美元樹 (DLTR) 2009 Q4 法說會逐字稿

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

Today's call is being recorded.

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

Tim Reid, Vice President of Investor Relations.

Please go ahead.

Thank you, Brandy.

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

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

Our call today will be led by Bob Sasser, our President and Chief Executive Officer.

He will provide insights on our performance in the quarter and recent developments our business.

Kevin Wampler, our Chief Financial Officer, will provide a more detailed review of our fourth quarter financial performance and provide guidance for 2010.

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

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

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

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

Now like to turn the call over to Bob

Thanks, Tim.

Good morning, everyone.

This morning we announced earnings for the fourth quarter of $1.52 per diluted share.

This is an increase of 32.2% over last year's reported $1.15 per diluted share.

Our operating margin for the quarter was 14% .

That's an increase of 210 basis points over the fourth quarter last year.

Operating income increased by $53 million, or 32.2% over last year and net income rose 28.3%, to $135 million.

As previously reported, total sales for the quarter were $1.56 billion, an increase of 12.4% over the fourth quarter of fiscal 2008 and comp store sales increased 6.6% in the quarter, driven by a combination of 5.7% growth in traffic and a 0.8% increase in average ticket.

For the full year in fiscal 2009, earnings per share were $3.56, an increase of $1.03, or 40.7% over last year's reported $2.53.

Net sales were $5.23 billion, an increase of 12.6% over fiscal 2008 and comp store sales increased 7.2%, on top of a 4.1% comp store sales increase last year.

Operating income in grew by $147 million to 9.8% of sales, an increase of 190 basis points over 2008.

And net income rose 39.7%, to $321 million.

I want to thank everyone for joining us today and for your interest in Dollar Tree.

By every measure, 2009 was a terrific year at Dollar Tree.

Whether seeking the balance of household budget, planning a birthday party for the kids, or just to find those fun things for the season, Dollar Tree has become a destination stop for millions of shoppers and for a lot of good reasons.

First of all, our customers like our merchandise value and our fun and friendly shopping experience.

It is unique.

We are gaining new customers all the time, as evidenced by the fact that our traffic is up and they like what they find.

Our average ticket transaction is on the rise.

Shoppers are finding that we have it all.

When times are tough, what better place than Dollar Tree to help balance your budget on the things that you need.

Our stores offer a balanced mix of everyday basics, things they need him alongside assortments of fun, and exciting discretionary items; things you want.

You can balance your budget at Dollar Tree and go ahead and splurge on discretionary products because it is still just $1.

Customers like our stores and our store size.

The larger 10,000 to 12,000 square foot store that we are opening today in strip centers and in freestanding locations is iDeal$ for our model.

It's small enough to be convenient, but yet large enough to accommodate the needs-based products that we have now added, including HPC, cleaning supplies, food, and frozen and refrigerated products.

In 2009, we added freezers and coolers to an additional 197 stores, and we now have frozen and refrigerated products available in 1291 Dollar Tree stores and 132 Deal$ Stores.

Our measured expansion of frozen and refrigerated products is continuing and this year, we intend to roll this product out to another 225 stores.

While adding more stores -- new stores were also learning what our customers need and we're refining our frozen and refrigerated assortments to provide more value and excitement for customers in the existing stores.

The addition of frozen and refrigerated products and the increased mix of high-value , fast turning consumer basics is driving footsteps into our stores on a more frequent basis.

As I said, our customer traffic is up, and the increased customer traffic is driving sales of our high-value, high margin discretionary products.

To keep our values high, we have invested in infrastructure along the way and we are now leveraging those investments.

A retail technology is tailored to our unique business model.

Using point-of-sale data by item, by store, where making smarter allocations, flexing our inventory to meet increasing customer demand and improving our in stock of basics and optimizing the flow of seasonal product to our stores consistent with sales trends.

All this translates into a better customer experience , improved sell through, and increased inventory turns.

Our inventory turns increased by 26 basis points from 3.8 turns in 2008 to 4.06 turns in 2009.

We've consistently increased our inventory turns every year over the past five years.

Along with retail technology, we have invested in solid and scalable logistics infrastructure to support a nationwide retail footprint.

In 2009, improved trailer utilization and increases and backhaul reduce cost per delivery, and DC productivity increase by over 14%.

We expect continued gains in efficiency as our volume increases.

Every new store that we open makes our network more efficient.

In addition, we recently announced the purchase of a new DC in San Bernardino, California to replace a leased facility in Salt Lake City that is scheduled to close in April.

Work on the new San Bernardino DC is progressing on schedule and on budget.

We intend to begin receiving merchandise into the new facility next month, and begin shipping to stores in April.

San Bernardino is slightly larger than the Utah DC that it replaces.

It is fully automated and will provide further increases in DC productivity.

In addition, it is strategically located to decrease [ten] miles both in inbound and outbound, and better serve our base of existing stores while supporting our new store growth in southern California and the Southwest.

The total cost for the new facility is expected to be about $37 million and will be financed using available cash.

Most of the capital expense associated with this project is already behind us; $31 million is included in our 2009 year-end numbers.

With the completion of the new DC, we will have the capacity to support $7.5 billion in annual sales with no meaningful additional investment in infrastructure.

While many retailers pull back in 2008-2009, Dollar Tree continued to open new stores and increase market share.

For the full year 2009, we opened 240 new stores and relocated and expanded 75 store , for a total of 315 projects.

We ended the year with 3806 stores.

The new store class of 2009 average approximately 10,000 square feet which is similar to the class of 2008.

Our plan for 2010 includes 220 new Dollar Tree stores, 25 new Deal$ Stores, and 75 relocations for a total of 320 projects.

Over the longer-term, we believe that we can operate up to 7000 Dollar Tree stores across the country and the Deal$'s model expands this number.

Speaking of Deal$s, we continue to improve the operating metrics.

We had very strong sales performance at our Deal$s Stores, especially in the fourth quarter and particularly in the new stores that we've opened over the past three years.

Traffic, ticket and average unit retail all increased in the fourth quarter and we're seeing positive customer comp across a broad range of categories.

The top categories for the quarter included domestic and textiles, housewares, household products, toys , gifts, and health and beauty care.

Were offering more variety, more brands, and more overall value.

Looking forward to 2010, we will continue to build and refine our assortments to create more merchandise excitement , increased the wow factor, and give our customers more reason to shop at Deal$s.

We continue to refine and improve key operating metrics; that means continuing to upgrade our standards to run better more compelling stores.

And we'll focus our real estate strategy on rolling out new Deal$ Stores in targeted locations in a measured and thoughtful way.

While on the subject of new growth, in the first quarter 2009, we launched our e-commerce platform, Dollar Tree Direct.

Dollar Tree Direct is another way to offer Dollar Tree values to more customers, including organizations, small businesses , or individual customers planning events.

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

Customers responded positively on a range of new products, including Christmas items, HPC, gifts, toys, and housewares.

Dollar Tree Direct is off to a great start and 2009 was only the beginning.

We see major potential to grow this business.

In fact, in the week leading up to Valentine's Day this year, Dollar Tree was the third most popular search term for the online retail gift industry.

Will continue to expand our assortments in 2010, and increase the number of items available exclusively on Dollar Tree Direct.

In addition, we would continuously improve the site and make it increasingly customer friendly.

I encourage you to check it out at www.DollarTree.com.

Now I'd like to turn the call over to Kevin Wampler, our Chief Finance Officer , who will give you more detail on our finance metrics during the fourth quarter and

Thanks, Bob.

As Bob mentioned, our diluted earnings per share increased 32.2% in the fourth quarter to $1.52.

The increase resulted from our strong sales, a 150 basis point improvement in gross profit, and a 60 basis point rate reduction in total SG&A compared to the fourth quarter last year.

Starting with gross profit, our gross margin grew to 37.1% during the fourth quarter, compared with 35.6% in the fourth quarter last year.

Several factors contributed to this performance.

Merchandise costs , including inbound freight, decreased 140 basis points.

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

These improvements offset the negative pressure from product mix.

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

In addition, expenses for buying, distribution, and occupancy decreased 10 basis points with positive sales leverage was partially offset by increased profit sharing and incentive compensation for distributions center associates.

SG&A expenses were 23.1% of sales for the quarter, which is a 60 basis point improvement from the fourth quarter last year.

This was driven primarily by a 40 basis point reduction in depreciation.

A 30 basis point reduction in store operating expense due to lower utility costs and emerging of the comp store sales increase, payroll expenses increased by approximately 10 basis points.

Greater incentive compensation driven by the favorable sales and earnings performance offset the benefits of leverage from sales growth on overall payroll related expenses.

Debit and credit card fees also increased slightly as a percent of sales, reflecting continuing 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 [stamp] or food stamps in 75% of our stores.

In the fourth quarter compared to the fourth quarter last year, debit card penetration increased 170 basis points and credit card penetration increased 70 basis points.

With our expanded mix of food items, stamp is small but a growing component of our business.

We tend to continue expanding foodstamp acceptance for more stores in 2010.

Depreciation and amortization declined 40 basis points in the fourth quarter and totaled $41.3 million.

For the full year, depreciation was $157.8 million, a 50 basis point decrease from last year when depreciation was $161.7 million.

For 2010, depreciation and amortization is estimated to be in the range of $160 million to $165 million.

We anticipate that depreciation as a percent of sales will continue to decline in 2010.

Operating income increased $53.2 million compared with the fourth quarter last year.

Operating margin was 14%, an increase of 210 basis points from the fourth quarter last year.

For the full-year, operating income increased $147 million, and our operating margin grew to 9.8% , up 190 basis points from last year's 7.9% operating margin.

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

The tax rate for the quarter was 37.8%, versus 36% in the fourth quarter last year.

The increased rate reflects higher state tax rates in several states, less tax exempt income as a percentage of total income, and a smaller positive impact from work opportunity tax credits.

For the full fiscal year, the tax rate was 36.9% versus 36.1% last year.

Looking at the balance sheet and cash flow, cash and investments at year-end totaled $599.4 million versus $364.4 million at the end of fiscal 2008.

Cash [no debt] was $331.9 million at year end 2009.

During the fourth quarter, we invested $38.5 million to repurchase 800,000 shares of Dollar Tree stock.

For the full year, we repurchased 4.3 million shares at a cost of $193.1 million.

At year end, we had $260.6 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.

Capital expenditures were $51 million in the fourth quarter of 2009 versus $27.1 million in the fourth quarter last year.

The increase was driven by $31 million in capital expense for our new distribution center in San Bernardino, California.

For the full year of 2009, capital expenditures were $164.8 million, compared with $131.3 million last year.

The majority of capital expenditures this year were for new stores, remodeled and relocated stores, the new distribution center, and the addition of frozen and refrigerated capabilities to 197 stores.

For fiscal year 2010, we're planning capital expenditures to be in the range of $155 million $165 million.

And capital expenditures will again be focused on new stores and remodels, the addition of frozen and refrigerated capabilities to another 225 stores, and the remaining $6 million of cost related to our new distribution center.

Our inventory at the end of year increased by less than 1% versus the same time last year, and selling square footage grew by 6.6%.

Merchandise inventory per selling square foot decreased 5.6%; inventory turns increased once again the fourth quarter.

With regard to the inventory accounting change announced in this morning's press release, the Company uses the retail inventory method to assign cost to store inventories.

Since inception, the Company has employed one inventory pool for this calculation.

Effective January 31 of 2010, the first day of fiscal 2010, the Company will use approximately 30 inventory pools in its retail inventory calculation.

This change was made possible by the Company's investment in information systems and will facilitate improved decision-making and further enhance our [inventory planning] process.

As a result of this change, in the first quarter of 2010, the Company expects to record a nonrecurring, non-cash charge to gross profit and a corresponding reduction in inventory at cost of approximately $28 million or $0.20 per diluted share.

This impact accumulated over the 23-year history of the Company and is included in our guidance.

There will be no effect on prior periods related to this change in inventory accounting.

Turning to our guidance, as we look forward to 2010, we must be mindful of a couple of issues.

First, we have a powerful relevant concept and we intend to continue growing.

However, while gross national product appears to be improving, consumers remain under great pressure.

Unemployment is still at or near double-digit levels.

This places a very serious burden on families.

We are factoring this uncertainty in our guidance.

Also, Easter is one week earlier this year.

This represents about $10 million sales challenge in the first quarter.

Our guidance assumes that ocean freight rates will be lower than last year through the first quarter.

And we assume that diesel will fuel prices will be higher throughout fiscal 2010 than they were last year.

Our guidance also assumes a tax rate of 37.6% for both the first quarter and the full year, and no impact from potential additional share repurchases for the year.

With all this in mind for the first quarter of 2010, we are forecasting sales in the range of $1.29 billion to $1.33 billion.

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

The Company's earnings per diluted share for the first quarter of 2010 are expected to be $0.57 to $0.65, including the aforementioned, nonrecurring, non-cash charge of $0.20 per share related to the inventory accounting change.

Absent this change, earnings per diluted share for the first quarter of 2010 would be expected to range from $0.77 to $0.85.

The Company reported earnings per diluted share of $0.66 in the first quarter of fiscal 2009.

For the full fiscal year of 2010, we are forecasting sales in the range of $5.59 million to $5.76 billion, based on a range of low to mid single-digit increase in comparable store sales and 6.3% square footage growth.

Diluted earnings per share are expected to be in the range of $3.76 to $4.03, including the non-cash charge related to the inventory accounting change.

Absent this non-cash charge, our diluted earnings per share are expected to be $3.96 to $4.23.

This would represent an increase of between 11.2% and 18.8% over our record EPS of $3.56 in fiscal 2009.

I also want to remind you that as reported in our press release this morning, beginning this year, we will accelerate our financial reporting timetable by six days.

You will get our results sooner, and you will get all the numbers at the same time.

Starting this May, we will announce quarterly sales , comp store sales, earnings, and our forward-looking guidance on the third Thursday following quarter end.

We will no longer announce net sales in comparable store sales results in a separate press release.

With that, I'll turn

Thanks, Kevin.

I have just a few summary remarks.

In 2009, we grew sales by 12.6%, increased comps store sales by 7.2%, expanded operating margin by 190 basis points to 9.8%, and increased earnings per share by nearly 41% on top of a 21 % increase the previous year.

In many ways, 2009 was our best year, but I have to add, it is our best year so far because as we look to the future, we see even more opportunity, we are excited about our business and we like how we are positioned.

We have a series of initiatives in place to drive our business to higher levels in 2010.

We're focusing efforts on wowing the customer, creating more merchandise excitement with an even better store experience, featuring more and tactful signage, greater item-of-the-week emphasis, more powerful end caps, and more frequent updates of in-store graphics and messaging.

We're expanding our emphasis on key merchandise categories like party, health and beauty care, our teacher's corner, household chemicals, as well as food and consumables, and we're refining are frozen and refrigerated assortments to drive traffic.

We're moving our in-stock position on basic, non-food items that people need every day like that batteries and light bulbs, kitchen utensils and stationery.

We also have more in-store marketing events, featuring more differentiation and more wow in our merchandise values.

When you shop our stores this spring, you'll see new unbelievable wow items including solar landscaping lights for only $1, [we] accessories for just $1.

Our values have just never been better.

Our confidence in the future is also based on the solid foundation that makes it all possible.

Our investments in infrastructure continue to translated into better inventory management, increasingly efficient supply chain logistics, more productive 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, enhancing our supply chain with a new distribution center, and developing new retail concepts including Deal$s and Dollar Tree Direct.

These investments bring greater opportunity for our associates to grow and develop their skills while expanding overall employment opportunities.

Most importantly, we're getting more efficient and reducing supply chain and back office costs.

Our plan is to reinvest much of these savings into higher merchandise values and to provide a better customer experience in our stores.

With our compelling mix of low price and high value consumer basics, and our unique assortment of fun, compelling seasonally correction discretionary products, were positioned to be relevant to customers in all economic circumstances.

We had a great year in 2009 and were determined to do even better this year.

We have plenty of opportunities to grow our business , a vision of where we want to go, and the infrastructure and capital to make it happen.

We're off to a good start in 2010.

We had a strong Valentine's season and our sell through improved despite record snow falls that closed many stores in the mid-Atlantic and in the Northeast during the holiday week.

Our stores transitioned quickly and are now set for Easter and spring season.

We're now ready for your questions.

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

(Operator Instructions).

We will go first to Mitch Kaiser with Piper Jaffray.

Good morning and outstanding year.

Congratulations.

Could you talk a little bit about -- you saw an uptake in tickets for the first time in several quarters.

Maybe what you saw there and your hypothesis on what drove that.

And I do have one follow-up for Kevin.

Sure, Mitch.

The ticket, the average sale was up in the fourth quarter by 0.8%.

But that's the first increase we had all year.

While our traffic continued to be up, as it was in previous quarters, we really see the uptick, the rise in average ticket as a real positive.

And we think that while we've got a lot of new shoppers into our stores, people that have tried us for the first time, due to maybe just trying to balance their budgets, and find a way to find those things that they need, we think maybe they are coming back and now they are buying a little bit more.

Maybe it was trial the first time, but now they like what they see.

They like their shopping experience, and when they are coming back their buying a little more.

We're encouraged by the rise in average ticket.

Okay.

And then Kevin, just as we think about the capital structure, obviously a lot of momentum going in the business right now.

Square footage growth up 6% this year, but you have a lot of cash.

Could you help us think about what you view as the optimal capital structure and how you may be -- contemplate initiating a dividend or even going even greater into the buyback?

Thanks.

Sure, Mitch.

Obviously, historically, the Company has done a good job of deploying its capital and we continue to look at it.

The best investment we could ever make is building another Dollar Tree store.

But obviously, we want to make sure they're profitable stores so we measure our growth accordingly.

But obviously, we do look at things like the stock buyback.

We bought back almost $200 million this year.

Going back a year before, I think over a three-year period, we bought back about $1 billion worth of stock.

That's always been something -- one way we've looked at potentially returning value to our shareholders.

Historically, the Company has made some acquisitions over its history.

That doesn't mean there is anything on the table, just means that something is available.

I think what we like as much as anything about where we're at, is were very flexible.

The world is our oyster in many respects.

We've all of these avenues open to us.

As we think about a dividend, it's not that it -- isn't talked about by management and the Board.

But I think at this point, we really believe that a share buyback has been a better accretive and return to the shareholders at this point in time.

Obviously, we can't talk prospectively about what we might do in the share buyback.

But it's always been in our arsenal and we've always used it accordingly.

And we'll go next to Dan Wewer with Raymond James.

Thanks.

Bob, the obvious question is, the first quarter sales guidance is incredibly robust given the difficulty in the year-over-year comparison.

Does imply an acceleration in your two-year comp run rate.

Is your confidence based on the success that you've seen quarter to date?

Or perhaps have investors overestimated the impact of Easter shifting a week for your first quarter results?

Good morning, Dan.

The impact of Easter is in our guidance, and I think we factored that to be about $10 million negative to our top line.

But the answer to your question is, all of the above.

Obviously nothing is happening in the first quarter that is not considered in our guidance so far.

It's early in the quarter.

But were excited about our business.

And we think that we have initiatives in place that were going to continue to gain traction on.

We believe that it starts with this contingent to wow the customer.

And that means better product, more value, and I've seen the product and it is more value, and some of it is just unbelievable.

I believe our customers are going to continue to like what they see when a come in to buy the basics, the things they need.

We're getting better at that.

Think they are going to like what they see on our seasonal product; it's a fun and discretionary product that they find in our stores .

Our infrastructure is in place.

We continue to leverage our technology with our assortment planning now.

And we're starting to see a lot of the great impact on that in our sell through of our product and our inventory flow through our DC's and into the stores that were seeing leverage on our infrastructure that is showing up in the form of higher turns, more efficiency in our stores.

We're bullish on our business.

And yes, we did have a great fourth quarter last year, 9.2%.

Almost everybody at Dollar Tree can quote it that we were very proud last year with that comp.

But we're also excited about our ability to exceed that this year and that's what you see in

When you think at or look at 2009, that was the strongest comp sales growth in the Company's history.

Yet if you look at your sales per square foot, is significantly lower than the $210 that you were generating back in 1999 before you embarked on expanding the store size.

When you start to think about what is the art of the possible and what sales per square foot could we achieved five or seven years down the road, is there a number that really stands out in the way you think about the business ?

Dan, I was a much younger man and more impressionable in 1999, but a lot of things have changed as we've gone from the small, mall-based stores that were highly productive, but that maxed out in sales pretty much the first year.

They were so productive that we actually paid for those stores in less than a year's time.

We love those stores.

They really did start this company off in the right direction.

We were seeing now though, as we've expanded our store size, we've expanded it so that we can become more of a destination for our customer so we can include some of those things that people need every day.

Over time, we've added health and beauty care to our stores that we did not have in 1999.

We've added all the cleaning supplies that are basic things that people need.

Those things are serving us very well today.

And they also, these larger stores, with this broad mix of products, things you need, things that you want, gives us the ability in these larger stores to comp up over a longer period of time.

Were seeing comp increases year-over-year on these larger stores.

Where does it go?

Well, we think it goes up.

I don't have a number that I'm going to tell you -- that I even have a number out there.

Because I'm not sure that I know what the total potential is on that.

But it's more.

These larger stores are starting off -- by the way, our new store productivity this year was the best it has been in years.

There started off better and then they're growing year-over-year.

Sales per square foot from the small stores to the larger squares went down.

And now are seeing an inflection point where the stores that we're opening up are the same size as basically the stores that were running.

We're going to see those sales per square foot continue to increase.

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

Good morning and congratulations.

If I look at your guidance, it looks like you're guiding operating margins up about 40 to 90 basis points for the full year because of the (inaudible).

Could you give us the largest factors that are driving margin expansion in 2010 ?

And looking forward, where do those further opportunities lie

Joe, this is Kevin.

I think as we look at our business and within our guidance, I think we believe that there continues to be various areas of our business that we can leverage.

We talked a little bit, and maybe I'll talk first about SG&A.

We talked about the fact that depreciation, the percent of sales, we continue to believe that will decline.

And obviously, we've talked in the past about the fact that we feel about this DC as a structure here it and -- in the past, we really are reaping the benefits now as we continue to add stores, we become more efficient.

We know we'll get some efficiencies there.

As we look at other areas of the Company, obviously from an SG&A perspective to us, it all comes down to two things.

It is either things we buy or processes that we can control.

For the things we buy, obviously some of the things we've done is more reverse auctions and auctions around various commodity things that we use in our business.

And that can be things like the bags we use in our stores, it could be fixtures, it could be many different things.

Process is what we've talked a little bit about this year from the standpoint of -- I've talked a lot about the whole idea of inventories moving and how that touches so many areas of our business.

From the time we buy it to the time it goes out the door at the retail location, it touches every part of our business, and it has driven some greater efficiencies this year, but we don't think were done.

We think there's more there and we expect to gain more there.

I think there's areas there where we'll see some improvement.

From a gross profit perspective, I think -- we think that we can continue to leverage DC costs.

Again, as we've said, we think that's very efficient, an area where we can gain efficiencies.

I think the areas that will be tougher at the end of the day are the fuel costs .

Obviously, we know that diesel fuel is going to be higher all year long and that's in our guidance, unless something really unusual happens.

We know that to this point, we get a benefit in Q1 from our inbound or ocean freight rates.

After that, it's up for negotiation.

I think those are some of the things we look at as we look at the year going into it.

It's not any one silver bullet big area.

It's a lot of small gains in

Thank you.

That was helpful.

On the quarter itself, it looks like inventory was down about 5% on a first-store basis.

I know you've talked about better inventory planning.

Was that within the range that you are looking for?

Do you think you left some sales on the table?

Yes.

I think we had a 6.6% comp for the quarter which we were very happy with.

It was a great, great quarter from our perspective.

We have been running about that -- we been down on a per square foot basis basically all year and driving the comps that we've driven, 9% and basically three 6% pluses in a row.

Really it's more a part of our overall view of how would like to operate our business.

Obviously, our turns increased 26 basis points this year.

It took a nice healthy jump up from a 3.8 to 4.06.

We think that those are things that are very important.

And honestly, it helps us from a working capital perspective as well, from a generation of past cash.

A lot of positive things that come out of it as we continue to go down that road.

As a reminder , we ask that you limit yourself to one question and one follow-up question.

We'll go next to Meredith Adler with

Thanks and congratulations.

Maybe we could just talk about a couple of other issues about the use of capital.

You talk about limiting your growth to about 6.5% and you're looking to open good stores.

What is the constraint in terms of growing faster?

As we look at it, one, it's finding good locations that we believe are the right spot for us.

I think we've all heard in our retail careers, location, location, location.

And it's not like there aren't places out there.

Part of the issue is there are no -- really not a lot of new development coming out of the ground.

Where a couple years ago, there was a lot of development going on.

That's obviously been significantly curtailed, based upon capital constraints on developers.

Two, I think that there is space out there that needs to be redeveloped.

There are many boxes out there, bigger than those 10,000 square-foot store that were really looking to build, that need to be redeveloped.

And again, I think it somewhat goes back to people finding enough people, enough businesses that want to expand, and then redeveloping that space.

Those are some of the constraints that we face and so, we look at it.

Were pushing our real estate teams hard.

Otherwise, we think that the number were building is about right.

I think as Bob talked about, the new store productivity last year was the highest we've seen in quite a while.

And so, we feel very good about that.

That's where we'd rather be at the end of the day.

Okay.

Great.

And you did say something about acquisitions.

When you think about where it is that you feel like you might want to add something to your business, or what you're able to offer customers, it's probably not more stores.

There's not much left to buy in that area.

Is there something you think about, particularly something to add onto Dollar Tree Direct ?

I'm trying to understand what you're thinking about

Meredith, this is Bob.

Kevin was speaking to acquisitions as another way that we have used capital in the past.

As a matter of fact, all options are on the table for our capital structure.

We do have a lot of flexibility, as Kevin said.

He gave you the priorities.

Acquisitions is out there, too.

Do I see one?

Not right now.

Is there something that might pop up?

Well, you never know.

We do have a lot of core competencies of sourcing and logistics, and IT infrastructure and people oversight and the ability to run retail businesses.

We have that.

We have the capital to do it.

If something were to show up, obviously we would take a look.

And we'll go next to Scot Ciccarelli with RBC Capital Markets.

Hi guys.

How are you?

My question is, and I know there's been a couple questions about margins.

Is there any change in the thought process regarding gross margins?

I know you guys are trying to provide customers with as much value as possible.

But you've also had four straight quarters of improving gross margins.

You talked about improving productivity, Kevin mentioned it.

Should we read anything into that or has there been a change in thought process?

We tend to keep a little more on the books from what we used to do.

Scott, this is Bob.

It's not a real big change, but we do believe in investing in our customer.

And two things, one, that's in the stores that we run and the shopping experience.

And two, it's in the value of our product.

And the way we drive our sales, the way we drive our top line, is offering more value for the $1 price.

We don't change our retail.

We change the value of the product.

Going through the times that we've gone through last year, as we look out to 2010, we've done really well, but it's tough out there.

And customers are under pressure and unemployment is almost double digits.

It's debatable if it's double-digits or not.

But customers are under pressure and we think now is the time to step it up.

While we've got a terrific margin, were really looking to drive the top line with more value.

If we can continue to drive the top line, will leverage all those fixed costs.

We'll satisfy all those customers and that's how we're going to keep propelling our business forward as we go up into 2010 and beyond.

Okay.

That's helpful.

And Bob, I know something you had mentioned previously, was you had a lot of good pricing from your vendor's heading into the holiday season.

Have vendors become a little less desperate to liquidate inventories, does that actually put some pressure on the margins?

Thanks.

Are you talking about closeouts, Scot?

Yes.

I know during your analyst meeting, you referenced that you had gotten a lot of good deals from your vendors and some of that was close out.

Some of that was just, times are tougher.

They were doing what they could to gain market share, I believe.

Yes.

We are still seeing the buyers --, it is still somewhat of a buyers' market.

We are finding opportunities to lower costs or to provide more value.

Closeouts, in regard to margin though, they've never necessarily been -- I say never, they're not necessarily a margin enhancer.

Sometimes we just get a terrific close out that you'd never be able to sell for $1, but all of a sudden it's a close out and we're able to buy it in such a way that we can offer it at $1.

It may be less margin though than some of our other businesses.

Sometimes we use close outs to drive the image, drive the footsteps, the customer satisfaction and excitement in our stores.

The bigger issue is just the question about leveraging the power of our pencil.

We do continue to do that, and we have continued to see improved pricing, especially our foreign pricing as we bought into 2010 year.

You'll see that to continue.

And we'll go next to Adrianne Shapira with Goldman Sachs.

Hey, guys.

It's [Morey] on for Adrianne.

On the ocean freight versus the diesel, you mentioned that ocean would help you in the first quarter and diesel would be a headwind.

Could you just tell us which one would be a bigger piece for margin ?

I could tell you is this.

Historically what we have said about diesel is that a $0.10 change in rate for diesel for the year is about $0.01.

Obviously, we've got some assumptions within our guidance that looks at that based upon what we know today.

Obviously, that can all change in a hurry, as we've seen based upon a lot of things that none of us can control.

The ocean freight has been, obviously, a big benefit this past year and will be again in Q1.

And that's built into the guidance as well.

What we don't know there is a fact that the contract is renegotiated annually which we've talked about on the May time frame we'll go through that renegotiation and determine how that will affect the spend.

I don't know about -- I don't have really specifically how much that will affect us.

I can't really say which one will be bigger.

Okay.

Thanks.

That's helpful.

And just one follow-up, on the sourcing side, what you guys seeing as far as deflation?

I assume is still helping you to some extent.

Have you seen any change in recent months?

Did you say deflation, Mark?

Yes.

Deflation, again, pricing is still favorable, especially in our foreign sourcing.

Were seeing great opportunities to improve our values to our customer and offer even greater products in our stores.

And we'll go next to John Zolidis with Buckingham Research.

Good morning.

Great results, guys.

Thanks, John.

A schematic question, a lot of the inquiries I get from investors has to do with the benefit that Dollar Tree is perceived to have gotten in 2009 with trade down and the potential for that to reverse in 2010 and beyond, trying to look at Dollar Tree as maybe being -- was in the perfect storm, where you could really benefit from the environment and now that is going to wane.

How do you think about that?

Do have any evidence at all from your customers or surveys or talking to customers or other surveys done by independent parties, that customers might start migrating away from value oriented concepts as the economy gets better?

Is there any historical evidence of that ever happening?

Thank you.

I don't have any evidence as much as I have anecdotal evidence or comments.

And of course, we've always said that were right for all times because we sell all the things that people need when they're under pressure to balance their budget, HBC, cleaning supplies.

But we also sell a large amount of discretionary products.

Our discretionary product is still only $1 so customers are thrilled by it as long as we keep running great stores and offering the shopping experience, offering great value to our customers.

And we believe that as the economy recovers, that we will have stickiness, as it's been called.

We are finding new customers all the time.

Our traffic has been up.

That is data that you can point to.

When you look at where we locate our stores, I like where we are in our sector and in retail in general.

We locate our stores where middle America lives or shops.

That middle America customer, we've got the opportunity for that trade down.

Those people that are going to the, quote, better places, that are now trying us.

We co-locate with many of those people.

We get a lot of that traffic anyway.

It's one of the reasons that we put so much emphasis on our shopping experience and our stores.

That trade down customer wants a nice, clean, bright, fun shopping experience and we put a lot of merit to that and a lot of effort to providing that.

And then the value.

We they get in there and they came for this, but then, oh my gosh, look at what else I found and the great values they find.

That's what keeps them coming back to us.

The data that I can point to is our traffic is up.

If you want to look at history, about trade down, we looked at all that.

And you have to go back to the Great Depression and you start asking the question, is there a significant lasting change, a scar that has been left on the consumer as we go forward.

I believe there has been.

I believe people that have lost their job, obviously, they felt pain and we're right in their crosshairs of trying to balance their budgets.

And people that were near misses, they didn't lose their job, but it was close and they're worried about it.

I'm working, but I'm struggling and frankly, I'd like to save a little bit.

You never know what's going to happen.

Those people are coming to see us, too and they are finding something that they really like.

That's where our focus is focuses at, providing the shopping experience and that value.

Thank you.

We'll take our next question from Alan Rifkin with Banc of America.

Thank you very much.

You said that about 75% of these stores now accept food stamps.

By our calculation, approximately 50% of your stores today have refrigerators.

What proportion of your stores accept debit cards, have refrigerators, and also take food stamps?

And how is the comp performance of those stores that have all of the initiatives compared to your posted number?

Okay.

Kevin, you're the guy to try to answer this one.

All of our stores accept debit cards.

We have credit and debit in all of our stores, Alan.

We have freezers and coolers in roughly, closer to one-third probably.

In some of our stores we have what we call a mini cooler which has ice cream and some things like that which helps us qualify as well.

I don't know that I can actually give you an actual number.

I'll tell you what, I will look at it and I can get back to you on that because I can't do it just offhand.

Alan, I think one of the things you may be reaching for there is the runway on this.

Again, we will continue to roll this out.

Some of it is, whether or not we put the freezers and coolers in and take food stamps, is determined somewhat by the customer and the market that were serving as well as our supply chain.

This supply chain on personable product is more of a hub and spoke.

Is not the typical -- we have nine DCs that we ship things long distances on.

But then for our frozen and refrigerated, we have other suppliers, more of a hub and spoke delivery that we have to employ.

We're restricted in some calm cases by the real estate.

In some cases, we find restrictions that we have to work through from the supply chain and availability of the product.

And in some cases, it's just the size and volume of the store.

We choose not to put it in because of the size and volume of the store, and the investment.

I don't know if that helps you.

It is a little more color.

No.

I appreciate that.

And as a follow-up to an earlier question, concerning -- the concerns around the sustainability of traffic.

Is there any way that you folks are able to break down within the increases in traffic?

Are those increases coming from repeat customers?

Or what are you seeing with respect to new patrons coming to the store at this point ?

Only anecdotally, our traffic is up.

Some of that is from new customers.

And when we talk to our field people and when you're in the stores, and you talk to customers, you hear first-time shoppers.

You hear people say how much is this?

Those folks probably haven't been there before.

By the way, we like it when they say that because it means we got them.

We've exceeded their expectations.

They think it's worth more than $1.

I don't have any imperical data that says how many new customers versus number of shopping trips for existing customers.

Over time, we'll get at that.

Okay.

Since you aren't able answer my first question , do I get a follow-up?

Does this count as

Sure.

Go ahead.

You mentioned that the productivity within the DC has increased by 14% and that yielded a 10 basis point improvement in margin.

Is that the relationship that we should view going forward as you continue to increase the utilization rates of your DCs?

I think part of what -- the 10 basis point improvement was really more than just distribution centers.

It also included occupancy, as well.

I don't know that that's quite the right relationship at the end of the day.

But there is obviously some relationship there.

It may be just not quite be a full 10 basis points like that.

And we'll take our next question from Charles Grom with JPMorgan.

Thanks.

Good morning.

Just a question on the overall guidance.

Last year, if I look at your [255 to 275] which you obviously easily exceeded, it was 5% or 6% earnings growth.

This year, Kevin, as you said, you're guiding at least to 11% to 18% earnings growth.

Correct.

Clearly is why the stock is up today.

I was wondering, is it the confidence in the comps that is giving you the comfort to guide that aggressively?

Or is it the confidence in the gross profit line, given that you probably bought from each quarter of 2010 so you have a lot of visibility on the gross profit margin line?

I really believe it's all of the above.

I would tell you that I think they play together well.

Obviously, our whole business is built around wowing the customer.

And with the pricing that Bob talked about, the sourcing that has still been favorable, that's obviously allowed us to create some great value for our consumers that they really like.

Obviously when they really like it, that turns into sales.

It tends to feed upon itself at the end of the day.

I really look at it as being both of them that give us confidence going forward.

And we think were well-positioned.

I think that's the best thing we can say.

Okay.

Fair enough.

And then just on the ocean freight, I know you've got a contract coming up in May.

There's a couple of other department stores that are saying that ocean freight costs are going up by it $250 to $300 a pop today in order to avoid being rolled.

Just to paint the scenario where that does go up for you guys, post the May contract, would that be a drag to what you provide today from an earnings perspective?

Or have you assumed that it is going to gradually go up a little bit after May?

We factor everything that we know into our earnings earnings guidance, Chuck.

Speaking to your earlier comment about some people paying a few dollars more, from time to time, we have opportunities and things we have to work out with our carrier.

But we have strong relationships with the major carriers.

We've been a good partner to them and they to us.

We've been able to work through and smooth through those things.

We know what the freight rates are through May.

We just don't know what they're going to be after.

And frankly, until we get into those negotiations, you really can't call it.

What you have to do is factor that in as uncertainty in your guidance and that's how we assumed it.

Looks like we have time for one more question.

We will go next to [Tom Roland with Credit Suisse].

Thank you very much.

Can you talk about some of the ways that you have augmented or changed your advertising to the consumer in order to drive traffic?

Things like website or circulars?

In 2009, we really didn't spend any additional advertising.

I think our percent advertising was about the same, year-over-year.

And we never been a really aggressive advertiser anyway.

What monies we do spend, we spent more efficiently and effectively.

We've learned.

We do a lot more with our in-store promotions than we've ever done, really making the in-store effort more exciting and we've spent more money on that.

For a Deal$ stores, we do a few other things.

We had a Black Friday insert last year that we did, but it's pretty much the same kind of spin.

We had a holiday toy book for Deal$.

We had a holiday gift book in our Deal$ stores with great success.

We do a lot of product, but a lot of it is in-store efforts.

I think that's what you can count on going forward.

We are not launching into any great increase in advertising expense as we look into 2010, just making sure that what we spend, we spent efficiently.

Okay.

Got it.

And then, as you add a slightly increasing number of coolers and freezers to the store, are you seeing any pressure on the in-store labor expense necessary to handle those high turning items?

And given the $1 price point, is the ticket high enough to -- is the sales increase given that ticket, high enough to offset that labor pressure?

We haven't seen labor pressure on that by the way.

We've been able to manage it.

It is easy for me to say that, but our field people have done a terrific job on improving efficiencies, bringing product through the back door and onto the shelves or into the coolers, and then out the front door.

We've made great strides in that year.

We're going to make some more improvements in our operating efficiencies in our stores next year.

But as it relates to coolers and the $1 price point, that doesn't put any undue burden on us.

The $1price point in and of itself is one that requires the volume, more volume really to leverage that labor cost because every $1 sale is a unit touched.

It's really the model in and of itself.

There's no difference in the frozen and the general merchandise.

We like the volume though.

With volume, we can leverage the labor component.

We can leverage all of our fixed costs.

And the more volume we have, of course the more customers we serve and the more brand that we gain from that.

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

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

Thank you very much.

This is Tim Reid.

Thanks again, all of you for participating on the call and for your continued interest in Dollar Tree.

I'll remind you that with our new schedule, our next scheduled sales and earnings release and conference call are scheduled for Thursday, May 20, 2010.

Thank you very much.

This concludes today's conference call.

We thank you for your participation.