美元樹 (DLTR) 2010 Q1 法說會逐字稿

Good day and welcome to this Dollar Tree Inc first quarter 2010 earnings release.

As a reminder today's call is being recorded.

At this time I would like to turn the call over to Mr. Tim Reid, Vice President of Investor Relations.

Please go ahead.

Thank you, Tim.

Good morning and welcome to the Dollar Tree conference call for the first quarter of fiscal 2010.

My name is 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 our business.

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

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

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

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

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

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

Bob.

Thanks, Tim.

Good morning, everyone.

For the first time ever today we're announcing both our sales and earnings at the same time and we're announcing also six days earlier.

I would like to thank our finance team especially for their committment and diligence to make that happen.

We think this is a better way for announcing and we intend to do this as we go forward.

Moving to the results, this morning we announced that our comparable store sales for the first quarter increased 6.5%.

That's especially good, in my opinion.

This was on top of a 9.2% comp in the first quarter of 2009 and was the result of an increase in both our traffic and our average ticket.

Our traffic increased 4% and our average ticket grew by about 2.4%.

Total sales increased 12.6% to $1.35 billion.

As we disclosed in our February conference call and our 10-K, in the first quarter we recorded a nonrecurring non-cash charge of $26.3 million or $0.19 per share relating to an inventory accounting change.

Including this charge, our earnings for the first quarter increased to a record $0.73 per diluted share from $0.66 per share in the first quarter last year.

Excluding the charge, first quarter 2010 earnings per share were $0.92, an increase of 39.4% from the first quarter last year.

Operating income increased by $31.3 million.

Operating margin was 9.5%, an increase of 140 basis points compared with the 8.1% operating margin in the first quarter last year.

And net income rose 32.6%.

By the way, the operating margin at 9.5% was our highest first quarter operating margin since becoming a public Company.

In addition, during the first quarter 2010 we invested $218 million for share repurchase, including a $200 million accelerated share repurchase program that we announced in March.

These investments reflect our commitment to building value for long-term shareholders and our confidence in the future.

Our first quarter performance is further evidence of Dollar Tree's expanding relevance to the consumer, as well as underlying strength and flexibility of our business model.

We have a concept that customers love.

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

In fact, shoppers are finding that we have it all.

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

You can balance your budget at Dollar Tree and yes, you can afford it.

Go ahead and splurge on discretionary product.

It's all still just one dollar.

Sales were strong across many categories, including healthcare products, food, party goods, and products for the home.

Further, our seasonal business in the first quarter was terrific.

We had improved sell-through on both Valentine's Day and Easter seasonal merchandise compared to a very strong performance last year.

This was the result of our merchants delivering an exciting assortment of product, the best values ever, and our allocations and logistics teams getting it to the right stores at the right time.

Improved flow of product, high impact, in-store promotions and outstanding execution at the store level thrilled our customers.

I'm very proud of our store teams.

They continue to consistently deliver on the promise of a clean, bright, and fun place to shop.

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

We're now set for graduation, Memorial Day, and summer fun.

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

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

We're gaining new customers all the time.

Our traffic continues to grow.

I'll remind you it was up 4% in the first quarter.

And when they're in the store they like what they're finding.

Our average transaction increased by 2.4%.

We expected an increase in average ticket, particularly with an improving economy.

As our new customers become more familiar with the values and selection available at Dollar Tree and as people have a little more money, we expect them to buy more when they shop.

So far, that is exactly what we're seeing.

Customers like our stores and they like our store size.

The 10,000 to 12,000 square-foot store that we're opening today in strip centers and in freestanding locations is ideal for our model.

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

In the first quarter of 2010 we added freezers and coolers to an additional 137 stores and we now have frozen and refrigerated product available in 1,560 stores.

Our measured expansion of frozen and refrigerated product is continuing and this year we intend to roll this product out to another 263 stores by year-end for a total of 400 stores for the year.

You will note that we have increased our original plan by 175 stores for this year.

We have the ability to expand this category and we're doing so because it serves the current needs of our customers and it drives traffic into our stores.

The increased traffic is providing incremental sales across all of our categories including our higher margin discretionary product.

While adding more stores, we're also continuing to learn more precisely what our customers need and we are refining our frozen refrigerated assortments to provide more value and excitement in the existing stores.

We work to keep values high in many ways.

Over the past several years we've made investments in our future in the form of building infrastructure.

We're now leveraging those investments.

Our retail technology is tailored to our unique business model and it works, providing a better customer experience through improved in-stock of basics, higher sell-through of seasonal product and increased inventory turns.

Our logistics infrastructure is solid and scalable and capable of supporting a nationwide retail footprint.

Our new distribution center in San Bernardino, California became fully operational in April, on schedule and on budget.

The total cost for the new facility was $36 million, financed using available cash.

It replaced a facility in Utah that we had leased since 2003.

The lease on the Utah facility expired at the end of April and the transition to the new D.C. was seamless.

The San Bernardino D.C. is 418,000 square feet.

it is slightly larger than the Utah D.C. It is fully automated and will provide further increases in productivity.

In addition, it is strategically located to reduce stem miles and better serve our base of existing stores, while supporting our new store growth in southern California and the southwest.

We now have a network of nine Company-owned distribution centers with a network capacity to support $7.5 billion in annual sales with no meaningful additional investment in infrastructure.

Our logistics infrastructure is a strategic advantage, provides efficient service to our stores today, room for expansion in the future, and continuing asset leverage.

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

Turning to the subject of growth.

We continue to open new stores and increase market share.

During the first quarter this year we opened 74 new stores, relocated and expanded another 34 stores, and grew total square footage at 6.5%.

We ended the quarter with 3,874 stores.

While it's still very early, so far I'm pleased with the productivity of this year's new store class.

Last year we delivered substantial improvement in new store productivity and so far this year is better.

Our plan for the full year 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 7,000 Dollar Tree stores across the country and the Deal$ model expands this number.

We had very strong sales performance at our Deal$ stores in first quarter.

Once again, traffic, ticket, and average unit retail all increased.

And we're seeing positive customer response across a broad range of categories.

Top categories for the quarter included domestics and textiles, housewares, healthcare, personal care, pet supplies and household products.

Just like the Dollar Tree stores, our Easter seasonal sell-through at Deal$ was very strong and our Deal$ stores made a smooth transition to Memorial Day.

And now we're into graduation and summer seasonal product.

It is the best sell-through and transition so far that we've had at Deal$.

We're offering more variety in our Deal$ stores, more brands, more overall value, and customers are responding favorable.

Looking forward, we will continue to build and refine our assortments and improve key operating metrics to create more merchandise excitement.

We're learning how to run better, more compelling stores and give our customers more reasons to shop at Deal$.

While on the subject of new growth platforms, our e-commerce business, Dollar Tree Direct, continued to grow in the first quarter.

It's another way to offer Dollar Tree values to more customers, including organizations, small businesses, or individuals planning events.

We're in the early innings here with a lot of opportunity before us.

We expanded the selection available on Dollar Tree Direct by 80% compared to one year ago.

And we will continue to expand our e-commerce assortments and increase the number of items available exclusively on Dollar Tree Direct.

In addition, we plan to continuously upgrade the site and make it increasingly customer friendly.

As an example, in the first quarter we expanded the payment options available to Dollar Tree Direct customers and began accepting American Express, alongside Visa, MasterCard, and Discover.

We are excited about this business.

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

Kevin.

Thanks, Bob.

As Bob mentioned, our first quarter diluted earnings per share were $0.73, including a $0.19 per share charge relating to the change in our inventory accounting method, and were $0.92 per diluted share excluding this charge.

I'll start with a few comments about the inventory accounting change.

As previously announced, effective January 31, 2010, the first day of this fiscal year, the Company made a change in its inventory accounting method when it began using 30 inventory pools in its retail inventory calculations compared to formerly using only one pool.

This change facilitates improved decision making and further enhances our assortment planning process.

As a result of this change in the first quarter of 2010 the Company recorded a nonrecurring non-cash charge to gross profit and a corresponding reduction in inventory at a cost of $26.3 million or $0.19 per diluted share.

This impact accumulated over the 23-year history of the Company.

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

Excluding the charge, our gross margin was 35.2% during the first quarter compared with 34.6% in the first quarter last year.

The increase resulted from an improvement in merchandise margin of about 30 basis points and about 30 basis points of leverage on distribution and occupancy costs.

The improvement in merchandise margin was driven by lower ocean freight rates relative to last year, which offset the impact of higher diesel prices in the first quarter relative to the same period of last year.

We also saw improvements in our shrink rate compared with the last year and we saw 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 first quarter compared with the same period of last year.

And we also saw continued improvements in operating efficiency.

The improvements in buying, distribution, and occupancy costs reflected positive sales leverage.

Moving down the P&L, SG&A expenses were 25.7% of sales for the quarter, which is an 80 basis point improvement from the first quarter of last year.

This was driven primarily by a 30 basis point reduction in depreciation, a 30 basis point reduction in store operating expense due to lower costs for utilities and maintenance, as well as leveraging of the comp store sales increase and payroll expenses decreased by approximately 25 basis points.

Other operating expenses increased by about 10 basis points driven primarily by increases in debit and credit card fees, which reflect a continuing increase in penetration of these forms of tender.

We accept debit cards, Visa credit, Discover credit and EBT in all of our stores.

We also accept SNAP, or food stamps, in 2,994 stores or about 77% of the chain.

In the first quarter compared to the first quarter of last year, debit card penetration increased 160 basis points and credit card penetration increased 70 basis points.

SNAP penetration, although small, continues to grow as well.

Depreciation and amortization declined 30 basis points in the first quarter and totaled $39.3 million versus $38.8 million in the first quarter of last year.

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

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

Operating income excluding the charge increased $31.3 million compared to the first quarter last year.

And operating margin was 9.5%, an increase of 140 basis points compared to the 8.1% operation margin in the first quarter of last year.

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

The tax rate for the quarter was 37.7%, slightly higher than the 37.6% tax rate in the first quarter of last year.

Cash and investments at quarter end totaled $390.1 million versus $355.2 million at the end of the first quarter of 2009.

Cash net of debt was $122.6 million at the end of the first quarter of 2010.

During the first quarter we invested $218.4 million for the repurchase of Dollar Tree stock.

This includes a $200 million accelerated share repurchase announced on March 22nd and in addition we repurchased 385,600 shares for $18.4 million on the open market prior to the ASR.

Under the terms of the ASR we received 3.1 million shares through the first quarter.

We expect to receive additional shares at the final settlement of the agreement.

The number of additional shares will be determined by the weighted average price of the stock over the repurchase period.

At the end of the first quarter, the diluted weighted average shares outstanding was 86.8 million compared with 91.1 million shares outstanding at the end of the first quarter last year.

At quarter end we had $42.2 million remaining in our share repurchase authorization.

Capital expenditures were $45.1 million in the first quarter of 2010 versus $34.1 million in the first quarter last year.

The increase was driven primarily by $5 million in capital expense for our new San Bernardino distribution center.

This project is now complete.

For the full year, we expect capital expenditures in the range of $170 million to $180 million.

This is about a [$50] million more than our original plan reflecting our decision to add frozen and refrigerated capability to 400 stores, 175 more stores than our original plan.

Our inventory at quarter end was 2.8% greater than at the same time last year with selling square footage that grew by 6.5%.

Inventory turns continue to increase in the first quarter reflecting our continued -- continuing efficiency improvements.

Inventory turns have been increasing for the past five years and we expect this trend to continue for the full year of 2010.

As we turn to our guidance for the remainder of 2010, bear in mind that ocean freight rates have increased effective in May.

The higher rates are now included in our guidance.

Also, we are assuming a tax rate of 37.8% for both the second quarter and the full year and weighted average diluted share counts of 85.5 million shares for the second quarter and 86 million shares for the full year.

With in this mind, for the second quarter of 2010 we are forecasting sales in the range of $1.32 billion to $1.36 billion.

That's based on a low to mid single-digit comparable store sales increase and 6.3% square footage growth.

Diluted EPS is expected to be in the range of $0.77 to $0.85, an increase of 22.2% to 34.9% over second quarter 2009 EPS of $0.63.

For the full fiscal year of 2010 we are raising our guidance.

We are now forecasting sales in the range of $5.67 billion to $5.8 billion, based on a low to mid single-digit increase in comparable store sales and 6.3% square footage growth.

Diluted earnings per share are now expected to be in the range of $4.10 to $4 .31, including the non-cash charge related to the inventory accounting change.

Excluding this non-cash charge, our diluted earnings per share are expected to be $4.29 to $4.50.

This would represent an increase of 20.5% to 26.4% over our record EPS of $3.56 in fiscal 2009.

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

Thanks, Kevin.

Well, we're off to a great start in 2010 and are on track to accomplish our goals.

First quarter sales grew 12.6% and were consistently above plan throughout the quarter.

Comp store sales increased 6.5% and, as I said earlier, that's on top of a 9.2% comp last year.

Both our traffic and ticket was up and earnings per share increased by 39.4% excluding the nonrecurring non-cash charge.

This was on top of a 37% earnings per share increase in the first quarter last year.

As I look to the future I see even more opportunity.

I'm excited about our business and I like how we're positioned.

In challenging times we have the values that customers need on every day basics.

And yes, at Dollar Tree you can even afford to splurge.

Again, those discretionary items are still just a dollar.

We have a series of initiatives in place to drive our business to higher levels of performance as this year continues to unfold.

We're focusing on creating more merchandise excitement with an even better store experience.

We have expanded our emphasis on key merchandise categories, like party, home products, stationary, health and beauty care, household chemicals, as well as food and consumables.

We've stepped up our frozen and refrigerated rollout and we're refining our assortments to drive traffic.

We've improved our in-stock position on basic non-food items that people need everyday.

Our auto replenishment systems are working.

Our in stock on basics has never been better.

We'll continue to have more in-store marketing events and more wow in our merchandise values.

And our values, by the way, continue to grow.

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

Our investments in infrastructure continue to translate into better inventory management, increasingly efficient supply chain logistics, more productive stores, and crisper, overall execution.

We're reducing supply chain and back office costs and we continue 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-priced and high value consumer basics and our unique assortment of fun, compelling seasonally correct discretionary product, we're positioned to be relevant to customers in all economic circumstances.

With an eye on the future, we are investing for profitable growth, expanding our store base, enhancing our supply chain, and developing new retail concepts.

Deal$ and Dollar Tree Direct are growing and they're exciting.

Finally, 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, including the investment of more than $218 million for share repurchases in the first quarter of 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 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.

(Operator Instructions) And we'll take our first question from Joseph Parkhill with Morgan Stanley.

With regard to guidance for next quarter and the full year could you walk us through where the largest variability is for your high end to your low end, how much of that is driven by sales versus gross margins?

Well, Joe, sales obviously are part of it.

But I would say as much as anything, we talked today about the fact that fuel is always one of our big variables at the end of the day.

And we've said that the ocean freight rates have increased going forward.

We saw great benefit from that last year, but we know that's a variable that obviously is going up.

It's in our guidance.

We know diesel obviously is something that we've seen significant increase year-over-year in Q1 as well.

And that one in particular is a little harder to put our finger on.

We make some assumptions and build it in accordingly.

But that one, we always to have plan a little bit carefully around because it is very, very volatile at times.

So that's kind of the way I think I look at it from an overall perspective.

Okay.

And just on the international shipping, are those contracts contracted out so that you know those costs for the next year or is there some sort of variability to that?

They are contracted out for the next year.

It goes through next March, basically.

It's like anything else though, you don't know in the marketplace if something will change.

There could always be a little variability.

We think we're locked in pretty well.

But the markets change and you have to be ready for those as they come.

But for the most part they're locked and loaded.

Okay, thanks.

And just last question would be the real estate environment.

What are you seeing there?

Are rents going up?

Are you still getting the same looks at better locations as you've had over the last year or two?

The real estate environment is pretty much the same as it's been for the last year.

There is a lot of product out there available.

There's less money available to redevelop some of the product that's there and new developments are very, very slow coming out of the ground, if at all in many cases.

So in that environment, we have been able to find the locations that we like, the ones that work best for our model.

We've been able to find, in many cases, better real estate that we can afford in our model with this excess capacity that's out there.

And in some cases, we have been able to get lower costs.

All right, thank you very much.

And we'll take our next question from Mitch Kaiser with Piper Jaffray.

Thanks, guys, good morning.

Very nice quarter.

Thank you.

Could you talk a little bit what you're seeing on the tickets.

Certainly we saw a little bit in Q1, and now we're seeing some nice improvement in Q2.

Could you categorize whether that's driven by the frozen side or if that's driven by more of the discretionary goods?

I think you talked about that continuing kind of throughout the year.

Mitch, we do expect that to continue, especial as the economy, we hope, will continue to improve.

Some of that additional increase in our average ticket is from the basic needs product and some from the frozen, but our business across all categories, whether it's discretionary product, general merchandise, or basic needs product, our comp sales are up across both those categories.

So we're seeing with the increase of traffic in our stores, we're now seeing people buying more when they're in our stores.

Some of that I attribute to new customers.

And when they first maybe tried Dollar Tree, they really didn't know and they didn't know the values that were there.

But now that they've found us and they like us, they're shopping more frequently and they are buying more when they come.

Okay, that's encouraging.

Kevin, could you just take us through -- I know there's been a lot of commentary on ocean freight on the call and diesel.

Just kind of -- and I know we went through the renegotiation process.

Could you give us a sense for kind of what you're seeing?

I know gross margins, when we look at last year were probably up anywhere from 80 to 100 basis points just on lower diesel and freight, but what your expectations are for those two components as they relate to the gross margin line the next, throughout the year.

I can give you some directional comments, Mitch.

One of the things I would let everybody know is with the new retail stock ledger, really those components of fuel are inputs into that retail stock ledger and so they are blended in with our gross margin and we don't have the same way of speaking to them in regards to increasing by, increasing or decreasing by X number of basis points.

So we can give you some obviously some directional comments.

Obviously diesel rates, while volatile, I think they're about $0.70 to $0.80 difference year-over-year for Q1.

Historically we've always said $0.10 of diesel rate for a full year is about $0.01 of earnings, so that's always the metrics we point to at the end of the day that kind of gives you some idea around that.

And I will tell you, and we've disclosed this in our K as well as our Q that we just filed this morning, is we have started to hedge some of our diesel fuel to create as much certainty as we can around that.

And that's something we're learning.

It's new to us.

It's something we haven't done in the past.

We think we've come a ways.

But again, so that's one of the things we look to help control that a little bit.

On the ocean freight side, it is based upon contracts and I think you will hear from -- I would imagine you will hear from all the retailers that have significant amount of goods produced over there that they are seeing the same thing.

The capacity in the marketplace got a little thin at the end of the year and basically was part of the process in creating the rates to go up, I believe.

Our logistics team has worked very hard to negotiate the best rates possible.

And then beyond that we'll obviously continue to look for other efficiencies within our systems and process to control those.

But realistically, we expect both of those items to be headwinds compared to last year and that's built in our guidance accordingly.

So I think that's about the best thing I could tell you.

(Operator Instructions) We will take our next question from Alan Rifkin with Bank of America/Merrill Lynch.

Yes, thank you very much.

Congratulations on a nice quarter.

Certainly the decision to accelerate the rollout of refrigerators lead us to believe that you're very happy with the results that you are seeing.

Can you maybe provide some color as to what lift you are seeing in other product categories upon your adding refrigerator to an existing store?

Well, I can tell that you when we add frozen and refrigerated to our stores that there is a very nice lift overall to that store from that product.

It's not all from the frozen refrigerated product.

Our general merchandise categories rise accordingly.

Maybe not quite at the same rate as the frozen and refrigerated, because it's brand-new.

But what we're seeing is that it creates a lot of new footsteps in our stores and more frequent footsteps from our existing customers.

And when they are in our stores, after we have introduced this new product, the traffic goes up, the comps go up in that store, and they continue to go up over the next several years.

When I have more people in the store, we also sell more of our seasonal product.

We sell more of our party goods.

We sell more of our stationary and all those exciting, but yet discretionary products that we're well-known for at Dollar Tree.

That's why we accelerated the rollout.

First of all, we can.

We have the ability to accelerate it.

And we know how to do it and we have the supply chain to do it.

And secondly, it does really good things for our business.

Our customers need it right now, and they're, we're attracting new customers with that and when they come into the stores, they're finding other things that they would like to buy.

Bob, there's been a lot of talk certainly about Wal-Mart sitting up and taking notice of the strides that you and your brethren in the space have made over the last couple of years.

And there's talk about them making a more concerted push to recapture some of the share that's clearly been lost to you and other players over the last couple of years.

What can we expect going forward will you do to kind of defend the incremental market share that you've picked up?

Well, that's -- look, Wal-Mart is a great Company.

The largest Company, the largest business in the world, I guess, and they certainly do a nice job.

We've lived in their shadow for years, always preferring to be near Wal-Mart or near somebody that's generating traffic and creating a shopping region in the market, because we feel like if there's people shopping and if we can get them to come into our store, then we can get our share of that.

Our goal, as it always has been, is to focus on our business and finding ways to wow our customers with great values in our product, always looking to increase that value, offering the most value that we can for the dollar.

Our goal will continue to be to grow our business, opening up new stores in the best real estate that we can find, where middle America shops.

We intend to open up new stores more productively and we've had a pretty good year last year and we're starting off really good at that.

So we're opening up our new stores earlier in the year and more productively.

We're also -- we've rolled out a couple of new businesses with Deal$ and we're excited about our Deal$ business.

Like I said, our Deal$ business in first quarter our average ticket was up, our number of transactions was up, and we're seeing some real traction in our Deal$ business.

We think that's going to give us more room to grow as we go into the future.

And, of course, constantly investing in our stores and investing in our people and investing in creating the best merchandise and the best selling environment that we can.

We think if we keep doing that, that not ignoring what Wal-Mart or Target or the others are doing, but just if we keep focused on what we do best, then we're going to be able to continue to provide value to our customers and they're going to keep shopping with us.

And we'll take our next question from Dan Wewer from Raymond James.

Thanks.

Good morning, Bob.

Good morning.

Back in the late '90s when the Company was primarily comprised of 5,000 square-foot stores, you were generating sales per square foot a little bit north of $220.

Based on your guidance for the current year it looks like that sales per square foot will get back to around $170, $175.

From your perspective, getting back to that record level and the low $200 per square foot is that achievable with a larger footprint?

Well, Dan, I think over time it certainly is and we have some serious initiatives around improving our productivity, not only in our new stores, as I just spoke to, but also in our existing stores.

Certainly we can continue to improve.

Those small 5,000 square-foot stores, if you remember, they were really terrific in those times and they were mostly located in the malls.

And we sold a lot of things, discretionary product, but we really didn't sell anything that you needed, it was just school stuff and seasonal products and if we could get you in the front door then we thought we could do some business.

We've, in our new stores, moved off mall, as you know, and created more of a reason to come to Dollar Tree to shop, more of a destination with all these basic consumable products.

Along the way, moving from that small highly productive store to the larger store that we now operate, our productivity lessened per square foot.

But we did that purposefully and the reason that we did that, first of all the malls were going away and we needed to move where the people were going to be shopping.

But past the real estate reasons, we in those small stores would ramp up really quickly and that's about all you could get out of those things was after about the first year to two years you were doing about all could you get.

When we'd expanded our square footage to these larger stores, what we have created is a store that has more open to sell.

So we did it because over time we felt like we could continue to increase the productivity of these larger stores over a longer horizon.

And we are seeing that.

We are seeing these larger stores continue to comp year-over-year for several years running, as opposed to the small stores that ramped up very quickly.

In fact, yes, that's right, last year is your best comps ever.

And just as a follow-up, regarding Deal$, you're obviously very excited about what's happening with their sales and ticket size and so forth.

Can you give us any kind of hints as to the difference in operating margins between Deal$ and the Dollar Tree format, if that gap is narrowing or not?

And then also, from the standpoint of capital allocation.

On the one hand you want to grow Deal$ because they could be a promising new format, but on the other hand, you still get a better return out of Dollar Tree, right.

So how do you reconcile those capital investments between the two formats?

Well, look, the best investment we can make right now, as always, is in a new Dollar Tree store.

They are the highest use of funds.

And by the way, if you compare it to others in, other retailers out there, it's the best investment of a dollar around.

But our Deal$ format is gaining traction.

It is gaining in productivity.

We don't break it out separately.

It is not a segment.

It's just a part of our operating margin.

It's a part of our sales.

We look at it uniquely, but we really don't break it out.

The returns at Deal$ are not as high as a Dollar Tree store overall.

That's a broad statement, because I have some that is greater than a Dollar Tree store.

As always, not all stores are created equal.

What I'm excited about with the Deal$ model is as we perfect this, we're finding ways of improving our top-line, driving leverage on the fixed expenses and the potential of driving even more operating margin in our Deal$ stores is there.

As we continue to grow, it will become more of an important part of our structure as we go into some of the higher cost markets where the fixed costs are higher.

Our Deal$ stores with the higher volumes can leverage those volumes better.

It's also a better operating model once we get all the little moving parts perfected, you can go into some of these very dense markets with a Dollar Tree and do very well.

ut doing $3 million plus in a Dollar Tree a dollar at a time is a lot of operating issues, a lot of throughput from the back room to the front room, and a lot of cardboard to dispose of and it don't dispose of that well in the boroughs in the northeast.

This Deal$ model has a lot of operating efficiencies that we are finding that works better in the higher dense markets and we feel like as we go forward we can begin to open up these things alongside our Dollar Tree stores and do very well.

And we'll take our next question from Meredith Adler with Barclays Capital.

Thanks.

I wonder -- we've had some discussion about some of your operating costs like fuel and ocean freight.

Could you talk a little bit about what you are seeing in terms of the cost of imported product?

I think you usually have probably a good nine months of visibility into costs.

Yes, we do.

And we, honestly, we have some of the best product still coming to us because the buying trips last, over the past year have been very productive.

Our merchants have done a terrific job putting together these assortments with more value, better margins.

A lot of the improvements in costs that we've seen, obviously as we always do, we reinvest that into more value in the product so that we can thrill our customers.

But it really is with the size of our Company and the power of our pencil and with the way we go to market, the costs, and most of our imports are from China, but our costs out of China are very favorable and they have been consistently favorable for about the past year.

So we're not seeing in the domestic product -- from time to time there's products that tend to rise.

We've always felt that we didn't have to have anything, though, and our buyers are armed with that ability to drop an item.

We know our retail is a dollar and it's all about getting the cost for that item that fits our margin so that we can offer it to our customers.

If we can't offer an item to the customer, we'll drop it and we will add, we will pick it up somewhere else.

We're very deft, our merchant team is very deft at doing that.

But it's a very favorable buying environment right now.

Great.

And then I have another question just about cash.

It's very impressive that you bought back $218 million worth of stock and ended the quarter with about as much cash as you had last year at the end of the first quarter.

And I don't think your guidance -- I'd like to confirm that your guidance doesn't include any more stock buybacks, even though you clearly have the ability to do that from a cash perspective, but I would also like to ask about a dividend.

I know you say you don't like a dividend, but can you possibly use all that cash to buyback stock or should you think about a dividend?

Meredith, this is Kevin.

And the guidance does not assume any additional buyback within it.

So you are correct in that assumption.

As we've talked about cash the past few quarters, as we've obviously been generating some very healthy free cash flow, we continue to look at things such as funding the growth of the Company first and foremost, things like doing additional freezers.

We really were very opportunistic at the end of last year in picking up a D.C. building in California, which really we were able to pick up at below cost from our perspective.

We could not rebuild it, rebuild the facility for what we have in it today and have it fully up and operating.

So we look at things like that very opportunistically.

As we've talked, we always want to build stores.

That's the best return on a dollar from an investment standpoint we can make.

Beyond that, obviously, we have been very involved and very -- looking at the share repurchase over the last -- excluding '08, I think we've bought back about a 1.4 billion in stock over about a three-year period of time.

So we have been very into the market there.

Obviously, a dividend is going to be up to our board of directors.

It's not like -- we have those discussions almost every quarter about what are the best uses of our cash that we're creating and so they're very attuned to it.

And so it's always going to be up to them at the end of the day.

Realistically, we don't know that we believe it's the best use of our capital today.

Obviously we've also been in the mode in the past of make acquisitions and that's always out there.

Not that there's anything on the horizon, but that's another way we can continue to grow our Company and our business.

I think that is kind of the way we look at it.

We still look at it as the return from buying back stock is actually being a better use of the money at this point in time.

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

Yes, thank you, good morning.

Congratulations.

Thank you.

I guess you've talked a lot about the components of gross margin.

Can you just give us a bigger picture look?

In the past you've been in the 35%, 36% range, I guess, on an annual basis.

Can you give us a sense on how you think, now that you have ocean rate numbers figured out, how sort of the second quarter margin and the full year margin might pan out.

Well, obviously, we typically don't give direct guidance to margin.

Obviously we know the component.

Obviously we're getting great leverage from sales right now.

We're working hard to -- while things like freight are going up, we think there's some things in the business we can do to hopefully help offset that.

In Q1 we talked about having lower shrink.

If we can continue that trend that will be very helpful and beneficial as we go through the year.

So I think in general, we think about it as, we look at it as an overall business.

We don't just look at that, we also look at SG&A and how things are trending there.

And really the way we look at it is to say what is our overall plan.

What are we trying to get to here and obvious we're trying to grow the business.

And grow, not only grow the top-line, but grow the bottom-line.

There's a lot of moving pieces in between there and we're working on all of them.

So in general, we're going to continue to work hard to increase our margins, but there are some variables in there that my crystal ball is not clear enough to say how they will truly work out for the full year.

We've got some pretty good assumptions built in, but there's always room for fluctuation at the end of the day.

And then in terms of the comp guidance for the second quarter, compared to last year after this strong first quarter it looks like a slowdown in trend and I guess on a two-year basis, at the high end of your guidance, it's a little more flat.

Is there -- can you just comment on your thoughts about the comp trend into Q2 just given that you have such strong momentum in Q1?

I would tell you, in general, we are very pleased with our business and we feel good about the product we have.

We feel good about our inventory and realistically, I don't know that it's truly a slowdown.

Last year's 9% comp really had the benefit of a very big Valentine's Day, the best, one of the best ones at that point in time, and really didn't have any bad weather, per se, a lot of last year.

So in general I would tell you we feel good about business and if you look at last year we were pretty consistent.

After that 9% we were in the mid 6%s the rest of the year, as well as Q1 this year, so it seems to be a fairly stable kind of area where we've been performing at here for the last four quarters or so.

David, we really don't see a deceleration.

I'm not sure how you're getting to that, but that's not way we're looking at it.

And if you look at our consistency over the past year.

I mean, last year first quarter, 9.2, second quarter 6.8, then it was 6.5, then 6.6, now 6.5, there's a very consistent comp improvement there.

And in our guidance, of course, we've embedded our best thinking along with some uncertainties that we are not clear on, but we are not trying to -- we don't see the numbers that show a deceleration that you are pointing to.

Thank you,

We'll take our next question from Neil Currie with UBS.

Thanks for taking the question.

Just first of all, I just wondered how the prospect of food price inflation may feed into your expectations for second half of the year.

It looks as if it's sort of deflation is turning around and we should get some inflation.

It's difficult for you to pass through because of your fixed prices.

What are you contemplating for that in the second half of the year with regards to margin trends?

Well, we're not seeing any inflation, but understand we're in much different -- we're not a grocery store, we're not a super market.

We don't have every product and we don't feel an obligation to provide a shopping experience that includes everything in your shopping basket.

We have limited product assortment.

A lot of it is opportunistically we can get the best prices and offer it for a dollar.

If prices go up on a item, we pass and we buy the next product.

There's always sort of the world is our oyster.

There's always product available that we can offer great value to our customers.

We try to stay with a lot of the basics, but other than staying within a category we really don't have to have any one item.

And again, we're just not a grocery store or a supermarket so we choose what we sell and if we can't offer it, if it's not a value at a dollar we won't buy it.

If it doesn't fit our margin requirements we won't buy it.

Thank you.

And you obviously have a lot of stores and you can test new initiatives from time to time in some stores.

Is there anything that you are -- any test pilots that you're undergoing at the moment or any reward programs that you're testing in any stores?

Most of our testing is around new merchandise or categories are expanding over category.

For the past year or so we've expanded our assortment and our impact on our party business and we've seen our party business continue to flourish.

We are looking more at the things used in the home in our Dollar Tree stores.

And in some of our larger stores you will find home stores in our corner of our store, so you will see more emphasis on the things that people want and need for their homes in our stores.

The tests that we do are more on new product, new categories, new ways of showing the product to our customers, more ways of getting the product to them in the most efficient way.

Thanks and congratulations.

Thank you very much.

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

Hi, Charles.

Thanks.

Congrats on a good quarter.

Just I wanted to ask about, to follow up on Meredith's question on global sourcing.

I realize with the lead times that you guys are kind of locked and loaded probably to the early part of 2011.

But, through some of the contacts we have overseas it does appear there's a lot of instability over there.

There is some pretty big price hikes in a lot of different categories.

And I know you've been able to manage through that in 2007 pretty well, but I'm just wondering if you could share with us what you are actually seeing over there for product that you are probably starting to buy for the spring and summer of 2011.

Charles, we've bought our imports, large majority of them, up through Easter next year in that timeframe.

And our buyers will be going once more in the next 30 days back to work on summer and the current product we're selling in our stores now.

We, and I've said this and I'll just say it again, but it's been a very favorable buying environment for us over the past year.

You've seen it in our margins in our sales and our margins in our stores.

Right now, we're not seeing what you describe as turmoil in the market.

We're, frankly, seeing more product available than we did back in '08, particularly.

We're seeing lower prices than we saw back then.

We're seeing better product, more factories available to buy from.

Now, we're concerned about all that you just described.

We're always concerned about it.

We're always sensitive to it.

But at the same time, every trip so far the past year has been a better trip with either improved margins or opportunities to improve margins or opportunity to invest in even better product.

Some of that is how we go to market and the size of our pencil and the relationships that we have and some of it is in the way we're flowing the product to the stores.

The headwind what we have is ocean freight.

Ocean freight is up.

Our new contract started in May.

They're higher than last year.

The opportunity to offset that, we believe, is high.

We're always looking at the business from a holistic standpoint and every year there's a pressure on one line or the other.

Ocean freight rates were very favorable last year and they're a little bit of a headwind this year.

But we feel very confident that we can manage our margin as we go through the year, through sourcing, through product development, and through all the things that we do in the store to push and sell more of that high-margin discretionary product.

Okay, thanks a lot.

And then my second question, if I could just dig into the, I think you said, 4% increase in traffic.

Is that a new customer coming into your store or is that more of an existing shopper coming into your store more frequently?

And then my second backup to that would be the 6.5 comp in the quarter, can you give us a sense for where that trended regionally?

Was it as consistent across various parts of the country?

Thanks.

The customer -- that's a good question.

It is hard to say sometimes if it is a new or a existing.

I believe we're getting both.

I think our existing customers are shopping more frequently because we have more of the things that you need on a more frequent basis now.

Every time we're rolling out frozen and refrigerated to a new market or a new store, that's a new product that our existing customer is going to take advantage of and you do buy that more frequently versus party supplies.

But we're also seeing new customers.

I can tell you anecdotally in our stores we hear people, we listen to them, and we're getting a lot of new customers.

And they'll say, well, how much is this and of course it's all a dollar and they're learning.

But the other thing that we look at is our, the demographics of where our stores are located.

And some of our higher income demographics are growing at a pretty good clip.

So that gives me -- the leap of faith I make there is that we're getting some middle and higher income customers that are now shopping in Dollar Tree and they're finding us.

And of course when they're finding us, they're liking us and their part of our average ticket increasing.

The other question, regional, regionally.

I will tell you this it was darn close across the country in first quarter as we looked at the regions.

The fastest and highest growth was in the west, mainly on the west coast.

But it was very closely followed by the southeast and Texas and then the rest of the country wasn't far behind.

So it was very, very close.

And we'll take our last question from Brent Rystrom with FELTL & Company.

Hi, Brent.

Hi, good morning.

Congratulations, guys.

Quick question for you, a couple of them.

Looking at the new D.C. in southern California just trying to do some basic math, how often do you replenish your stores in that region or nationally?

Is it typically once a week, twice a week?

It's typically once a week.

We have some higher volume stores that are more than once a weak or we have some stores that are just hard to deliver that we deliver more than once a week, but overall it's once a week.

So just looking at the stem miles, and I may be way off base here, but it looks like just on the existing store base and assuming that roughly half your stores in California are going to be serviced from that, the other, I assuming, are going to be the old Gary Cino, a 98 cent clearance center stores, so just looking at the half in southern California and then the rest kind of New Mexico, Nevada, Utah, that sort of thing, is it reasonable, say, you might save $5 million or $6 million on fuel costs?

We're going to save money.

The stem miles over the long-term are much better.

We didn't just look at the existing base of stores.

We also looked at our growth and we considered where we're going to be this year, next year, next year and so forth.

So we included our growth plan in that, but one of the reasons for relocating in southern California versus Salt Lake City was because it did provide for better stem miles.

Because what I'm coming up with is a reduction of over 100,000 stem miles per week, which would imply a huge mid single-digit millions savings per year.

And then if you add another couple hundred stores down there you could be pushing $10 million a year in fuel savings.

I like your numbers.

I don't know that I have those in front of me right now, Brent.

But certainly we did -- you know how we do it.

You have known us long enough to know that we've model these things out.

Of course when we close Salt Lake City some of those stores went to Stockton, some of those stores went to the new D.C. Maybe even some of those went to Marietta, so there was a dispersing of the stores in several directions.

And it also ties into, again, our growth plan and we do intend to grow in the southwest and in southern California, so San Bernardino really helps us in that regard.

San Bernardino is also a automated building.

It's a little larger, not much larger than the Salt Lake City, but it's automated.

So we're going get a lot of productivity improvements over time from that automated building versus the Salt Lake City, in addition to the stem miles.

And your assessment, I can't ascribe to the numbers sitting here, but just in general your assessment is correct if your going with, yes, we've relocated that D.C., we do expect improvements in stem miles and we do expect operating improvements in the buildings for the automated D.C.

And final quick question for you from.

From the 7,000 store count expectation, albeit, eventually $7,000 resource, is that up from what you previously talked about?

We've said 5,000 to 7,000 for a long time.

Of course, we've also said that the Deal$ model will expand that number.

Okay.

Thanks, guys.

Thank you.

Okay, I think that concludes the call.

We're a little bit over our time.

Thank you all for your participation in the call and for your continued interest and investment in Dollar Tree.

Our next sales and earnings release and conference call are scheduled for Thursday, August 19, 2010.

Thank you again.

That concludes today's conference call.

We appreciate your participation.