went private, it looks like they've done just a terrific job in doing some things to reinvigorate their business.

But as you know, Patrick, our model is just different.

We are different in terms of price point.

They sell things for more than a dollar.

Everything we sell is a dollar.

We are different in store size, our store size is typically a little larger.

We are different in store locations.

We are looking for where middle America shops and we actually might pay a little more for our real estate to get in the right spots.

We're different in many ways.

We really focus on what we can do and who we are and what we bring to the table.

That is we're focused on bringing more value to customers at the dollar price point.

We're focused on running great stores because we believe that shopping experience is important to a Dollar Tree customer.

We are focused on profitable growth and we're focused on just the things we know that are important to our customers out there.

We have 3,700-and-change stores.

Again, just another point of differentiation, Dollar General has over 8,700 stores, I think, something like that.

So we've got a lot of room to grow out there and it's compared to any of the other competitors, our opportunity to open more Dollar Tree stores is really greater, we have fewer to start with.

There is more places where we can put a Dollar Tree store.

And with the addition of our Deals model, that opens up even more opportunities and new markets.

In some of the more expensive markets we think we can run Deals stores and expand our opportunities for growth with that.

I like where we are positioned.

I see our infrastructure built out across this country, and we can go anywhere in the 48 states because we have the distribution and logistics, we have people and we have training and we have the ability to run stores across all 48 states.

But we only have 3,700 stores, so how many can we open.

We've always modeled it and we always say something in the 5,000 to 7,000 store range.

Who knows what it could be.

Both our other key competitors have much more than that.

Again, we are focused on the profitable growth.

And, again, we think Deals can expand that.

Those are my thoughts about the space.

We are different.

I like our growth opportunities the best, I love our business, I think we are right in the right place for the customers, really relevant for all times.

The fun shopping experience in our business sets us apart, and we really work hard to keep that, that's not by accident.

That's something we do because we want to do it and because we think it's important to our business.

So who else is out there?

You know the same people that I see, and who do we compete with?

We compete with everybody because we are general merchandise people.

You've got the chain drugs out there with seasonal and party and those kinds of things, you have the specialty stores like Michael's, we have food stores now.

We have all the general merchandise people.

The gas stations sell general merchandise now.

So where we are taking it from, I can't really tell you where.

I will tell you this.

Sometimes I believe we create a sale where none existed just because they saw it at the one dollar price point and why not.

So we're excited about our future.

And that looks like that's all the time we have for questions.

I'd like to turn it back over to our speakers for any additional and closing remarks.

Thank you very much, Brandi, and thanks all of you who participated in the call.

Our next conference call is scheduled for Tuesday, November 24th, 2009.

Mark your calendars.

It's Tuesday in deference to the Thanksgiving holiday on Thursday.

So it'll be Tuesday, November 24th, 2009 when we do our third quarter.

Thanks again and that's it.

This concludes today's conference call, we thank you for your participation.