美元樹 (DLTR) 2010 Q2 法說會逐字稿

Good day, and welcome to the Dollar Tree, Inc.'s second 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, sir.

Thank you, Lena.

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

I'm Tim Reid, Vice President of Investor Relations.

Our call today will be led by Bob Sasser, our President and Chief Executive Officer, who will provide insights on our performance in the quarter and recent developments in our business.

Kevin Wampler, our Chief Financial Officer, will provide a more detailed review of our second 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, 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.

In addition, during the second quarter, the Company executed a three for two stock split in the form of a 50% common stock dividend.

All per share data that we discuss today will reflect the impact of the stock split.

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

Now, I'd like to turn the call over to Bob Sasser.

Bob?

Thanks, Tim and good morning, everyone.

This morning, we announced our sales and earnings for the second quarter 2010.

Comparable store sales increased 6.7%, and I'd remind you that that is on top of a 6.8% comp in the second quarter last year, 2009, which was a 6.5% comp over the year before.

So, for a total of three years, that's 20%, and it was spread consistently over the last three years.

The comp was driven by a 5.6% increase in traffic and a 1.1% increase in average ticket.

Sales were strong throughout the quarter, and total sales increased 12.7% to $1.38 billion.

Earnings for the second quarter were $0.61 per diluted share.

This represents a 45% increase over last year's $0.42 per share.

Operating margin for the quarter was 9.3%, an increase of 200 basis points over the second quarter last year.

Operating income was $128 million, an increase of $38.5 million, or 43% over a strong base last year.

And net income rose 37% to $78 million.

For the first half of 2009 compared with last year, sales were $2.73 billion, an increase of 12.6%.

And comp store sales increased 6.6%.

As we've previously disclosed, in the first quarter this year, we recorded a non-recurring, non-cash charge of $26.3 million or $0.13 per share relating to the previously announced retail inventory accounting change.

Including this charge, our earnings for the first half 2010 increased to a record $1.10 per diluted share.

Excluding the charge, first half 2010 earnings per share were $1.22, an increase of 42% compared with $0.86 per share in the first half of last year.

Operating income increased by $70 million.

Operating margin was 9.4%, an increase of 170 basis points compared with the first half of last year.

And net income rose 35%.

I'm very pleased with our results for the second quarter and particularly by the sustained growth in sales margin and earnings over the past several years.

These results speak to the relevance and value of our merchandise and the quality of the Dollar Tree shopping experience.

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.

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

Through good times and tough times, customers know they can save money at Dollar Tree.

Our efforts are being validated by the results.

Customers continue to shop in record numbers and they're buying more when they visit.

Our sales growth in the second quarter came from a mix of both basic needs and discretionary products.

Our top performing categories included food, health and beauty care, the basics, fashion health and beauty care and party supplies.

In addition, our seasonal business continued to drive sales and merchandise excitement from Mother's Day through the end of the quarter, where the planning of picnic, a graduation, a wedding, a patriotic Memorial Day or a July 4th celebration or even a Father's Day get-together, customers know that they can find great products and balance their budgets at still all just $1.

Everything revolves around the customer at Dollar Tree and we make coordinated effort to wow them every time they visit our stores.

We work to keep values high in many ways.

First, we have a very flexible merchandising model.

We build our assortment with two requirements in mind -- to offer the greatest value to the customer for $1 and to do so at a cost that delivers our desired merchandise margin.

Margin at Dollar Tree is all about the mix of product and not as much driven by an individual item's cost.

This is a key differentiating factor for us.

Our model is very flexible.

We are not locked in to any specific item.

We do not use planograms at Dollar Tree and that gives us the flexibility to move quickly from item to item.

We decide what to sell.

We're in control of our mix and as a result, in control of our margins.

So, while you hear of cost pressures and think that it should translate into lower merchandise margins, in reality, that has not been the case.

History shows that we are consistently able to manage through economic cycles and buying cycles by changing the product or changing the source.

Currently, you may be hearing about higher merchandise costs from other retailers, mostly on imported goods.

We are not seeing higher merchandise costs.

Our most recent buying trip to Asia was very successful with higher initial markup, better values and a terrific merchandise selection.

Second, over the past several years, we've built a solid and scalable infrastructure which we're now leveraging and which provides a foundation for our future growth.

We 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 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.

And 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 on seasonal product and increased inventory turns.

Our inventory turns increased once again in the second quarter, as they have consistently for the past five years.

We're also committed to growth, and continue expanding our business by building more stores, increasing store productivity and developing new retail concepts.

During the second quarter this year, we opened 56 new stores and relocated and expanded another 34 stores.

Through the first half, we added 130 new stores and expanded or relocated 68 stores.

Selling square footage grew by 6.8% from the same point last year which is slightly more than our original square footage growth plan.

We ended the quarter with 3,925 stores.

For the full year, we now plan to open 230 new stores and we will relocate and expand about 95 existing stores for a total of 325 projects.

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

The result is selling square footage growth of about 6.5%, slightly more than our original guidance.

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

Along with expanding the number of stores, we're focused on operating more productive stores.

We've refined our real estate model over the past few years and honed our store size to 10,000 to 12,000 square feet.

The new store productivity has been improving since 2006.

The productivity of last year's class also improved significantly and so far this year, I'm very pleased with the class this year which is better than last year.

This year's class should average approximately 10,000 square feet, similar to the 2009 class.

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

Our measured expansion of frozen and refrigerated product continues in the second quarter 2010.

We added freezers and coolers to another 117 stores.

We now have frozen and refrigerated product available in 1,677 stores.

We intend to roll this product out to another 146 stores by year-end for a total of 400 stores for the year.

We continue to expand this category 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 categories, including our higher margin discretionary product.

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

Turning to new retail concepts, sales momentum continued to build at our Deal$ stores in the second quarter as we refined this model.

We currently have 161 Deal$ stores, with merchandise focused predominantly, but not limited, to $5 and less.

Once again, traffic, ticket and average unit retail increased in the second quarter and we're seeing positive customer response across a broad range of categories.

Top categories for the quarter included domestics and textiles, healthcare, personal care, electronics, hardware and household products.

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

Looking forward, we will continue to build and refine our assortments and improve key operating metrics to create more merchandise excitement, increase the wow factor, run better, more compelling stores and give our customers more reasons to shop at Deal$.

We continue to roll out new stores in a measured and thoughtful way.

We plan to open 10 more Deal$ stores in the second half.

We are extremely excited about the growth potential of the Deal$ concept and the opportunity that it gives us to serve even more customers across the country.

Dollar Tree Direct, our eCommerce business, continues to expand.

We made several enhancements to Dollar Tree Direct in the second quarter, aimed at improving the customer experience and expanding our reach.

We added the acceptance of PayPal, providing another payment option for our customers online.

We launched or 24/7, 365 day a year call center, and customer response has been positive.

We introduced a new small business center at dollartree com providing tools and information tailored for small businesses.

We continue to increase the depth, as well as the breadth of our product offerings.

We now have over 1,700 products available for online purchase, with new categories including car care, baby shower, bridal shower, food pantry, bath and body and emergency preparedness.

We had more than 2.75 million visitors to our site in the second quarter, and we sent e-mails to 6.5 million customers.

Additionally, we've recently redesigned the look and the feel of the website.

If you haven't visited our site recently, I encourage you to check it out again at dollartree.com.

You will find just like our brick and mortar stores, there's always something new at dollartree.com and everything's a great value.

Now, I'd like to turn the call over to Kevin who will give you more detail on our financial metrics here in the second quarter and also provide guidance.

Thanks, Bob.

As Bob mentioned, our diluted earnings per share increased 45.2% in the second quarter to $0.61.

The increase was driven by our strong sales, a 60 basis point improvement in gross profit, and a 140 basis point reduction in total SG&A expense compared to the second quarter last year.

Starting with gross profit, our gross profit margin was 35.1% during the second quarter, compared with 34.5% in the second quarter last year.

The increase resulted from an improvement in merchandise gross margin of about 20 basis points, and about 40 basis points of leverage on distribution and occupancy costs.

The increase in merchandise gross margin was driven by continued reduction in our shrink rate, and the impacts of process improvements and better sourcing, which offset the negative pressures from the shift in product mix and higher freight cost relative to the same period last year.

In addition, the comp sales increase of 6.7% provided leverage on expenses for buying, distribution and occupancy.

SG&A expenses were 25.8% of sales for the quarter, which is a 140 basis point improvement from the second quarter last year.

This was primarily driven by the following.

First, an 85 basis point decline in payroll-related expenses reflecting reduced expense for workers' compensation and insurance benefits, and leverage on payroll and incentive compensation.

Second, a 30 basis point reduction in depreciation.

Third, a 20 basis point reduction in store operating expense due to lower cost for utilities and maintenance, as well as leveraging of the comp store sales increase.

And a five basis point decrease in other operating expenses, as reduced expenses for legal fees and inventory services offset increases in debit and credit card fees.

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

We also accept SNAP, or food stamps, in 3,084 stores or about 79% of the chain.

In the second quarter, compared to the second quarter last year, debit card penetration increased 130 basis points and credit card penetration increased 90 basis points.

The SNAP penetration, although small, continues to grow.

Operating income increased $38.5 million, compared with the second quarter last year.

Our operating margin for the quarter was 9.3%, a 200 basis point improvement compared to the second quarter last year.

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

The tax rate for the quarter was 37.6%.

In the second quarter of last year, the tax rate was 35.3%, reflecting the benefit from an immaterial correction of deferred tax assets.

The impact of the higher tax rate in the second quarter of 2010 was about $0.02 per diluted share.

Cash and investments at quarter-end totaled $480.3 million versus $358.2 million at the end of the second quarter of '09.

Cash net of debt was $213.8 million at the end of the second quarter.

During the first half of 2010, we invested $218.4 million for the repurchase of Dollar Tree stock.

This includes a $200 million accelerated share repurchase announced on March 22, through which we repurchased five million shares.

In addition, in the first quarter, we repurchased 578,400 shares for $18.4 million on the open market, prior to the ASR.

We did not repurchase any additional stock on the open market in the second quarter as the ASR was ongoing until August 6.

In June, the Board of Directors authorized an additional $500 million for share repurchase.

Including this authorization, we had $542.2 million remaining in our share repurchase authorization at quarter end.

We also issued a 50% stock dividend in June which had the effect of a three for two stock split.

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

At the end of the second quarter, the diluted weighted average shares outstanding were 128.1 million.

Capital expenditures were $45 million in the second quarter of 2010 versus $33.9 million in the second quarter last year.

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

For the second half of the year, capital expenditures will focus on new stores, remodels and the expansion of frozen and refrigerated capability to more stores.

Depreciation and amortization was $39.4 million for the second quarter, versus $39.1 million in the second quarter last year.

We expect depreciation of $158 million to $162 million for the year and that depreciation expense as a percentage of sales will continue to decline in 2010.

Our inventory at quarter end was 1.4% greater than at the same time last year.

And selling square footage grew by 6.8%.

Inventory per selling square foot decreased by 5.1%.

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 included in our guidance.

At the beginning of the year, we implemented a new retail stock ledger which we discussed in detail in the first quarter.

The new process provides a more precise and timely measure of the composition of our inventory.

As a result, we expect that some additional merchandise cost will shift into the third quarter and out of the fourth quarter, relative to last year.

For the second half overall, the impact of the change will be neutral, and this is included in our guidance.

Also, we are assuming a tax rate of 37.9% for both the third quarter and the full year.

And weighted average diluted share counts of 127.8 million shares for the third quarter and 128.5 million shares for the full year.

While we still see share repurchase as a good use of cash, for modeling purposes, our guidance assumes no additional share repurchase.

With this in mind, for the third quarter of 2010, we are forecasting sales in the range of $1.35 billion to $1.39 billion.

Based on a low to mid-single digit comparable store sales increase and 6.8% square footage growth.

Diluted earnings per share are expected to be in the range of $0.57 to $0.62, an increase of 11.8% to 21.6% over third quarter of 2009 EPS of $0.51.

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

We are now forecasting sales in the range of $5.77 billion to $5.86 billion, based on a low to mid-single digit increase in comparable store sales and 6.5% square footage growth.

Diluted earnings per share are now expected to be in the range of $2.84 to $2.96, including the non-cash charge related to the retail inventory accounting change in the first quarter.

Excluding this non-cash charge, our diluted earnings per share are expected to be $2.97 to $3.09.

This would represent an increase of between 25.3%, and 30.4% over our record EPS of $2.37 in fiscal 2009.

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

Thanks, Kevin.

I'll just say again, I'm very proud of our Company's first half performance and I couldn't be more excited about the remainder of this year.

After growing our earnings per share by 41% in 2009, our momentum continues through the first half of 2010.

Sales grew 13% and earnings per share were up 42%, excluding the non-recurring non-cash charge in the first quarter.

Comp store sales increased 6.6%.

Our traffic continues to grow and our average ticket is increasing.

Our operating margin increased by 170 basis points to 9.4%.

This was our best first half ever.

And said another way, this was our best first half so far because we can do even better.

We have a strong and flexible business model that can adapt to a changing environment.

With our compelling mix of low priced and high value consumer basics, and our unique assortment of fun, compelling, seasonally correct discretionary products at Dollar Tree, we're positioned to be relevant to customers in all economic circumstances.

In challenging times, we have the values that customers need on everyday basics.

We're there to help the customers balance their budgets and when customers have a few extra dollars in their pocket, our assortment of fun, compelling, seasonally correct discretionary products just can't be beat.

At Dollar Tree, you can even afford to splurge; those discretionary items are still just a dollar.

We are strategically located to serve middle America.

Our stores are bright, convenient and fun to shop and our values will remain relevant as long as people want to get the most for their dollar.

We have a 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 a crisper overall execution.

As we reduce supply chain and back office cost, we continue to reinvest much of these savings into higher merchandise values and to provide a better customer experience in our stores.

With an eye to the future, we're investing for profitable growth, expanding our store base, improving our store productivity and developing new retail concepts.

The Deal$ format is young and fresh.

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

It is improving operationally and proving its merit to the customers.

Dollar Tree Direct is exciting and in the early stages.

We have just begun to harvest the potential of eCommerce retailing.

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, while generating substantial free cash.

We continue to use our capital for the long-term benefit of our shareholders including the investment of more than $218 million to repurchase 5.6 million shares so far this year.

It's an exciting time at Dollar Tree.

We had a great first half.

Our merchandise values are better than ever.

We're raising our guidance for the second half and we look forward to an outstanding fall 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 to two.

We're now ready for your questions.

(Operator Instructions) And our first question comes from Dan Wewer with Raymond James.

Thanks.

Good morning, Bob.

Good morning, Dan.

Actually just two long-term questions, if I may.

First, the Company's peak operating margin was achieved back in 1999.

That year your operating margin was about 13.1%.

It looks like you're going to be within a couple of percentage points of that peak operating margin this year.

The key difference obviously is your store prototype is about 2X the size that it was back in 1999.

So, when you think about the art of the possible and where operating margin can go, do you think that that peak could be lower or higher than what the Company achieved back in 1999?

Dan, I can tell you that it's on an upward trend and I think we have room for continued improvement in the operating margin.

This year's going to be better than last year and I would expect that next year would be better than the last.

The 13.1 or 13.2 that you predict, I don't know, we're going to make it as high as we can.

We are on a pretty good trajectory over the last few years.

We went through a period of time of investment in our business.

We invested in logistics.

We invested in technology, POS and all the things to run our business better and we also invested in expanding our store size and right-sizing our stores.

All of that at one time did impact our peak operating margin, which was back in 1999.

But it's bottomed out and it's going back up.

So, we're pleased with the trajectory we're going, Dan, and we're going to keep on pushing it to even higher limits.

Then the other question, you noted there was probably room for another 3,000 Dollar Tree stores domestically.

What will be the difference in the real estate characteristics of those next 3,000 stores?

Will there be a bigger emphasis on rural locations?

A bigger emphasis on urban locations?

And also, would you contemplate diminishing returns becoming visible as you begin to fill out the next 3,000 sites?

We spent a lot of time over the last few years working on things like site location, market planning, how many stores in a market, what size, where the right location is, moving existing stores and the potential for moving stores and then opening new stores.

And we are doing a much better job now of real estate acquisition.

And I would point to the productivity of our new stores over the last couple of years.

Last year, 2009, was a great improvement over 2008.

And so far in 2010, our class of 2010 productivity is much improved over 2009.

So, while we're getting more stores, and there is some more complexity as we grow out -- as we fill in the markets and grow and spread out across the country, we're getting better at understanding these markets.

We're getting more sophisticated, if you will, on our site selection.

And we're absolutely focused -- one of our key initiatives, is to drive the productivity, not only in our existing stores, but also in our new stores.

So, I would say that we're going to continue to drive productivity.

We are continuing to look to right-size our stores to the market.

We're looking at better site locations as we plan our sites and we have more data now to do that with.

And we also have an experienced real estate team that has been doing it now for some years and understands the dynamics of a Dollar Tree site.

We're excited about our growth.

There's plenty of room to grow.

When you compare us, Dan, to the others in the -- we're the small guy out there.

We've got a lot of locations that we can put productive Dollar Tree stores.

And I think we've shown a history of growing at the rate -- that is a profitable growth rate.

And we'll go next to Mitch Kaiser with Piper Jaffray.

Thanks, guys.

Good morning.

Nice quarter.

Thank you, Mitch.

Thanks.

Just thinking about the gross margin, thanks for the detail on that, understanding the planograms and things like that.

Are there other regions that you could potentially look at outside of Asia?

Or have you been doing that?

Our sourcing -- our import sourcing is almost entirely now from Asia.

Not completely.

There's some things coming from south of the border, Mexico and South America.

But with the value of the -- the strength of the euro over recent years, although it's fallen back now somewhat, we haven't done as much sourcing in Europe as we had once done.

So, most of our importing is from Asia and the majority of that is from China.

And what we're experiencing in China, I was trying to address that in the prepared comments, because I do hear from department stores, mostly, and maybe from apparel retailers, I hear pressures on cost coming out of China, coming out of Asia and what they're really pointing to, I believe, is the cost of raw materials, cotton -- cotton prices are really high.

We're not seeing that, though.

First of all, we're not an apparel retailer.

We're not a department store.

But our model is very flexible and I'll just say, again, we don't have to have anything.

We change probably half of our mix anyway every year, year-over-year.

We're looking for change and fresh product and as we do that, we're always looking for the best value at the cost that we can afford and still make our margins.

But, even having said that, I was with the buying group on the last buying trip in July.

And I got to tell you that the pricing was favorable.

It wasn't -- other than what I hear, I didn't see it.

The pricing was favorable on this last trip.

Our initial market -- mark-on was up at the end of the trip and the product is just terrific, actually more high value product than the same trip last year.

Okay.

Good.

That's helpful.

And just thinking about where you're purchased through, I think maybe last quarter you talked about being through Easter, if you could just talk about that?

And then, I was just curious, we heard from a couple of retailers about once the unemployment checks stopped being sent in late June, that they saw a fall-off, or saw an impact.

To me, it sounded like you said that the traffic trends and comps were fairly stable throughout the quarter.

If you could just address both of those, that would be helpful.

Thank you.

Mitch, we're bought through pretty much this time next year.

So we went on -- on the last call I talked about buying in Easter.

On this trip, we bought for the seasons and the period of time after Easter, through summer and all the way up into back-to-school.

So, we're bought that far out on our import buys.

Of course, the domestic buys are on a little shorter horizon.

We don't have to go as far out on those.

As to second question there was--?

Unemployment.

Unemployment.

We don't report our period sales, but I will tell you it was very consistent throughout the quarter and second quarter, as I said, and I think that maybe just speaks to our model and the value that we have.

It seems like when times are really tough and maybe you get to the end of the month and you've only got a couple bucks, then we're certainly a good place to go spend what you have.

So, we experienced very, very stable and great sales, comp sales throughout the quarter.

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

Hey, guys, how are you?

Good morning.

First, just a quick housekeeping item.

Kevin, how big is the merchandise cost shift between 3Q and 4Q?

Well, really I don't know that I can define it to a number, realistically.

Obviously, the new retail stock ledger, it's a new process for us as well.

What I can talk to, Scott, is the fact that if you think about the retail inventory method, it's really a giant averaging process is what it really is.

And so prior to this implementation of the new retail stock ledger this year, we had one pool of inventory.

And so, when the goods came in, they were all averaged together into one pool.

So, what you got to understand is we received the majority of our high margin Q4 discretionary goods in Q3.

And so these would get averaged into that one pool and as we sold goods in Q3, the margin benefited from the receipt of those higher goods, instead of when they were actually sold in Q4.

So, under the new retail stock ledger, we have about 30 pools of inventory.

And when the Q4 goods are received here in Q3, they'll go into some separate pools, instead of just one pool.

And so basically when we sell the goods in Q4, that's when we'll get the benefit of those higher margin goods instead of Q3, which is the way it was in the past.

So, we're not going to define it.

Obviously, it's in our guidance and that's the way we're looking at it going forward.

And as I said, it's new to us and we'll be able to speak more to it after we get through it.

All right.

So, it's truly a timing issue of when the goods come in and when they're sold, so.

Absolutely.

Okay.

Neutral for the quarter -- for the year.

Got it.

And then you guys obviously have stores across the country.

I'm curious, have you seen much of a difference in mix between the geographic regions, i.e., areas that might be harder hit from an unemployment standpoint, you sell more consumables, while other areas more discretionary?

Any kind of color on that would be very helpful.

We do see a higher degree of discretionary or needs-based products in the harder hit areas, the more urban markets, the ones that were hit more by the economy.

People are under pressure.

We're a place to go.

Our values are terrific.

We now sell full range of health and beauty care and cleaning supplies and a lot of food and grocery and beverage type items.

So, in those markets where the economy is especially bad and where the unemployment is especially high, we do see an increase in our share of needs-based products in those stores.

Overall, though, it's, as I said -- right now, in the last year and this year, we're going through a period where the needs-based product, the whole country seems to have been pressured, especially the lower income folks, for a couple years now, maybe longer, and these needs-based products are certainly serving us well.

Our customers are flocking to the stores, they're buying that.

But you know what?

When they're there, it's still only a buck to buy a toy for the child or something for the party or an artificial floral arrangement to put on the table and make you feel good or a little gift or a stationery item.

And those are all discretionary, but they're still only a buck.

So, while our needs-based product has grown overall, so has our high margin variety discretionary product.

All right.

That's very helpful.

Thanks, guys.

Once again, as a reminder, we do ask that you limit yourself to one question and one follow-up.

And we'll go next to Alan Rifkin with Bank of America-Merrill Lynch.

Thank you very much.

Somewhat of a follow-up to Scott's question.

Your same-store sales continued to take off in the wake of a very difficult employment picture and certainly the prognosis for employment in this country going forward continues to be not as rosy as what everyone is looking for.

If you look at your stores in markets where unemployment is significantly above that, of the national average, California, South Carolina, Rhode Island, things like that, can you maybe provide some color relative to the corporate average as to how the stores in those markets are doing?

Scott, I--.

This is Alan.

Scott was--.

Alan, I apologize.

That's okay.

Color's about all I can give you, and it's anecdotal.

And again, where the customers are mostly under pressure, our needs-based product has grown the fastest in those areas, where unemployment is the highest, where foreclosures are the highest.

Some of those -- like California has been a terrific for years for us and the needs-based product has picked up in some of the California markets of late.

Even in Florida, southern Florida, where the foreclosure rate was higher earlier in the economic downturn, the needs-based product has grown.

This new store that we have, that offers full choice, we attract people when times are tough, you go there, you can buy your cleaning supplies for buck, your paper towels for a buck, your toothpaste for a buck.

When times get a little better, we still -- we've got the toys and the floral and the seasonal product and all of that high margin stuff, it's only a buck too.

But anecdotally, I would say that in areas where people are more under pressure we're more and more a retailer of choice in those areas.

Okay.

And it was also mentioned that your new store productivity has been increasing steadily since 2006.

Your square footage growth is among the highest of any of the companies that we follow.

Can you maybe quantify as to what the new store productivity is doing today for the recent class versus the last couple of years?

What is the number relative to last year and the prior year?

Well, I don't know that I've quantified that.

I can tell you, it's up remarkably.

I'm very pleased with the class of 2010.

The productivity is up and it's on top of a really good increase in 2009.

It's not over yet.

We still have a lot of stores to get open.

But--.

Bob, is that mid single digits, high single digits higher or even average store volumes for the class?

We haven't quantified it.

And I'm not prepared to.

I don't even have the numbers in front of me right at this minute.

I don't want to just guess at it.

It is absolutely a -- we're excited about it.

This is a tremendous -- we've been working really hard, the store teams and the merchant teams, real estate teams, to work together to drive up that new store productivity.

We've right-sized the store.

The stores that we're opening up now, about 10,000 square feet this year, about the same size last year, very close to that the year before.

We're getting the stores in the right places.

We're getting a better mix of product when the store opens.

We're doing a better job in our grand opening activities.

We're doing a better job in following up and replenishing those stores when they open and we're seeing a sizable increase in our new store productivity over the last three years.

Okay.

Well, thank you very much.

Thank you.

And we'll go next to Meredith Adler with Barclays.

Thanks and congratulations.

Thank you.

Everybody focuses on the gross margin, but what seems to me to be most outstanding about this quarter and has been true recently, is amazing expense control, even with strong sales growth.

And you talk a bit about logistics and inventory management.

I was wondering if you could be just more specific about what you've done and what you think is still the opportunity to do, because it sounds like you think that you can continue to manage expenses.

And then just along with that, I sometimes hear people have concerns that if your comp slows, that's going to put pressure on expenses.

But it seems to me that you've been very good at flexing your expenses.

So, I was wondering if you could also talk about that a little bit?

Okay.

Well, Meredith, we do feel good about the direction we're heading with our expenses and our expense controls and I've spoken some the last -- end of last year and into this year about some of the things we've done around inventory and smoothing the flow of inventory.

And really, as I've said before, it touches every part of our business when you control the flow into our distribution network and so that they can plan accordingly, control over time, but still meet all the needs of the stores.

You can flow it then to the stores.

They can plan for it, get it to the floor quicker, which obviously, we believe helps sales and that controls their payroll.

And obviously, store payroll is by far our largest expense that we have on our P&L.

So, those things are very, very important to us.

The other thing I think is that we've always looked at is things that we buy or acquire and then process.

Obviously, in regards to things we purchase, we have a purchasing department.

We're doing a lot of things around that to look at reverse auctions, to bring down cost.

Obviously, we continue to get bigger which helps us with the power of the pencil.

On a process basis, we continue to look for automation where it makes sense.

We obviously are very transactional driven, probably over 700 million transactions this year.

So anything that we can do, saving even $0.005 here per transaction is huge at the end of the day.

So, those are the kind of things we're always focusing on and always trying to bring into play.

I think that in the sense that your question about if comps slow, what kind of pressure does that put on expenses.

Obviously, we do have the ability to flex.

From a store scheduling standpoint, there are basically metrics that we schedule around, and a lot of those are based upon sales per hour and that is all taken into consideration.

And we look at every line item every year.

We go through a fairly comprehensive process to look where we can drive out cost.

One of the things -- and sometimes it's just saying do you really need that.

One of the things that we've done this year that has gotten some notoriety is the fact that we basically took music out of our stores.

It wasn't necessarily the most popular decision with our store people because they like it.

But you look at other retailers, there's a lot of retailers that don't have music and there was a cost associated with that and we made the determination that we thought that our consumer, who is a value shopper, is not really going to miss it.

So, it was a decision we made to take cost out of the system.

So, those are the kind of things we think about all the time.

And we'll go next to Charles Grom with JPMorgan.

Thanks.

Nice quarter.

Can you quantify the negative impact from freight and mix in the second quarter for gross profit margins?

And then, also within SG&A, could you quantify the decrease in workers' comp accrual?

And then I have one follow-up.

All right.

In regards to gross margin and freight, obviously as I talked about last quarter, with the new retail stock ledger, it is basically the margin and the freight, it's all loaded in the retail stock ledger.

I don't have the same visibility or we don't report on it in the same way we have in the past.

Obviously, what we do know is that import rates are up.

New contracts, as of May this year, probably we don't feel the full effect of those increases in Q2 as much as we do in Q3.

But obviously, that's all implied within our guidance.

So, basically what we did see in Q2 is the fact that the merchandise mix, we did see a shift of roughly 190 basis points in mix there to more consumables.

So that obviously is a negative to the overall margin, but as we said, we were able to basically overcome that through the fact that IMU and other things were positive.

Then obviously shrink has been a big help this year as well.

We've had very good shrink results.

So, all those things, you've got to look at all the levers to really feel pretty good about that.

The workers' comp accrual was -- it was a benefit.

I don't know that -- it's not something we would normally quantify, but it's probably -- it was probably maybe a quarter of the help that we got there in payroll.

So, it's not a huge number but it was a help.

Obviously, we've had good development of our losses there and it's something that, again, we work on with our stores every day.

Okay.

And then my second question, in the Q you filed this morning, you talk about the negative impact on GPM from higher freight and mix.

So, are we to assume that your overall gross profit rate will be down or flat in the back half?

Or are there the IMU and shrink, do you continue to think that those will help offset the negatives on the gross line?

Yes, it's more the latter, Chuck.

Obviously, we believe that, as I said, there's always levers we work with and shrink has been better.

Obviously, good sales will continue to help us from a leverage standpoint.

And overall, I don't think that we necessarily believe that it'll be flat in the back half.

Okay.

Great.

Thanks.

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

Hi.

Good morning.

Congratulations on continued success.

Thanks, John.

Thanks, John.

A question on the regional differences or store adjacencies.

If you look across your stores and say, I know you've got some stores that are close to Walmarts, you have some that are close to grocery stores, you have free-standing stores, is there any particular group which is underperforming or outperforming the chain average meaningfully?

In general I would tell you ,John, that with the strong results, we've had strong results across all categories.

In general, I would say that things like -- we love being by Target and Walmart at the end of the day.

They are good operators.

They bring a lot of traffic, cross-traffic that we can capitalize on.

And we look very favorably upon that.

We're in a lot of centers with grocery stores and that's another neighborhood markets and where middle America shops and those continue to do very well.

So, I don't know that I would point out any single group.

I think we're just seeing strong traffic in our stores.

As we said, on our comp, we saw 5.6% traffic increase in the quarter, so we feel very good about all categories.

Any difference, say, in like the metro areas versus rural areas or more of the -- or anything else that you can identify that might tell you that a specific customer group is hurting more than other areas?

No, one of the things -- I don't have so much data on that but we do have a data point in the sense of looking at income bands and looking at how the comps compare for the income bands and realistically it was exactly the same.

So, the people at a little lower income and the people at a little higher income, the comp was exactly the same for the quarter.

So, that's the one data point I can point to.

And that's factored using DMA data around the stores, not customer surveys, right?

Correct.

Okay.

All right.

Sounds good.

Look forward to speaking to you later.

Thank you.

And we have time for one or two more questions.

And we'll go next to Mike Baker with Deutsche Bank.

Thanks, guys.

So, two questions.

One, on margins, I think the implied guidance, if you use the high and low end of your sales and high and low end of your EPS gets you to about somewhere between 15 basis points and 75 basis points margin expansion in the third quarter which is lower than it was.

So, I guess my understanding is that's because of the new way you do your buckets on your inventory, as well as higher freight costs, or are those the factors that we should be contemplating in that guidance?

Absolutely, those are the key factors at this point.

Okay.

Thank you.

And then second question, ticket versus traffic, you did say that they both were up.

I think this is the third quarter in a row that ticket has been up.

I'm just wondering about the growth ticket versus the previous quarter.

Is it up about the same?

Is ticket becoming a bigger part of the total comp or smaller, is it more traffic driven, et cetera?

Ticket was actually down compared to Q1.

I mean, we were up 2.4 in Q1, up 1.1.

I don't know that we look at anything in particular that drove that.

The main thing, the seasonality of Q1 versus Q2.

Exactly.

So, obviously, you have a different seasonality factor in there which affects -- Easter is huge for us in Q1.

Q2, there's a lot of holidays, but they don't mean maybe quite as much to our business at any one point in time.

So, I think that may be the only factor that we really understand at this point.

Okay.

Thank you very much.

That was helpful.

And we'll go next to Neil Currie with UBS.

Thank you.

Thanks for taking the question and congratulations.

I just wanted to ask a question on your sales guidance for the third quarter.

It would imply a slowdown on a one or two year basis.

But, I'm just presuming that this your default guidance which you seem to put out each quarter or are you seeing anything in the opening weeks of the third quarter which suggest a low to mid-single digit comp?

Neil, we're excited about the third quarter and the second half and thus, the reason for raising our guidance in the second half, our sales guidance.

We're really excited about our opportunities.

It's just too early.

We don't report other than the quarterly anyway.

But, I will just tell you we're only slightly into the third quarter, so it's really too early to say that's a trend.

There's nothing there that tells me it's going to be worse than, though and we're excited about where we're going.

So, you can take that sort of color in our thoughts and our enthusiasm for our business.

We've put everything into our guidance that we know, scientifically.

We've put in headwinds we know about.

We put in the opportunities we see.

And as a result, we raised our guidance.

Okay.

So essentially, though, you're not seeing any particularly changed trends since the end of the quarter?

There's no reason to believe that the guidance that we just gave that we -- should not have been raised.

Okay.

In terms of freight, obviously freight has been going up, mainly because it was so low last year.

But there seems to be some new capacity coming onstream.

Looking into next year, it may be a bit too early to comment on it, but do you see once this new capacity has come onstream that you can actually get freight costs down again?

It's all about supply and demand.

When there's extra capacity and more capacity, that would lead you to the belief that the rates could be going down next year.

It is too early to say, but more capacity will put pressure on the rates to go down.

Great.

Thanks very much.

Thank you.

And we'll go next to David Mann with Johnson Rice.

Hi.

Yes.

Thank you.

Great job, guys.

Going back to the question about adjacencies, when Walmart was doing the rollbacks, did you see any kind of positive or negative effect there?

And anything since they've pulled back on them?

Well, David, you saw our sales and our comps for the second quarter and they were consistent across the country.

Walmart's across the country and we're either co-located with or near or around, because we all try to go where customers are shopping.

So, if you assume all that, then we really didn't see any effect.

Look, we don't even compare ourself to Walmart.

They're just a huge business and a huge store and the assortment that they carry, they sell everything in those Walmart stores.

We're a variety store, small in nature, convenient, things you need, things you want, everything's $1.

They are terrific retailers.

We just stay focused on what we do.

We believe that the most important thing about our sales results is how we plan our promotions and the mix of product that we offer and the values that we offer and how we treat our customers.

Great.

And then for the follow-up, Kevin, with the change in the legislation on fees the banks can charge you, any thoughts on how that will impact you going forward?

Well, we're obviously hopeful that it will be favorable.

But there's a fairly long time frame here for it to truly come to fruition from everything I have read at this point, it's at least nine months.

But we are very hopeful that there will come out of this something that will help control the bank card fees.

Because obviously, our penetration continues to increase which is very good.

But we've also then seen their fees increase, not only just because of our penetration, but because of rates going up fairly regularly as well.

So, really view at this point, we really believe it could only be positive long-term.

Great.

Thank you.

Good luck.

Thanks, Dave.

And we have time for one more question.

We'll take our final question from Dan Binder with Jefferies.

Hi.

Good morning.

Hi, Dan.

Just had a couple questions for you.

First, you talked about higher import freight cost.

I was wondering if you can just give us a rough range of what that looks like year-over-year in the back half?

And then, secondly, what would you estimate, and I'm not looking for a precise number here, but maybe just a range of what do you think the refrigeration roll-out and the acceleration of that adds to your top line this year?

Let me take a stab at the import freight rates.

We don't break that out and I can't right now, but just anecdotally, last year freight rates, ocean freight rates across the country were probably as low as they've been in many years.

They're not as high this year as they've been in many years, but they certainly are much higher than last year.

And of course, we have included the higher rates into our guidance, so you can see that we -- even with the higher rates, we are expecting to offset much of that increase with other parts of our -- how we run our business, as we always do.

The lift on frozen and refrigerated, Kevin, you want to take a shot at that?

Typically, what we have said when we put frozen and refrigerated in the store, we'll see a lift of 5% to 8%, roughly, thereabouts.

And really what we don't see, is we don't see it go away.

It really helps our business all across the entire store.

We see lift in our other categories as well.

So, again, the reason to do this is, it's obviously lower margin but high return.

We get many customers coming back on a weekly basis and while they're there maybe getting their needs from frozen and refrigerated, they can pick up some discretionary items as well.

So, we real really feel that it helps us on an overall basis and it's something that we've obviously accelerated our roll-out this year and obviously it's something that we truly believe in.

Last question, maybe I'll try and just get a third one in.

I'm just curious if you can give us a little bit of an idea of why Dollar Tree is different in terms of being able to buck the trend on rising costs out of China?

And then to your point, you're getting better markup year-over-year and what's making you different than everybody else?

It is counterintuitive and I know when I say those things that people -- it's hard to get your head around that if you're not in the middle of it.

But it starts with, we really change our mix every year dramatically.

We probably change half of what we sell every year.

We're not relying on selling the same item year-over-year.

And as rising costs -- as costs do go up on an item, we're likely just not to buy that item again.

We're likely to buy a different item, because we are a small retailer and we don't have the big store assortments.

We don't planogram.

We don't nail down an item.

And I tell our buying group that you don't have to have anything which gives them a lot of freedom to find the best value for the customer.

We like to have -- we want toothpaste all the time, but if I can't buy Colgate, then I want to buy the Crest, if I can't buy the Crest, I'm going to buy another brand.

And I'm going to do it at a cost that I can offer a great value to the $1 to the customer, first and foremost and then one that fits into my margin.

So, we're managing that margin every day, every week, every month, throughout the year.

When we go on these import buying trips, we go with a plan.

We know what we bought last year and how it sold.

We know what already the things that we wouldn't like to possibly repeat and then the things that we're going to drop and we're looking for replacements.

So the things that we're possibly going to repeat, because it's a great item, I'd like to do that again or I'd like to do it one more time, we're looking for the vendor, the person that makes it that can give us the price that we need for it.

It may not be the same vendor.

It may be the same item.

It may not be the same factory next year.

So, we have the freedom to move around our product.

Remember, it's only $1 retail.

And as we remix every year, we know our margin targets and our buyers are doing a terrific job of building product that fits not only the value, but the margin target.

$1 is our price point.

It has been for 20 -- how many years?

24, almost 25 years.

$1.

We know the retail when we go to market.

What we're working on is the cost.

And that, when rising cost periods, our retail's still $1, we know the cost, we know the margin we need to make and we manage the product to fit that.

And when prices and periods of deflation and there's a benefit and we can buy things a little better, some of it we may take into our margin, but we're just as likely to turn that into better product for the $1.

Because remember, we're not changing our price, it's $1.

So, we manage the value and we manage the cost as we go to market and we go to market consistently.

So, that's how we do it.

There may be rising cost pressures on commodities, like cotton.

There may be rising cost pressures on steel or copper or any of those things.

But we don't think we have to have anything and we certainly don't have to have the same item year-over-year, so we're able to manage through those times.

Great.

Thank you.

You're welcome.

At this time, I would like to turn it back over to Mr.

Tim Reid for any additional or closing remarks.

Okay.

Thank you all for participating in this call.

And thanks also for your continued interest in Dollar Tree, and particularly for the buy siders out there, thank you very much for your investment in Dollar Tree.

Our next sales and earnings release and conference call are scheduled for Thursday, November 18, 2010.

Thank you.

And this concludes today's conference.

Thank you for your participation.