美元樹 (DLTR) 2010 Q3 法說會逐字稿

Good day and welcome to the Dollar Tree Inc.

third quarter 2010 earnings release.

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

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

Tim Reid, Vice President of Investor Relations.

Please go ahead.

Thank you Tim.

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

My name is Tim Reid.

I'm Vice President of Investor Relations.

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

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

Before we begin, I'd 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.

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

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

Thanks, Tim.

And good morning, everyone.

Thank you for joining us.

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

Here are some of the highlights.

Our comparable store sales increased 8.7%, and I would add that this is the best third quarter comp in at least the past 12 years.

That was on top of a 6.5% comp in the third quarter 2009.

The comp was driven by a 6.7% increase in traffic and a 1.8% increase in average ticket.

Our total sales increased 14.2% to $1.43 billion, and our inventory turns increased once again in the third quarter as they have consistently over the past five years.

Earnings for the third quarter were $0.73 per diluted share, a 43% increase over last year's $0.51 per share.

Gross margin increased 20 basis points to 35.5%.

Operating income was $141 million, an increase of $33.3 million or 31% over a strong base last year.

Operating margin for the quarter was 9.9%, an increase of 130 basis points over the third quarter last year.

And I would add that, that is the highest third quarter operating margin since 1998.

The net income rose 37% to $293 million.

Year-to-date, through three quarters of 2010 compared with 2009, sales were $4.16 billion, an increase of 13.2%.

And comp store sales increased 7.3% on top of a 7.5% comp last year.

As we previously disclosed in the first quarter this year, we recorded a nonrecurring, noncash charge of $26.3 million or $0.13 per share relating to the previously announced retail inventory accounting change.

Including this charge, earnings through three quarters of 2010 increased to a record $1.82 per diluted share.

Excluding the charge, earnings per share were $1.95, an increase of 42% compared with a $1.37 per share through three quarters last year.

Operating income increased by $103 million.

Operating margin was 9.6%, an increase of 155 basis points compared with the same period last year.

Net income rose 35%.

As noted in the press release, I am very pleased with our results in the third quarter.

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

I am especially proud of the efforts of our buyers and our stores who worked diligently to understand the needs of our customers and then to provide it for 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.

Customers continue to shop in record numbers and they are buying more each time they visit our stores.

Sales growth in the third quarter came from a mix of both basic and discretionary products.

The top-performing categories included food, housewares, domestics and home products, party supplies, health and beauty care, and seasonal merchandise.

And just a comment on the seasonal business.

Seasonal products has always been a very important part of the Dollar Tree business.

It adds color, fun and merchandise energy to our stores and even though it is discretionary in nature, it is still only $1.

Our seasonal assortments this year have been more complete and more compelling than ever.

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

We have now transitioned very quickly from Halloween and our stores are now set with our best merchandise values ever for Thanksgiving and the Christmas holiday season.

As expected during the third quarter, we experienced higher freight costs.

You may remember this was built into our guidance.

The price of diesel fuel and our ocean freight rate is higher this year than last year.

Like many other companies, over the summer we were faced with container and vessel availability issues.

Our logistics team worked very hard to deliver merchandise to our stores on time, and they succeeded.

We had a great merchandise presentation in our stores throughout the quarter.

Customers responded in record numbers.

Even with a higher freight costs, our gross margin for the quarter increased.

Our business continues to expand both through new stories and increased productivity.

During the third quarter of this year, we opened 86 new stores, and relocated and expanded another 27 stores.

Through the third quarter, we added 216 new stores and expanded or relocated 95 stores.

Selling square footage grew by 6.6% from the same point last year which is slightly more than our original square footage growth plan.

We ended the quarter with 4,009 stores.

And I will add that since the end of the quarter, we have opened an additional 16 stores.

As of today, we have achieved our 2010 plan with 232 new stores and 95 expansions and relocations for a total of 327 projects.

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

Efforts have been concentrated on improved site selection, on the rightsizing our stores at about 10,000 square feet and on opening new stores earlier in the year.

New stores productivity has been improving since 2006.

So far productivity of this year's class has been the highest in years.

Our measured expansion of frozen and refrigerated product continues, and the third quarter 2010 we added freezers and coolers to 109 stores.

Since then, we've added another 47 in the fourth quarter for a total of 410 installations so far this year.

Frozen and refrigerated products are now available in 1,834 stores.

The plan is to continue to expand this category.

It serves the current needs of our customers, it drives traffic into our stores, and provides incremental sales across all categories, including our higher-margin discretionary products.

The third part of our growth strategy is to develop new retail formats and momentum continues to build in this area beginning with Deal$.

We currently have 168 Deal stores.

While the majority of the merchandise that Deal$ is focused at $5 and less, customers can also find incredible values on special items at prices above $5.

I'd like to give you a little color on Deal$ to give you a feel for why we're so excited about the concept.

Once again, traffic, ticket, and average unit retail increased in the third quarter at Deal$.

Average ticket at Deal$ overall was $9.12 in the third quarter of 2010.

Average ticket for a basket including at least one item priced over a $1 was $14.06.

Average unit retail for items above $1 was $3.02, and that's up from $2.90 in the third quarter last year.

Items over $1 accounted for more than 43% of Deal$ sales.

Our Deal$ stores are offering more variety, more brands, more overall value, and customers are responding favorably.

We are seeing positive customer response across a broad range of categories.

The home and domestic categories continue to add excitement at Deal$.

This year, we have comforters and blankets, quilts, sheet sets, cookware, small appliances, all priced between $5 and $15.

In addition to these items, top categories for the quarter included hardware, personal care, household cleaning supplies, and health care products.

Halloween sales and sell-through were excellent.

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.

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

We opened six new Deal$ stores in the third quarter.

With the acquisition of Dollar Giant in Canada, we are now expanding into new territories.

This is the first expansion of our retail operations outside of the United States.

Just a couple of data points on Dollar Giant.

The Company was founded ten years ago in 2000 and has grown to 86 stores, each averaging 9000 square feet.

The stores are located in four provinces -- British Columbia, Ontario, Alberta, and Saskatchewan.

The stores offer a mix of things you want and things you need all priced at $1.25 Canadian or less.

Dollar Giant is successful, growing, and profitable with an outstanding management team.

The management and associates have extensive retail experience, and the proven ability to build and expand an effective profitable business.

They are one of the key reasons for my confidence about our future success in Canada.

We expect the acquisition will be accretive in the first year.

Longer-term, we believe the Canadian market can support 900 to a 1,000 Dollar Tree Stores.

This is in addition to the 7,000 store potential for Dollar Tree in the United States and our Deal$ format expands that number.

Dollar Tree Direct, our e-commerce business, is also growing.

Several enhancements to Dollar Tree Direct were made in the third quarter aimed at improving the customer experience and expanding our reach.

The homepage was redesigned in the third quarter to feature more engaging content and to showcase key items and hot items at key events.

Customers asked for more things to see and do on the site, and we think we've taken a large step in giving them just that.

There are now over 2,000 products available for sale online.

That's 90% more than this time last year.

Examples of new online category additions in the third quarter included such things as kitchen gadgets, kitchen linen and textiles, nutrition bars and energy drinks.

There were more than three million customers visiting our site in the third quarter of this year.

45 million e-mails were sent to existing and potential customers and over 100,000 catalogs were mailed to customers.

There is great potential in Dollar Tree Direct, and I'm pleased with the progress the team has made.

There's more to come.

Now I'd like to turn the call over to Kevin who will give you more detail on our financial metrics during the third quarter and provide guidance.

Kevin?

Thanks, Bob.

As Bob mentioned, our diluted earnings per share increased 43.1% in the third quarter to $0.73.

The increase was driven by our strong sales, a 20 basis improvement in gross profit and a 110 basis point reduction in total SG&A expense compared to the third quarter last year.

Gross margin grew to 35.5% during the third quarter compared with 35.3% in the third quarter last year.

This was despite a significant increase in our freight cost.

As Bob mentioned, ocean freight rates are higher this year, and we had to deal with container and vessel availability issues.

This was anticipated and was included in our guidance.

We were also impacted to a lesser degree by change in our product mix as basic consumable products continued to increase as a percentage of our mix in our third quarter compared with the same period last year.

Third, at the beginning of the year, we implemented a new retail stock ledger.

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

As a result, some additional merchandise costs shifted 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.

These three factors amounted to 85 basis points of additional merchandise costs in the third quarter compared to the third quarter last year.

This was offset by 75 basis point decrease in occupancy and distribution costs resulting from leveraging the 8.7% comp sales increase, a 20 basis point decrease in markdown costs due to fewer markdowns taken in the quarter compared with the third quarter of last year.

In addition, we benefited from continued improvements in our shrink rate and improvements in operating efficiency.

SG&A expenses were 25.6% of sales for the quarter, which is a 110 basis point improvement from the third quarter of last year.

This was driven primarily by, first, a 35 basis point decline in payroll-related expenses reflecting leverage on comp store sales.

Second, a 35 basis point reduction in depreciation.

Third, a 20 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.

Fourth, a 20 basis point decrease in operating and corporate expenses driven principally by a realized gain of $2.7 million relating to the favorable resolution to a legal matter.

This gain contributed $0.01 to earnings per share.

In addition, we leveraged expenses for legal fees and inventory services.

Debit and credit card fees continue to increase reflecting growth in usage of these types of tender.

In the third quarter compared to the third quarter of last year, debit card penetration increased 110 basis points and credit card penetration increased 140 basis points.

SNAP penetration, although small, continues to grow.

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

We accept SNAP or food stamps in 3,300 stores for about 82% of the chain.

Operating income increased $33.3 million compared with the third quarter of last year.

Our operating margin for the quarter was 9.9%, a 130 basis point improvement compared to the third quarter of last year.

Year-to-date through the third quarter, operating margin is 9.6%, an increase of 155 basis points from the same period of last year.

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

During the third quarter, dividend income of $5 million was recorded in other income based on a dividend declared by [Allays] Holdings, Inc., of which the Company owns 10.5% This increase in other income contributed about $0.02 per diluted share to the third quarter earnings.

The tax rate for the quarter was 35.6%, slightly lower than the third quarter last year and lower than our expected tax rate for the quarter.

This was due to favorable provision to return reconciliation adjustments in the lower tax rate on the dividend income.

For the first three quarters the tax rate was 36.8% compared with a tax rate of 36.2% during the first third quarters of 2009.

Looking at the balance sheet and statement of cash flow, cash and investments at quarter-end totaled $392 million versus $342.1 million at the end of the third quarter of 2009.

Cash net of debt was $125.5 million at the end of the third quarter of 2010.

During the third quarter, we invested $72.4 million to repurchase 1.4 million shares of Dollar Tree stock.

This brings the total repurchases to 7 million shares at a cost of $290.8 million through the first three quarters of the year.

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

As of the end of the third quarter, we have $469.8 million remaining in our authorization.

At the end of the third quarter, the diluted weighted average shares outstanding were 127.8 million.

As has been our practice, we will continue to view share repurchase opportunistically and we will update you on additional share repurchases if any at the end of the quarter in which they may occur.

Capital expenditures were $56.6 million in the third quarter of 2010 versus $45.8 million in the third quarter of last year.

For the full year, we expect capital expenditures in the range of $175 million to $185 million.

Depreciation and amortization was $38.9 million for the third quarter versus $38.6 million in the third quarter of last year.

For the full year, we expect depreciation of $158 million to $160 million, and that depreciation expense as a percent of sales will continue to decline.

Our inventory at quarter-end was 10.5% greater than at the same time last year and selling square footage grew by 6.6%.

Inventory per selling square-foot increased by 3.6% and is a reflection of timing of receipt as well as supporting our sales growth.

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've turned to our guidance for the remainder of 2010, bear in mind that, first, consumers remain under pressure, with unemployment near double-digit levels.

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

We are factoring this uncertainty into our guidance.

Second, freight rates and fuel prices are higher this year than last year.

The higher rates are included in our guidance.

Third, as a result of our new retail stock ledger, some additional merchandise costs shifted into the third quarter and out of the fourth quarter relative to last year.

This should provide some benefit to merchandise margin in the quarter.

For the second half overall, the impact of the change should be neutral.

We are assuming a tax rate of 37.9% for the fourth quarter and 37.3% for the full year.

Weighted average diluted share counts are assumed to be 126.1 million shares for the fourth quarter and 128.1 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 all of this in mind, we are raising our guidance for the fourth quarter and the full year.

For the fourth quarter of 2010, we are forecasting sales in the range of $1.72 billion to $1.76 billion.

Diluted earnings per share in the range of $1.20 to $1.27.

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

It is an increase of $0.02 per share to both the low and high end of the previous guidance range for the quarter and would represent a 19% to 26% increase compared to the fourth quarter 2009 earnings per diluted share of $1.01.

For the full fiscal year of 2010, we are now forecasting sales in the range of $5.88 billion to $5.92 billion based on a mid single-digit increase in comparable store sales and 6.8% square footage growth.

Diluted earnings per share are now expected to be in the range of $3.01 to $3.08 including the noncash charge related to the retail inventory accounting change in the first quarter.

Excluding this noncash charge, our diluted earnings per share are expected to be $3.14 to $3.21.

This would represent an increase of between 32% and 35% over our record earnings per share of $2.37 in fiscal 2009.

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

Thanks, Kevin.

Once again, I'm very proud of our Company's third quarter performance.

Here is why.

In the face of tough comparisons, comp store sales increased 8.7% and total sales grew 14.2%.

And with much higher freight costs this year, gross margin increased 20 basis points to 35.5% and operating margin increased 130 basis points to 9.9%.

Our traffic continues to grow and average ticket is increasing.

Our earnings per share increased by 43% compared to a very strong performance last year.

We believe we can do even better.

Dollar Tree has a strong and flexible business model that can adapt to a changing environment.

That has been proven now for almost 25 years.

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

We continue working to keep our values high, our buyers have just concluded their fall buying trip.

The trip was very successful with higher initial mark-up, great values and a terrific merchandise selection.

Our stores are strategically located to serve middle America.

They're bright, they're convenient, and they're fun to shop.

We have a solid foundation that makes this all possible.

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

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

We continue to generate substantial free cash and to use our capital for the long-term benefit of our shareholders including the investment of more than $290 million to repurchase 7 million shares so far this year.

With an eye on the future, we are investing for profitable growth, expanding the store base, improving store productivity, developing new retail formats and expanding into new territories.

The Deal$ format 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've just begun to harvest the potential of e-commerce retailing.

We are now expanding our retail presence into Canada.

The acquisition of Dollar Giant provides additional opportunity to leverage our resources and infrastructure to offer more value to more customers.

It is an outstanding platform for significant profitable growth in the Canadian market.

It's just one more reason that I believe our future has never been brighter.

This is an exciting time at Dollar Tree.

We are having a great year.

Our merchandise values are better than ever, and our stores are set for an exciting holiday season.

We are now ready for your questions so that we can accommodate as many callers as time permits, we ask that you limit your questions to two.

Tim?

(Operator Instructions) And we'll take our first question from Alan Rifkin with Bank of America Merrill Lynch.

Thank you very much.

Congratulations on an outstanding quarter.

Bob, would you mind just giving us the obligatory update on what you are seeing on sourcing particularly out of southeast Asia?

Sure, Alan.

Outlook is terrific.

We are hearing about higher merchandise costs in the market, but we are really not seeing it.

First off, our most recent buying trip was very successful.

Buyers put together really great values and a terrific merchandise selection.

Our margin was up over the previous season last year.

And I would remind you that we are little different than other retailers.

Margin at Dollar Tree is all about the mix of product and is much driven by an individual item's cost.

I believe that is a key differentiating factor for us.

We built our assortments with really two requirements.

We already know the retail, so we want to offer the customer the greatest value for the $1 at a cost that delivers the desired margin for Dollar Tree.

We have a very flexible model.

We don't do plan-o-grams.

We can change quickly.

I have always said that as we have price pressures where our buyers are empowered to say no, they are empowered to change the item or change the product, and we are going to keep the $1 price point, but we are in control of what we pay for it.

The margin really is in our power.

The short answer to your question is we are still finding success in planning our assortments.

We have not seen overall inflationary pressures.

There are some things that I have seen that, for instance, cotton is at record highs I think.

It is extremely expensive.

But we are not in the apparel business.

We saw a few kitchen domestics and that type of thing, so it's not a big issue for us.

But we do see some of the commodity prices like cotton going up.

But our experience has been that our margins have actually been increasing in our sourcing out of China.

Thank you.

And one follow-up, if I may, for Kevin.

Kevin, I know you said that merchandise costs shifted from Q4 into Q3.

If the costs collectively will be on par for the second half, so that obviously implies lower merchandise costs in Q4.

Can you maybe quantify the shift from Q4 to Q3, which will obviously pick up now in Q4?

With the new retail stock ledger, Alan, obviously, this is the first year we've had this in place.

It's a new process for us.

We don't have historical data to really compare it to.

We know in general that there is going to be a shift.

It is very hard to really calculate that to a fine item amount at this point in time.

The other piece that lays in there, because of the fact that all of our freight is now incorporated within the RSL as well, that muddies it a little bit because we are obviously seeing increased freight costs that are loaded in there.

Not trying to be vague, but it is just very hard to be able to say that what that number is going to be -- obviously, directionally, as we've said, we believe it will be neutral to the second half of the year.

Okay.

If I may, what impact into the third quarter did it have?

Were you able to quantify that at least?

I would tell you that, again, a lot of moving pieces.

In general, we talked about the fact that the 85 basis points of pressure on costs, and if we want to break that all little bit, we would tell you that mix had a little bit of a shift there in a sense that consumables grew by about 90 basis points for the quarter, so we take that into consideration.

And we know that there was a little bit of help or a little bit of hurt from the retail stock ledger.

Really, the majority of that is freight costs at the end of the day.

Freight -- obviously, we all know about the ocean freight rates.

Obviously, diesel prices are a piece of that as well.

Diesel prices are up about $0.35 for the quarter year-over-year.

Just domestic rates are up as well due to less competition within the United States.

So you've got all three of those being a headwind.

That the majority of that 85 basis points difference we saw year over year.

Okay.

Thank you.

Best of luck in the fourth quarter.

Thank you.

And we will take our next question from Mitch Kaiser from Piper Jaffray.

Thanks, guys.

Good morning.

Congratulations.

Thanks.

Obviously, it's been a very successful run over the past three years and probably more.

I guess just in terms of thinking, what makes you nervous about the business?

Things are going so well on the traffic side, the ticket side, the sourcing side.

What are the things that cause any concerns or nervousness about the business?

Mitch, the general economic environment is still uncertain.

That's the thing that we don't know about.

Just the idea of higher unemployment and the economy doesn't seem to be recovering as quickly and there is just -- diesel prices are up and gasoline prices are rising, just a lot of uncertainties in the economy.

Those are the things that I grapple with as we are trying to manage our business and how we think about going forward.

At the end of the day, we settle back into really just doing the things that we know how to do that we know will drive our business, starting with the top line, and that is all that we can do to offer the greatest value for the $1 to our customer.

Really wowing the customer with the merchandise, then we get them in a store, the best shopping experience we can have -- clean, bright, neat.

We feel very confident in being able to improve our operating metrics in our store.

We are getting better all the time, more efficient in our stores.

We are opening up new stores better, more productively, and we feel confident that we can continue to keep that growing.

We've got new formats that we are into.

The Deal$ format is gaining traction.

Dollar Tree Direct is exciting and it's getting the traction.

We are doing some things that are really going to give us the benefit in the eCommerce in the future.

Now with entry into Canada and all that, that brings, I will tell you that Dollar Giant acquisition, 86 stores, the thing that I like most about them is that it's a great management team, a great group of people.

They have 86 stores.

They are profitable, and they are excited about growing their company.

I think we are going to have really a tremendous opportunity in Canada.

I've said 900 to 1,000 stores there, so our growth potential is outstanding.

We have infrastructure built and in place in every new store we open that leverages that, so I don't lose any sleep about the infrastructure that we've built.

Our technology works.

We are getting better and better at using it.

I am not rosy-eyed here.

I do know there are always obstacles, but, frankly, the obstacles that I see and continue to grapple with and worry about are really those macroeconomics issues out there -- the uncertainly.

I would absolutely love to see unemployment lower.

I'd like to see people working with money in their pockets, and as that happens, that will put a lot more stability in how we think about our business.

Okay, great.

Just as you think about store growth in the future, it sounds like you made the accelerated growth in Q3 or open stores a little bit sooner.

Your new store productivities are obviously very strong.

How should we think about that for next year given between Deal$ and Dollar Giant and the Dollar Tree stores just as you contemplate growth of stores given the good productivity and the multiple banners that you have to open that in?

Well, we are still working on our budgets for next year, and we haven't announced our store growth for the next year.

It would be at least consistent with what our growth has been this year.

We are going to spend a lot of next year putting all the things in place for our Canadian Company.

As you know, we believe in building the infrastructure, and that includes the store teams and the people and the technology and the systems and the logistics and getting those things in place.

Of course, from there, stepping on the gas in our growth in Canada.

We will grow next year, but our real focus is going to be getting the infrastructure in place so that we grow profitably in Canada.

Deal$ is gaining a lot of traction.

We've still got some work to do, but it is gaining traction and we are excited about where we are going with that.

We've got, in addition to Dollar Tree, we have 4,009 stores now.

We've said we can run 7,000 stores across the country.

We have plenty of room for growth with Dollar Tree in the US.

Deal$ expands that number.

Now Canada expands that number.

And then this eCommerce opportunity that we've begun is another way of expanding our business.

On top of that, I'm excited about the productivity in our stores.

It is up again.

We've got a lot of initiatives in place.

There's a lot of hard work being done on improving productivity of our new stores as well as our existing stores.

We are seeing some good results from that.

I would -- while I cannot tell you the numbers for next year, I can tell you the opportunity is terrific.

Okay.

Thanks, guys.

Good luck.

Good luck with the holidays.

Thanks.

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

Hi.

Good morning.

Congratulation.

I know you've talked about your ability to manage through margins from a foreign perspective, but I was wondering if you could comment a little bit on what you are seeing in the consumables area?

Are you seeing inflation trickle through in food either in private label or in branded and how are you managing through that?

Well, about 40% and this is estimating, 35% to 40% of our business is private label, whether it be domestic or whether it be import.

It's about that much.

We have always been -- we have always developed private labels as an important part of our business.

Our food business, again, we are not your destination.

We are not a grocery store.

We don't have to have anything.

Our goal in groceries and in food is the same as it is in HBC or in Stationery or in any of our other businesses, and that is to offer the best value to the customer for $1.

As we see prices change on brands or as we see price pressures on the product, we move to another product.

Remember, it is only a small portion relative to our total business.

We have the ability to move from product to product and manage our margins accordingly.

The thing that we are so excited about with our food business and our more consumable business is the opportunity to drive traffic into our stores.

In times like now, as you know, with the customers under pressure, unemployment is high and the people that are still working are afraid they are not going to be working, and they are looking for ways to balance their budget.

The fact that, that they can now come to Dollar Tree and buy food products, to buy some beauty care products, to buy their cleaning supplies and paper towels and all those things you need every day, has really become important to them.

We have ramped up our business accordingly.

We are following what the customer told us they need, and we are really driving those businesses.

You can see that growth in our business overall.

It grew again 90 basis points, increased in our consumables in the third quarter, that's because we're driving it.

We are finding even more ways to offer more value to the customers.

That's really the reality and the color of it.

Is there price pressures on an item?

Yes, there is, but we'll change the item.

We'll drop the item, we'll add an item, we'll change the mix.

We'll be out there with something that the customers need every day.

Great.

Thanks.

Could you also provide us with an update on the new format you highlighted during your Analyst Day featuring the [homes at fifth corner]?

How many have you -- how many remodels have you done so far, and how are those stores performing?

We have 60 so far, and I think that was our goal.

We shared that with you at the Analyst Day.

We are very happy with the performance of our fifth corner stores.

Those are our largest stores.

We have increased our home penetration in those stores, increased our assortment.

We've increased our party business in the stores, increased our assortment.

The big idea from that is not just the 60 stores as we explained at Analyst Day, but it's also the parts of the business that we find and the expansion of the assortment in those 60 stores.

We're taking the best of the best and we're driving it out into the rest of the 4,000 stores.

We're finding some real homeruns in these 60 stores, and I'm very happy with the performance so far.

Thank you.

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

Good morning Bob.

Hey Dan, how are you?

Good.

So back in 1999 --

God bless you.

Before we started this journey of building larger stores, Dollar Tree was generating sales per selling space of about $230 per foot.

I guess right at the midst of the impact of the transition, your sales dropped per foot about $155.

You've rebounded about $20 since then.

I was curious, how many of the 10,000 square-foot and larger prototypes are running at $230 per foot if any?

We have some running higher than that.

Our best stores are higher, much higher than that.

Are they operationally difficult to manage once they exceed that productivity?

You get to a point -- there's good and there's bad.

The higher volume stores, you leverage all those fixed costs.

You can run a higher volume store without adding a whole lot more payroll at a point.

You leverage your rent and your lights and all the things -- trash disposal and all those things.

On the other hand, it has required a higher level of expertise and management and store teams along with building these new stores over the years, Dan, we've also built our store teams and built our expertise.

We've also added technology to help us run and help our managers run the stores.

Our managers now know what they are selling.

They know what's coming on the next truck.

They know the percentage share of each category.

They know what it takes to run the store as far as manpower planning.

They're doing a better job.

That's why we are able to run some of these higher volume stores.

When we think about the art of the possible on your sales productivity five years down the road, there is not a physical capacity limit on the sales per square foot that you can manage.

We haven't found it yet.

Some of our highest volume stores, if I got them all to that level, you'd really like the answer.

We are doing it very well.

I haven't seen a limitation yet.

I will tell you that are Deal$ stores offers I think a better opportunity to even do more volume because of the average ticket.

Average ticket in our Deal$ stores right now has climbed much higher than the Dollar Tree stores.

As we enter into some of the more expensive markets in the Northeast, for example, these Deal$ stores have an opportunity to do even more volume, so that is one of the key reasons that we are into the Deal$ model.

And just one other question I wanted to ask on the real estate growth.

I know you haven't finalized your plan for next year, but do you think you will be including the 100 stores in Canada when you are thinking about that 6.6% square footage growth going forward, or will that 6.6% still be focusing on the US market and then growing Canada from 100 to a 1,000 stores and they will be on top of that?

The Canadian growth is on top of our US growth, so that's if we were to grow the same rate as we did next year in the US, then Canada would be on top of that.

Great.

Thanks a lot.

Thank you.

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

Thanks.

On the Dollar Giant acquisition, I know the stores are around 9000 square feet.

Can you talk to what the sales productivity is relative to what you guys are doing today and also what the four wall margins look like?

I'll just give you some color on it.

The sales productivity is as good or maybe a little even better in some of these stores.

A lot of these stores are in highly populated areas, Vancouver, for example.

These stores are well-run, they're clean, they're bright, they're about the same size as the Dollar Tree.

The price points are a $1.25, which is CAD1.25, so a little different there.

But I would just characterize it as productive as the Dollar Tree, maybe a little more so far.

Okay.

Great.

And then just to fall back on the sourcing questions you keep getting here, I realize that you guys can change your assortments and don't have plan-o-grams, but how do you guys feel about the product that you are buying for next fall ?

Historically, you've talk about the string of Christmas lights, for example.

Are you downsizing some of the products?

Are the quantities the same in your purchases for next

No, we are in more of adding value than taking away of value.

I've always said, you change the product, not the price.

When costs are a little less, we tend to put more value into the product.

You would see more of that in this fall trip that was just completed.

This is through fall and Halloween of next year.

You would see more of the reinvesting and more value in the product than not.

So we just haven't -- our buying power is larger.

We have great relationships.

We are buying more direct than we were.

We are doing a lot of things to leverage our size and our ability to source products.

That's how we are able to manage the cuts.

There have been times in the past where we have had to reduce the value -- the lights, for example.

At one point, we had to reduce the count on the light sets.

We were able to do that, but it's still a $1.

While other companies -- other retailers might have been raising their prices during that time, we were reducing the size and keeping our price.

That is how we have done it now for almost 25 years.

Same price for almost 25 years.

But not the same items and not the same values.

That's the piece that we are in control of that helps us manage our margins.

Very consistently, by the way, if you look back over the years.

And we'll take our next question from Daniel Binder with Jefferies & Company.

Good morning.

Couple questions for you.

Can you give us an idea of what happened in the Canadian stores when they took price up?

Was that -- as they broke their old price point, what impact that had on their sales at the time?

And then my other question relates to your comments earlier about container and vessel pressures.

I'm just curious how that shaped up for you in Q4?

And then, finally, if there is anything you can share with us, Bob, on the economics of the Deal$ stores and how that's been -- I know you said it's been getting better, but I'm just curious how close we are to it being at a point where you can roll it out more aggressively?

CAD1.25 -- you've got to understand different market, different country, different competition.

Their competition had actually raised their prices to not one price but they went from a CAD1 to several prices.

CAD1.50, and up to CAD2, I believe.

In the face of that, Dollar Giant raised their price from everything's a CAD1 to everything a CAD1.25 or less.

They stayed with a single price strategy at a CAD1.25 versus the multiple price strategy up to CAD2.

The result was just as you would imagine.

I don't think it would be any different.

Their sales in the short-term went down.

Their margins went up a little bit.

It has more to do with the whole market, I guess, that they were in.

And the response from the Canadian customers as they shopped the competition, as they shopped the Dollar Giant stores, their reaction .

Sales did go down and dipped for a period of time.

On the container pressures that we -- ocean freight this year is much higher than last year just in general.

And then during the summer, we did have -- there was a shortage of containers.

There was a shortage of vessels and we ended up having to pay even more than we had planned to pay in order to get the product but we were able to do it.

Our logistics team to a really nice job of managing that process, getting the product we needed when we needed it.

Obviously, you can see the sales results.

They were able to do the product in and on the shelf, and we did sell it.

The freight costs were higher.

That is in our margin for the quarter.

The biggest pressure on our margin for the quarter was freight cost.

Where do we go from here?

Well, the freight costs are still going to be higher for the rest of the year.

We -- ocean freight, we renegotiate our rates in May of each year.

The contracts that we put in place last May will be in force through the coming May.

So the ocean freight prices are still higher than they were a year ago.

The domestic freight is a combination of diesel fuel prices and also availability as the economy has suffered, a lot of the carriers had either gone out of business or downsized.

So there is fewer of them.

But there is also pressure on the domestic freight.

All that is embedded in our guidance for the fourth quarter and for the year.

We considered all of those things.

At the end of the day, we are able to manage through that as we have in the third

And the final question was related to the economics of the Deal$ store.

We don't break those out.

I tried to give you as much color as I can and as much -- share the enthusiasm that we have for the Deal$ stores.

The fact is that we are growing the Deal$ stores, but we don't break out the economics.

It's just another one of our stores in our incorporated.

I guess what I was getting at is it seems like each quarter your enthusiasm is growing.

I was just curious as it pertains to the store economics versus where you'd like to be before your roll.

Do you think we are a year away?

Do you think it's less than that?

Any color you can give us?

I really can't tell you.

They are improving, and I'm happy with the improvements.

We are continuing to grow the Deal$ concept.

We are also growing the Dollar Tree concept.

One of the reasons that we are so excited about our Deal$ concept is what we can do with some of these higher cost markets.

You will see more of them in the Northeast.

You'll see more of them into the urban markets.

You'll see more of that.

But I really can't break out and share anything past that.

We are excited about it.

The sales per square foot are up.

The efficiency of the stores are up.

Our customers are responding favorably.

We continue to find new categories and new customers and to gain brand recognition with our Deal$ stores.

So it's a long-term strategy.

(Operator Instructions) We will go next to Meredith Adler with Barclays Capital.

Thanks very much.

I would like to just go back to you talk about your plans for growth in Canada and said that you are going to build some infrastructure before you actually push hard on the growth.

But I was wondering, first, is there a pipeline of signed leases in Canada?

I don't know too much about the Canadian real estate market.

Is that market substantially tougher than the US so that if you felt you were ready to accelerate growth, there would be any obstacles to doing that?

Meredith, there is a pipeline of Deal$.

As a matter of fact, we went through a stack of them just this week.

There is growth.

We are going to grow next year.

I didn't mean to give that impression.

I do want you to understand that we are going to build infrastructure in Canada.

As we've done in the US, we believe in profitable growth.

We believe in supporting our long-term growth.

We are going to -- the growth -- the infrastructure that is there already was sufficient for the current growth of Dollar Giant, but with our plans to ramp up, we are going to need to expand some logistics capability.

We want to get our systems in.

We want to get our people trained on the new systems, and we want to get our store teams ready.

While we are doing that, we are still going to open up at least as many stores as they would have, if not a few more.

Look at next year as a building of infrastructure and good growth and going forward, the potential for 900 to 1,000 stores is there.

As far as the real estate market, it is just different.

One of the things I like about Canada is there is less retail per customer than there is the US, so there's less competition.

We like that.

We think we can really serve the Canadian customers very well.

On the other hand, the real estate market is just a little different.

We have to understand how to do that.

We have real estate people and brokers and expertise in Canada that have been working with Dollar Giant.

We are learning -- there is nothing so far that gives me pause that we cannot grow very nicely in the Canadian market and that we don't have potential for 900 to 1,000 stores.

Great, and then I have a question about shipping.

You made a comment at your Analyst Meeting about having good relationships with shippers and that helps you.

Today you have also said that you are, in fact, in contracts through May.

What I have heard is that a lot of shippers did not actually honor the contracts that they signed with people.

Were you luckier than some others and you were able to get those contracts honored?

I'm just wondering if there was anything in particular that you were able to do to give you perhaps a better relationship with the shippers than some others?

I don't think we were lucky at all.

We did have to pay above contract rates, and that is unpalatable, to say the least.

Our relationships with our shippers enabled our logistics team to manage through that.

They were able to go to alternatives.

They were able to use non-vessel operating carriers to place the goods when we had to place them.

They were able to use as much leverage as possible to get the product.

Again, the proof is in the fact that our third quarter results -- our top line and the margins are terrific.

They did a real nice job managing through it.

They did that because of relationships that they have built over the years, but no, it was a very difficult time for everyone with ocean freight and with the carriers taking capacity out of service and then using that as leverage to ask for more than the contract rates, frankly.

We had the same problems that everybody else did.

We were just able to manage through them and still sell our merchandise, still deliver that 9.9% operating margin.

So I am very happy.

Maybe it was one of our finest moments of managing through that logistically, so --

Well, congratulations.

Congratulations on great performance and great results.

Thank you very much.

It looks like we have time for one more question.

We'll take it from Scot Ciccarelli with RBC Capital Markets.

Hey, guys.

It's Scot Ciccarelli.

I guess one of my questions is you guys have made a lot of technology changes over the last couple years.

I guess what I'm wondering is, how big of an impact has that had on your store productivity?

Is there anyway to quantify it?

I don't know how to put it into terms.

If you look at our inventory turns, that's one metric that we have increased our inventory turns every year over the past five years.

We have increased our inventory turns again this third quarter, and there is still room to do that.

That is one metric that you could look at that is out there.

We have been able to grow, and we have been able to grow profitably.

If you look at our operating margins and our growth in that over the last several years, after we have gotten our infrastructure built, technology as well as our logistics infrastructure, we are getting great leverage on that.

And you can see the operating margin rising, you can see the comp sales rising.

All of those metrics are due to visibility, knowing what we are selling by store, knowing what we own by store, by SKU and our logistics network with the ability to deliver accordingly.

So it's been a huge -- we could not have done it without it, frankly.

You just can't grow to a national company with 4,000 stores and now an international company without access to that technology.

There is still plenty left to do.

There is still a lot of enhancements that we can now do now that we know the basics of our business and have visibility.

The way we're using it and enabling -- there's a lot of enabling technologies that will help us reduce costs and increase sales and increase inventory turns as we go forward.

All right.

That's a lot for that, Bob.

I guess my other question is you guys changed out a significant amount of inventory every year, I think 50% is the number you've thrown out to people.

Outside of the growth in consumables, has there been any other underlying change in the merchandising or consumer demand for various types of merchandise that you been able to identify as the recession hit full swing over the last few years?

The -- I guess we've ended up in the bull's eye.

We've got all the things that people need so our consumables business has grown.

As you know, we keep talking about it growing as a percentage of our business, and we keep driving and we keep pushing that business, whether it is food or snacks and beverage or HBC, cleaning supplies, all that stuff.

We keep driving that business.

Along with that, our party business, with the traffic we create and we get from the footsteps of new customers as well as existing customers shopping more frequently, our stores are fun to shop.

We have party, we have seasonal merchandise energy at the fronts of our stores.

We sell stationery in our teacher's corner and all those artificial flowers and home decor.

Our home business is something we are really excited about it as tested by our new home store in about 60 of our stores and what we're doing there.

Our customers, we are seeing more visits from existing customers.

We are still seeing anecdotally, new customers that are coming that maybe have never shopped at Dollar Tree before.

Maybe they were used to shopping a little higher.

Maybe they were shopping at more expensive stores.

But now they are looking for -- and they are coming in and liking what they are finding because we do have that discretionary mix of products, things you don't need but things that you like to have at great values.

All right.

That's helpful.

That's a lot, guys.

Thank you.

That concludes today's Q&A session.

I will turn it back to Tim Reid for any closing remarks.

All right, Tim.

Thank you very much.

Thank you all for your participation on the call today.

More importantly for your interest, and most importantly, for your investment in Dollar Tree.

Our next sales and earnings release and conference call is scheduled for Wednesday, February 23, 2011.

Thank you very much.

That concludes today's conference call.

We appreciate your participation.