美元樹 (DLTR) 2009 Q3 法說會逐字稿

Good day, and welcome to the Dollar Tree Incorporated third quarter 2009 earnings conference call.

As a reminder, this call is being recorded.

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

Tim Reid, Vice President of Investor Relations.

Please go ahead.

Thank you, Clayton.

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

I'm Tim Reid, 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 the business.

Kevin Wampler, our Chief Financial Officer, will provide a more detailed review of our third 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, quarterly report on Form 10-Q, and annual report on Form 10-K 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 to Bob Sasser, our President and CEO.

Bob?

Thanks, Tim, and good morning, everyone.

I appreciate your continued interest in Dollar Tree.

This morning, we announced earnings for the third quarter of $0.76 per diluted share.

This represents a 61.7% increase over last year's $0.47 per share.

Operating margin for the quarter was 8.6%, an increase of 240 basis points over the third quarter last year.

Operating income was $107 million, an increase of $38 million or 55% over what was a very good performance last year.

And net income rose 58% to $68 million.

As previously announced, total sales for the quarter were 1.248 billion, that was an increase of 12.1% and our comp store sales increased 6.5% for the quarter.

That's on top of a 6.2% increase last year.

Year-to-date through third quarter and compared to last year, sales were $3.7 billion, an increase of 12.7%.

Gross margin through the third quarter was 34.8%, an increase of 110 basis points.

SG&A was 26.8%, an improvement of 80 basis points.

Operating income through Q3 grew by $94 million to 8.0% of sales, an increase of 180 basis points.

Net income rose 49.2% to $185 million, and earnings per share, year-to-date, through third quarter have increased 49.6% to $2.05 per share.

I'm pleased with our performance in the third quarter.

It speaks to the value of our merchandise and the quality of our shopping experience.

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

Our traffic is up.

Long-time customers are shopping more frequently and new customers are finding us all the time, and when they shop our stores they're finding a balanced mix of both high value basics that are needed every day and surprising value on discretionary and seasonal product selections that add excitement to the shopping experience.

As evidenced in the third quarter, our top performing categories included health and beauty care basics, household cleaning supplies, and party goods.

Seasonal product has always been a very important part of our business.

We like the margin, which is generally higher, and it adds an element of fun to our stores.

Our seasonal assortments are more complete and more compelling than ever, and the customer can count on getting a value.

Even though it is a discretionary purchase, it's still only $1.

During the third quarter, our merchants provided a superior assortment of seasonal product.

Our store teams executed the transition smoothly from summer to back-to-school through Halloween, and our customers responded.

The sell-through on Halloween and fall seasonal merchandise was excellent.

Our stores are now set for Thanksgiving and the holiday season.

Dollar Tree has proven to be relevant in all economic times, through good periods and bad, we continue to thrill our customers.

This is no accident.

It's our merchandise value, and our shopping experience that brings them back.

Our strategy has been validated by results, and it's largely due to five key initiatives.

First, over the past several years, we have right-sized our stores and added new product.

Our stores are now a mix of things customers need and things customers want.

The 10,000 to 12,000 square foot store that we are opening in strip centers and in freestanding locations across the country is ideal for our model.

It's small enough to be convenient, yet large enough to accommodate more of the needs-based products that customers are looking for as they seek ways to balance their budgets.

These consumer basics are driving footsteps into our stores on a more frequent basis, and the increased customer traffic is driving sales of our high value, high margin, discretionary product.

Second, we have developed and implemented retail technology tailored to our unique business model, and we are now leveraging these investments.

Using point of sale data by item, by store, we're making smarter allocations.

We're flexing our inventory to meet increasing customer demand, improving our in-stock of basics, and optimizing the flow of seasonal product to our stores consistent with sales trends.

Our inventory productivity continues to accelerate, and we have consistently increased our inventory turns over the past four years.

Third, along with retail technology, we have built a solid and scalable logistics infrastructure to support a nationwide retail footprint.

And I have some news for you here.

We currently operate a network of nine distribution centers, eight of which are Company-owned, and one which is a leased, manual operation in Utah.

We acquired the Utah DC with the acquisition of Greenbacks a few years ago, and while it has served us well as we have grown the store base in that region, it's not the optimal location as we go forward.

This lease will expire in April, 2010, and we have given notice that we will not renew.

Instead we have recently completed the purchase of a building in San Bernardino, California, and we will transition to this location by April, 2010, when we close the Utah facility.

The new facility is 418,000 square feet, slightly larger than the Utah DC, and it will be fully automated.

In addition to adding capacity to our network, it is strategically located to reduce costs and better serve our base of existing stores while supporting aggressive new store growth in the Southwest.

The total cost for the new facility, land, building, automation, and installation of equipment is expected to be $36 million and will be purchased using available cash.

The move to San Bernardino will increase our network capacity to support $7.5 billion in sales.

We can supply product efficiently to all 48 states, and every new store that we open provides leverage to our system.

Our fourth key initiative has been our growth strategy.

While many retailers have pulled back, especially recently, we continue to open new stores and increase market share.

In the third quarter this year, we opened 94 new stores and relocated and expanded another 33 stores.

We have grown square footage by 7.2% this year.

Through the first three quarters of 2009, we opened 233 new stores and expanded or relocated 74 stores.

And we ended the quarter with 3,803 stores.

Since the end of the third quarter, we have completed our 2009 opening plan.

For the year, we opened 240 new stores and relocated and expanded 75 stores for a total of 315 projects this year.

The 2009 class average is approximately 10,000 square feet which is similar to the 2008 class and within our targeted size range.

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

Which brings me to our fifth key initiative, and that is developing new concepts to expand future growth, including Deal$ and Dollar Tree Direct.

We currently operate 156 Deal$ stores, offering merchandise focused, predominantly but not limited, to $5 and less.

We opened 19 Deal$ stores this year.

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

Top categories for the quarter at Deal$ included domestics, housewares, household supplies, and health and beauty care.

Customer acceptance in categories not offered at Dollar Tree is especially exciting.

Some of our best selling Deal$ items are coming from these categories, and we will continue to build these assortments.

Looking forward, as we refine the Deal$ model, we will continue to rationalize our assortments to create merchandise excitement and give our customers more reasons to shop at Deal$.

We are improving our replenishment disciplines, expanding the supply chain, and evaluating and testing our pricing policy.

We continue to refine and improve key operating metrics.

That means continuing to upgrade our standards and run better more compelling stores, and we will roll out new stores in a measured and thoughtful way.

While on the subject of new growth engines, earlier this year, we launched Dollar Tree Direct, our enhanced eCommerce platform.

Dollar Tree Direct is another way for us to offer Dollar Tree values to more customers, including case pack quantities to organizations, small businesses, or individual customers planning large events.

During the third quarter, we expanded the selection available on Dollar Tree Direct.

We launched our Christmas Corner, featuring more than 200 items for the holidays and drawing two million visitors in less than a month.

And we reached out to customers through more than 15 million e-mail blasts during the quarter.

Customer acceptance of our new website has been good, and we see a major opportunity to expand this business.

Our website is compelling, and I encourage you to check it out at www.Dollar Tree.com.

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

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 61.7% in the third quarter to $0.76.

The increase was resulting from our strong sales which was driven by increased traffic, a 130 basis point improvement in gross profit, and 110 basis point reduction in total SG&A expense compared to the third quarter last year.

Starting with gross profit, our gross margin grew to 35.3% during the third quarter compared with 34.1% in the third quarter last year.

Several factors contributed to this performance.

Merchandise costs, including inbound freight, decreased 90 basis points.

This was driven by lower fuel costs and lower ocean freight rates relative to last year, improvements in operating efficiency, and increased IMU on many product categories driven by continued improvements in our sourcing.

These improvements offsets the negative pressure from the shift in our product mix.

Basic consumable products continued to increase as a percentage of our mix in the third quarter compared with the same period last year.

In addition, expenses for buying, distribution, and occupancy decreased 30 basis points by leveraging the 6.5% comp sales increase.

SG&A expense was 26.7% of sales for the quarter, which is 110 basis point improvement from the third quarter last year.

This was driven primarily by a 40 basis point reduction in store operating expense due to lower utility coss and leveraging of the comp store sales increase, a 30 basis point reduction in depreciation, and a 25 basis point reduction in payroll-related expenses.

In the third quarter unlike previous quarters this year, the leverage from the increased sales was only partially offset by increased incentive compensation.

Debit and credit card fees increased slightly as a percent of sales, reflecting continued increases in penetration of these forms of tender.

We accept debit cards, Visa credit, Discover credit, and electronic benefits transfer in all of our stores.

We also accept SNAP, or food stamps, in 70% of our stores.

In the third quarter, debit card penetration increased 200 basis points.

Credit card penetration increased 30 basis points.

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

Appreciation and amortization was $38.6 million for the third quarter versus $38.3 million in the third quarter last year.

We expect depreciation expense of $155 million to $158 million for the full year.

Operating income increased $38.3 million compared with the third quarter last year.

Our operating margin for the quarter was 8.6%, a 240 basis point improvement compared to the third quarter last year.

Year-to-date through the third quarter, operating margin is 8%, an increase of 180 basis points from the same period last year.

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

The tax rate for the quarter was 35.7%, consistent with the third quarter last year.

The tax rate was lower than previous guidance due to favorable provision to return reconciliation adjustments.

For the first three quarters, the tax rate was 36.2%, which was also the tax rate during the first three quarters of 2008.

Looking at the balance sheet and statement of cash flow, cash at quarter-end totaled $342.1 million versus $78.6 million at the end of the third quarter of 2008.

Cash, net of debt, was $74.6 million at the end of the third quarter.

During the quarter, we invested $69.3 million to repurchase 1.4 million shares of Dollar Tree stock.

This brings the total repurchases to 3.5 million shares at a cost of $154.6 million through the first three quarters of the year.

As of the end of the third quarter, we have $299 million remaining in our authorization.

As has been our practice, we will continue to review our 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 increased 1.2% over the same period last year while selling square footage grew by 7.2 %.

Merchandise inventories per selling square foot decreased 5.5%, and inventory turns increased once again in the third quarter.

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

Capital expenditures were $45.8 million in the third quarter of 2009 versus $38.8 million in the third quarter last year.

For the full year, we now expect capital expenditures in the range of $160 million to $165 million.

Capital expenditures are focused on new stores, remodels, expansion of frozen and refrigerated capability to more stores, and the cost related to our new distribution center in San Bernardino, California.

The total capital expense associated with the project will approximate $36 million, with $30 million being incurred in 2009, and the remainder in the first quarter of 2010.

As we look forward to the fourth quarter, we must be mindful of a couple of issues.

First, consumers remained under great pressure.

For the first time in a quarter century, unemployment is at double digit levels.

This places a very serious burden on families which may impact their holiday buying decisions.

We are factoring this uncertainty into our guidance.

Second, while we have benefited from lower diesel prices in the first three quarters of 2009, we expect this to become a headwind in the fourth quarter.

Our guidance assumes that diesel prices will likely be higher in the fourth quarter 2009 than in the same period last year.

With all of this in mind, the fourth quarter of 2009 -- for the fourth quarter of 2009, we are forecasting sales in the range of $1.49 billion to $1.53 billion and diluted earnings per share in the range of $1.30 to $1.39.

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

It is an increase of $0.07 per share to the low and high end of the previous guidance range for the fourth quarter and would represent a 13% to 21% increase compared to the fourth quarter 2008 earnings per share diluted share of $1.15.

For the full fiscal year of 2009, we are forecasting sales in the range of $5.17 billion to $5.21 billion, based on a mid-single digit increase in comparable store sales and a 6.5% square footage growth.

Diluted earnings per share expected to be in the range of $3.34 to $3.43.

This would represent an increase of between 32% and 36% over our record EPS of $2.53 in fiscal 2008.

Our guidance assumes a tax rate of 37.8% in the fourth quarter and 36.8% for the full year.

Diluted share count of 90.1 million for the year.

I will remind you, however, our performance could differ materially from our current outlook as conditions change.

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

Thanks, Kevin.

It's been a great year so far for Dollar Tree building on a solid performance in 2008.

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.

We have the capital available to support our growth plans while generating substantial free cash, and we continue to use our capital for the long-term benefit of our shareholders.

With an eye on the future, we are investing for profitable growth, expanding our store base, developing new retail concepts including Deal$ and Dollar Tree Direct, and enhancing our supply chain with a new Company-owned and automated DC strategically positioned in the Southwest.

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

With our compelling mix of low-priced and high value consumer basics, we are relevant in tough economic times.

When the economy improves, our assortment of fun, compelling, seasonally correct, discretionary product can't be beat, and it's still only $1.

Our stores are strategically located to serve Middle America, and we are well positioned to benefit from a strengthening economy.

I'm very proud of our Company's performance this year, and I'm excited about our future because I think we can continue to improve and do even better.

We have plenty of opportunities to grow our business and a vision of where we want to go.

We have the capital to support our growth and a talented and motivated workforce to make it happen.

I'm especially proud of our Dollar Tree people, our management team, and what they have accomplished.

We're now ready for your questions.

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

Clayton?

Thank you .

(Operator Instructions) We will take our first question from Charles Grom with

Good morning.

Good morning, Charles.

On the 6.5% comp in the quarter, can you remind us how that trended?

And if you could shed any color on November sales to date?

Well, Charles, basically the sales were pretty consistent throughout the quarter.

There was strong good performance across many of our categories.

As I said in the press release, the HBC basics and the household cleaning supplies and party were the top performing categories.

Seasonal was very strong.

We were pleased with our back-to-school business this year.

We were pleased with our other holidays like Halloween.

Basically, there were no meaningful geographic differences in the sales, but, we didn't have much weather this year.

I think third quarter, we had no meaningful hurricanes or anything like that to affect things.

So it was just a very consistent, solid sales performance throughout the quarter.

As far as November, we really don't have any comments to make about that.

We will talk to you in about another couple months about that one.

Okay.

Then my second question is for Kevin on the gross profit line.

Appreciate the color on the 90 bps, but could we dig a little bit deeper to see how much you got from IMU?

How much was from crate and fuel, and then how much you got from occupancy leverage?

Well, we said that buying distribution and occupancy was 30 basis points of the leverage that we got.

Then in regards to the 90 bps -- realistically, the majority of that was fuel-related.

Obviously, as we have talked about this year, ocean freight rates -- we're seeing some nice benefits.

One of the things you need to remember is in Q3, we bring a lot of containers in as we're getting ready for the holiday season.

So we do see a nice benefit year-over-year from that.

The majority of it, realistically, was from that.

We are still getting benefit from diesel fuel at this point in time in Q3.

Basically, a little bit there, but not as much as we saw in Q2 based on how the rates compare year-over-year.

So that's kind of how it fell out.

(Operator Instructions) We will take our next question from Meredith Adler with Barclays Capital.

Thanks.

I'd like to follow on Chuck's comments or questions about fuel, and maybe just talk a little bit SG&A as well.

Can you look at the things that are benefiting you now and say how many of them are going to last through 2010?

And clearly, you're going to have a tough comparison by the time you get to third quarter of next year in terms of diesel rates.

Do you think they continue to come down?

I'm trying to get a sense of how much of this is going to be ongoing.

Okay.

Well, as far as diesel fuel rates go, I think your crystal ball is probably just as clear as mine.

I don't pretend to be able to predict where they are going to fall out at at the end of the day.

What we can speak in regards to SG&A is the fact that we look at it from two perspectives.

We spoke a little bit about this previously.

That is, the things we buy, and then the processes that we have.

So as it relates to the things we buy, we have been working to consolidate our buying power.

We created a centralized purchasing function within the Company a while back, and are working around that to create synergies that we can drive through the business.

Obviously, process is probably just as important if not more important when you think about our business being very -- we sell everything at $1.00.

So every transaction is an item that we have to buy.

We have to ship -- have it shipped.

We have to receive it.

We have to get it to our store, get it on the shelf.

So there's a lot of process around that.

So those are some of the things we look at specifically.

And we have talked about -- earlier this year, we talked about how we have worked on the flow of merchandise just through the system.

Bringing it in on a more level basis into the DCs, getting it out to the stores.

Really smoothing out the violent peaks, so to speak, which helps everybody from a planning perspective, a labor perspective, being able to get it, manage it, get it onto the floor on a faster timeframe.

So those are the kind of things we look at that are going to continue to be worked on by the Company that we will continue to benefit SG&A on the overall basis.

Then I guess I would just ask, some companies I talk to say that it's an ongoing process.

That you never run out of opportunities.

Do you feel that's true?

Or do you feel that all the low hanging fruit is gone?

Meredith, we still have a lot of opportunity in SG&A.

Some of the things that Kevin broadly described to you are the answers.

Looking at not only the direct cost of what we buy, and we're leveraging our buying power on that.

But, also looking at the processes.

There are a number of initiatives that we have ongoing that have proven successful, and I believe we can continue to drive down our SG&A cost.

As far as the margin, as Kevin said, your guess on the diesel fuel is as good as ours.

But as far as the things that we control, we feel very confident that we can continue to deliver the required initial markup and the merchandise margin that we need to hit our margin budgets going forward.

So if you look at the past, we have always been able to manage our margin within a pretty tight range, and we feel very confident about being able to do that as we go forward.

We will take our next question from Joseph Parkhill with Morgan Stanley.

Hello.

Good morning.

I was just wondering if you could help us quantify the success of your new and relocated stores in 2009.

How much better is that class performing versus prior years?

And are relocated stores contributing more to the comp this year versus last year?

Our new store productivity is up for the class of 2009, and it's up -- pretty good.

So we're very proud of our new store class this year as it compares to last year's sales per square foot.

I believe our reloads are also performing better than a year ago.

And I think some of this is, again as I spoke in the opening comments, it's all about right-sizing the store.

It's all about getting the balance between the mix of basic things that you need every day versus the discretionary things that you want every day.

So that's what we have been -- that's our initiatives that we have been doing.

And I think that's what we are seeing in our increased sales per square foot productivity in both our new stores this year as well as our relocated stores.

And we think there's still room to improve that year-over-year as we go forward.

Okay.

And your square footage growth for the quarter was a little bit higher than your annual guidance, is that just a timing issue?

Or did you take opportunities of some other real estate locations?

That was just timing.

Okay, thank you.

(Operator Instructions) We will take our next question from Adrianne Shapira with Goldman Sachs.

Thank you.

My question related to the guidance for the fourth quarter.

Obviously, we're up against a much easier comparison.

You had some weak weather last year.

I'm wondering if you could help us think about -- we appreciate the environment -- as you said, double digit unemployment.

But it does suggest a deceleration from current trends.

Is it just prudent conservatism given the environment, or have you seen something change since last quarter?

Adrianne, as we look at it -- obviously, as we have talked about -- in many ways, the economy is still in uncharted waters as we talked about with double digit unemployment which we haven't seen in 25 years.

So as I thought back about that it was kind of funny -- I wasn't even out of college when that happened.

This is something totally new to me and in many places.

So that, obviously, takes a big part of it.

We look at the burden that creates on the consumer.

It doesn't mean that we don't have a lot of confidence in our business.

It doesn't mean we don't have a lot of confidence in the merchandise that we're going to have out there, but it seems like the prudent thing to do given everything we know today.

Again, we don't know things like fuel.

We have seen it ramp up some here in the second and third quarter, and we want to be cautious in regard to that.

So I think those are some of the things we take into consideration as we look at it.

Okay.

Then just a follow-up on the consumables mix pressure.

Can you give us a sense of where that had been trending?

It sounds like it continues to be a negative pressure for the margin.

Have you now started to lap some of the peak pressures from a year ago, and where would you expect that mix to settle out going forward?

Well, it's up about the same as it was in Q2, actually.

And, we're starting -- it's starting to decelerate a little bit comparatively year-over-year.

And again, we're not forcing it one way or the other.

We're trying to give the consumer what they need -- be it basics or discretionary.

Obviously, in the current economic times, the basic needs have come into focus.

And especially as we have talked about -- Bob talked about the categories that were good this quarter which included the HBC basics which has done a real solid job for us this year.

So as we look at that, I think, that's really how we look at it at the end of the day.

I don't know that it's not really accelerating any more, I guess, is really what your question was.

I think it has started to maybe temper down a little bit.

Adrianne what we're seeing and what you're going to see in fourth quarter is our normal holiday shift.

So the sales of the discretionary product always lifts in fourth quarter.

It did increase as a percent of our business in third quarter, but that was fairly consistent with what we had reported in the past.

Look, we're doing business.

We're selling customers what they want to buy.

When they're under pressure, and they are looking for ways to balance the budget -- we invite them in, and we still make money on that consumer basics.

It's just that we sell it faster.

We make less on each item, but we sell a lot more of it.

So the shift in the mix, I think that it's very manageable.

We feel the rhythm of what's going on there.

And remember, we did raise our guidance as we go forward.

So we feel very confident in our business.

We will take our next question from John Zolidis with Buckingham Research.

Hello.

Congratulations on a great quarter.

Thanks John.

Question, I guess, looking at the first half of the year, if there was one criticism I could level it was that there wasn't much SG&A leverage.

Obviously, that turned around in the third quarter, and you had significantly better leverage.

Can you talk about what changed from the first half to the third quarter?

And then related to that, and this will be my follow-up.

On the depreciation, it came in below what we were looking for and below -- and you have lowered your guidance for depreciation for the year.

Looking into next year, can we expect depreciation to start to grow again on a year-over-year basis?

Especially with the addition of the extra distribution center?

Thank you.

Well, with regards to your first question, John, and regards to the SG&A.

One of the differences we called out is in regard to the payroll expense line item.

If you looked at the first couple quarters of the year, we didn't get a lot of leverage there.

And a lot of it was because the decrease we were seeing in the basic payroll was more than offset by incentive compensation based upon the favorable sales and earnings results.

We have basically started -- as we have talked about in this quarter, we actually saw that we were able to more than offset that.

Our decrease in payroll expenses outside of incentive compensation was higher, and we were able to create 25 basis points of leverage.

So that's something that was a pretty significant change, I guess, quarter-to-quarter.

We also saw a nice decrease driven out of store operating expenses and especially around utilities a little higher than we had been seeing.

You know it was not the hottest summer around.

It was a little bit milder.

We have also seen -- instead of seeing consistent rate increases, we have seen some of those actually decrease a little bit.

Some of that was based upon delivery charges which again is based upon fuel costs.

So I think those are some of the things beyond depreciation that we have seen helping us.

In regards to depreciation for next year, I don't know that we're ready to say that it's going to continue to go down or go up.

We haven't given guidance.

We haven't given that information out there.

What we can say obviously around the costs of the San Bernardino DC is the fact that we're going to actually save dollars in the long run.

That was part of the annual list of making that decision to close the Utah facility.

Let the lease expire, and open up the new location.

So I think that overall basis, we're going to be in a better position.

I think that's what we need to keep in mind.

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

Thank you, good morning.

Nice quarter.

I found it interesting that you didn't reference food as a big sales driver in the quarter for the first time in several quarters.

Could you just talk a little bit about how the mix is shifting, and how the customer response has been?

Especially given the strong traffic trends that you have continued.

You know Mitch, our food sales continue to be strong.

We continue to roll out frozen and refrigerated product, but that has become less of a percentage of the total.

We have -- I think we rolled out a hundred -- and how many stores?

160 total.

160-some stores, frozen refrigerated this year.

But we have more than 1,100 stores.

So the impact on the total is less as we roll out frozen refrigerated.

We have expanded our food assortment over the past several years, and while it's doing very well and we are very proud of it.

It was outpaced -- it was simply outpaced by HBC basics and household cleaning supplies.

The growth in those two categories outpaced a really, good solid performance and a large sales number on our food business.

That's what you're seeing.

We're selling a broad assortment of things that people need every day.

Our customers are finding the cleaning supplies that we sell.

It's only $1.00.

That they work.

They clean as well as the other stuff, and it helps them balance their budget.

So they're buying more of that HBC.

Of course with hand sanitizers and all the things that are going on with the swine flu, we carry a lot of that type product and that has driven a lot of the sales increases in that.

I would just have to tell you though that one of the things that we look at that we're very proud of all of our business.

But our party business was right up there in the top three as far as growth.

It continues to be a rapidly growing and expanding business for Dollar Tree.

Okay.

So it's pretty safe to assume that the only -- the traffic is not driven simply by the food.

It's a broader assortment of stuff.

It really is.

It's not just the food.

It's the whole idea of selling more of the things that people need every day, and that includes the household supplies as well as the HBC in addition to the food and beverage and candy, and all the things that you eat and consume.

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

Yes, thank you.

Congratulations.

Can you give us a sense on what the product cost is on merchandise that you sourced out of Asia for the spring?

How that compares to last year?

I will tell you that pricing has been favorable ever since -- well all year, really.

The spring product that we have sourced for next year, the pricing was favorable.

Our initial markup by the way in the third quarter was up.

We continue to see really more of a return to normalcy and improvements in our costs out of Asia.

Not just in the cost of ocean freight, but also in the cost of products that we're buying.

So that has been a favorable trend.

I think that's going to continue, and again, it was really the unusual turn of events last year driven by those sudden spikes in oil prices that drove the prices up then.

Even then, we were able to manage through that.

So because of the way we run our business, because we feel that we're in charge of our margin, it's all about how much value we put into the product for the dollar and how much margin we plan to make on the product.

We're in control of that.

So we think that as prices go up and down, we're able to manage through it.

And our history says that we have been able to do that.

And then in terms of Halloween, can you just elaborate on whether there was any unusual bump up from the timing of the holiday being on the weekend?

Yes.

Halloween, did you have any increased benefit in party or candy?

That was absolutely the best time to have Halloween.

I vote for let's put it there every year.

It really does give the best of all worlds for the parties and the adult parties as well as the Halloween and the kids trick or treating.

So that's about as good as it gets from a timing aspect.

We will take our next question from Joe Feldman with Telsey Advisory Group.

Hello.

Congratulations on the quarter.

The question we wanted to ask about was on Deal$.

If you could just give a little more color on what you're thinking there.

I know in the prepared remarks you outlined a few things you're working on.

Maybe you could share how some of those programs are benefiting, and what's not working?

And then, how you envision the chain a few years from now?

Is it going to be double, triple?

And what you're thinking.

Well, we're very excited about the Deal$ model because it gives us the ability that by lifting the restriction of the price point, we can offer more product to more customers.

We can add categories consistently that we're not able to do at a Dollar Tree store which is going to give us the ability to serve more customers.

To give you just a little more color on the Deal$ in third quarter, our top categories included domestics and housewares and household supplies.

HBC -- health and beauty care product was in the top five.

We also had a very good performance at back-to-school with some back-to-school items including our teaching tree and supplies for the classroom.

We had a backpack for $5.00 that was a sellout.

We're offering -- overall, we're offering broader assortments with compelling values in our domestics area.

We're able to sell sheet sets, and we're actually selling king size sheet sets for $10.00.

We're seeing a lot of growth in the domestics and the household area.

We're expanding in some new categories including small appliances for the fall.

Automotive products, including anti-freeze and motor oil.

So it really does give us the ability to get into some categories that you just don't see consistently and can't see consistently at the price point of $1.00.

We now have 156 Deal$ stores.

We have got a lot of room to grow, but we're still improving the model.

I'm proud of a lot of the progress that we have made on the average tickets.

All Deal$ stores' average tickets is over $9.00, and our new stores, it's approaching $10.00.

So that's a big improvement from our Dollar Tree average tickets which runs around $7.00 or maybe a little better.

But when we have an average ticket that includes a multi-price point, a higher than $1.00 item, our average ticket jumps up to almost $14.00.

And in our new stores, over $14.00.

So we see that as the customer responding positively to the product offering.

Almost 50% of our transactions now include a higher than $1.00 price point item.

Another key indicator to us that the new more than $1.00 product is resonating with our customer.

So we're excited about our Deal$ stores.

We have got some new stores that are really exceeding expectations.

We have got some new categories that are exceeding expectations.

We're still working on communication of the price image in our stores.

We have got a ways to go there.

We will get it, but there's still opportunity to improve the price image in the stores.

We're still working on improving the shopping experience in our stores, raising the standard, running better stores.

And we're still really focused on identifying and communicating what our Deal$ stores stand for in the eyes of the customer.

What's the top of mind when you think of Deal$, what do you think of -- to our customers.

So we're excited about it.

That gives you a little bit more color.

Where are we going to go in terms of numbers, next year we haven't announced our growth plans.

But I will tell you that Deal$ will be a part of that growth plan.

And as we go through we're in this for the long haul.

So as we continue on, continuing to open up more Dollar Tree stores across America, we are also going to be expanding our Deal$ concept where we see that it fits.

That's great.

Thanks.

If I could follow up with one more question, it was just about -- what are you seeing competitively?

I know everything in your store is $1.00, so you can't really beat that price.

But from Dollar General, Family Dollar, Wal-Mart, there's so much focus on the lower price and value this holiday season.

Anything to note there?

If you're not value these days then you're really struggling.

It looks like the folks with a value component in their business are the ones that are doing the best.

Dollar General -- they have been around a long time.

They have really done a great job.

I've always been an admirer of Dollar General, but it's just a different model.

We're different than they are, or they're different from us, whichever way you want to look at it.

I'm real proud of Dollar Tree sales growth and our industry leading margins, and our inventory management, and our consistent store expansion.

So I think we stack up very favorably against the other dollar stores, and again we're different and we have more room to grow.

We're the smallest of the three major players out there.

We got more stores to open, and I like our position.

As far as the other companies and pricing, it's competitive out there.

But again I think that we do a nice job of offering value to the consumer and a terrific shopping experience, and I think that's what's going to take us to the end zone.

Wal-Mart -- we pay very close attention to them.

Number one retailer in the world, they are awesome.

They are also a major traffic driver, and we like to be close to Wal-Mart because they bring customers into the shopping center.

So if we can get customers to come by our store, if we can get them in the front door, we believe our values and our shopping experience will do the rest.

So we feel very confident about being able to compete in what is an increasingly competitive environment.

We have time for just a few more questions.

We will go next with Allen Rifkin with Banc of America.

Yes.

Thank you very much.

Bob, does the decision to not renew the Utah facility but rather own a facility in California signal a greater commitment toward store expansion in that state specifically?

Yes, we're very excited about the Southwest.

I don't think this marks any special milestone.

We have been headed there for some time.

We have got a lot of stores in the Southwest.

But our lease was up in Utah.

And when the lease was up, we took the opportunity to -- do you renew the lease, or do you build a location, or do you buy a location?

And when we started looking at the optimal location with our growth plans for the next three to five years out there.

We saw that Salt Lake City was not the optimal location.

Moving to San Bernardino gives us a better access to the port facility for example.

Over time, it gives us better [stim] mileage.

We reduce our cost and support our growth better by being in San Bernardino than we do in Salt Lake City, Utah.

But the timing was really just more of, it was the end of the Salt Lake City lease, and here was our chance to either move or sign up for another five years.

We chose to move, and also, it's the right time to buy.

We got a deal, I believe.

We, as always, are looking for opportunistic purchases.

And in Southern California, San Bernardino, there were opportunities -- buildings that were already built that we could take and make our own with our own automation.

But that we got at a much lower price than if we built it ourselves.

Okay.

So that was really the answer to the timing.

Okay.

As we look at 2010 and hopefully it does mark an inflection point in terms of a rebound in the economy, can you maybe shed some color on how you're thinking about the proportion of non-consumables in your mix?

Would it be reasonable for us to expect that if, in fact, the economy starts to improve even in the latter part of 2010 that we can see the non-consumables portion of your mix start to increase?

Yes.

We think we're right for all times.

We will do better in an improving economy.

We want to see a strong economic recovery, and really it comes down to the value of our merchandise and the quality of our shopping experience.

The same things that have brought us for the past 25 years to where we are -- 20 some years to where we are.

Customers, they're acutely focused on value today, and that's what we have.

And as they explore their choices for value, we're getting new customers right now.

We're more relevant than ever for customers given the things they need as well as the excitement of the things that they want.

Our general merchandise is growing right now.

Just these tough economic times hasn't grown quite as fast over the past two years as the consumer basics have grown.

Our real estate strategy puts us right squarely in the middle where Middle America lives and shops.

And we think that as the economy improves, so will our consumers ability to buy.

They will be out.

There will be more traffic in the shopping centers.

They will come into our stores, and when you come into our store it's amazing what you can buy.

And it's still only $1.00 It may be discretionary, but it's still only $1.00.

That's why we're able to grow it now, and as the economy improves, I think that's why we will grow even faster.

We will go next to Mike Baker with Deutsche Bank.

Thanks.

So two quick questions.

One is on the average ticket.

We talked about traffic driving the comp.

Was the ticket up, down, or flat?

Then my follow-up question would be on what you spoke about with the incentive comp.

So that wasn't as big of a drag in the third quarter.

I assume we should assume going forward that also won't be as big of a drag as you probably start to cycle up against some of the increases in the sense of comp.

Is that a fair statement?

Thanks.

Your first question with regard to average ticket, it was basically flat.

It was basically flat.

So again as we have said, which has been pretty similar all year, comps have been driven by traffic.

With regard to fourth quarter incentive comp, I don't know that I can say exactly.

We don't give specific guidance to that at this point in time.

Anything that we know is implied within our guidance for the fourth quarter at this point in time.

So I don't think I can make an assumption one way or the other today as we sit here where that will fall out exactly -- whether it will be plus or minus overall.

But, I think we will do everything we can to leverage it, and if that happens we will like it.

We will go next to Scott Ciccarelli with RBC Capital Markets.

Hello.

Scott Ciccarelli.

Question about merchandise pricing, and I think, Bob, you mentioned that you got another round of good pricing for the spring already.

Obviously, you are pretty sensitive given your fixed selling price point.

If we were to see a persistently deflationary environment, from a strategic standpoint, are you inclined to pass the majority of that better pricing on to consumers?

Or are you in a position at this point where you might be able to keep a little bit more of it in the form of higher gross margins?

We make the call relative to the timeframe, and basically on how we feel about the consumers propensity to spend.

What I mean by that is, we're more likely than not in tough times to invest that back into the value of the product.

Times are tough out there.

The way we remain competitive is we give more value to the customer for $1.00 than anyone else can.

And so when costs go down, we're likely to invest a lot of that, if not all of it depending on the times, back into the offering better product for the same price versus just taking that in the form of margin.

I believe that we have taken some in the form of margin this year.

I think that's some of the things we see in our additional markup.

As I look forward into next year, I'm expecting things to remain fairly difficult out there.

We're looking to offer -- right now, we're working real hard for the customer to offer the most value we can for $1.00.

We will take our last question from Laura Champine with Cowen.

Hello, this is actually John [Kernan] in for Laura.

Looks like cash on the balance sheet is at similar level from the earlier quarters this year.

Can we think about share repurchases being similar in Q4 just from a modeling perspective?

Well, obviously our guidance assumes no repurchase.

And, I think, in general when we look at the cash levels, obviously, the first thing we always want to do is be able to fund our business.

We continue to do that by funding the expansion of our stores through new stores and remodels -- 315 projects this year.

As well as in this case, purchasing a new DC in San Bernardino.

So those are the kind of things we always look at.

Historically, we have looked at the stock repurchase plan as an opportunity to return -- help returns to our shareholders.

And I think we will continue to look at it that way as we go forward.

Okay.

Then just one follow-up, Dollar General threw out some pretty aggressive, long-term store expansion plans.

Have you thought about the ultimate store base you can support?

Have those plans changed at all?

No, we think that there's room for 7,000 Dollar Tree stores -- up to 7,000 Dollar Tree stores across the country.

And that the Deal$ model will expand that number.

I'll go ahead and turn the call back over to Mr.

Reid for closing remarks.

Thank you very much, Clayton.

Thank you all for participating in the call today.

Our next conference call is scheduled for Wednesday, February 24, 2010 when we will an announce the results for our full year 2009.

We wish you all a Happy Thanksgiving.

Thanks again for being part of the call.

This concludes today's conference call.

Thank you for your participation.