美元樹 (DLTR) 2010 Q4 法說會逐字稿

Good day and welcome to the Dollar Tree Inc.

fourth quarter 2010 earnings conference call.

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

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

Tim Reid, Vice President of Investor Relations.

Please go ahead sir.

Thank you Yvonne.

Good morning and welcome to the Dollar Tree conference call for the fourth 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 the fourth quarter financial performance and provide our guidance for 2011.

Before we begin, I would like to remind everyone that various remarks 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'll 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 would like to turn the call over to Bob Sasser.

Thanks Tim and good morning everyone.

I too would like to welcome you to our year-end 2010 conference call and thank you for your interest in Dollar Tree.

I'm pleased to report that our momentum continues.

This morning we announced earnings for the fourth quarter of $1.29 per diluted share.

This is an increase of 27.7% over last year's reported $1.01 per share.

Gross margin expanded by 50 basis points to 37.6%.

Operating margin for the quarter was 15%, an increase of 100 basis points over the fourth quarter last year.

Operating income increased by $40 million or 18.4% over last year and net income rose 20.3% to $162.5 million.

Total sales for the quarter were $1.73 billion, an increase of 10.7% over the fourth quarter of fiscal 2009.

Comp store sales increased 3.9% on top of a 6.6% increase last year.

And our inventory turns increased in the fourth quarter, as they have consistently for the past six years.

For the year our inventory turns increase to 4.17 turns in 2010, up from 4.06 turns in 2009.

We're very proud of this six-year record and excited because we know that we can continue to improve.

For the full-year fiscal 2010 net sales were $5.88 billion, an increase of 12.4% over fiscal 2009.

And comp store sales increased 6.3% on top of a 7.2% comp store sales increase last year.

As we have previously disclosed, in the first quarter 2010 we recorded a nonrecurring, non-cash charge of $26.3 million or $0.13 per share relating to a change in retail inventory accounting.

Including this charge, earnings in fiscal 2010 increased to a record $3.10 per share.

Excluding the charge earnings per share were $3.23, an increase of 36.3% over last year's reported $2.37.

For the full year fiscal 2010 operating margin was 11.2%, an increase of 140 basis points compared with 2009.

Operating income increased by $143.5 million and net income rose 29.1% to $413.7 million.

I am very pleased with our record performance in sales and earnings for the fourth quarter and for the year.

Sales for both the fourth quarter and for the full year ended comfortably within our range of guidance, while earning exceeded the top end of guidance.

We have been asked about the impact of weather in the fourth quarter.

I will tell you that our sales were strongest in the Southwest and Southeast, an indication that our record performance could have been even better were it not for the impact of several major winter storms that negatively affected large sections of the country throughout December and January, especially in the upper Midwest and the Northeast.

I know that most of you lived through those blizzards and experienced their effect firsthand.

This was unfortunate timing, but it was a terrific quarter in spite of the weather.

And the success of Dollar Tree, as it has always been, is based on our focus on the customer.

We aim our efforts at increasing the value of the merchandise, improving the quality of our stores and providing the infrastructure that supports them.

Our stores, merchants and support teams are guided by a strategic vision that involves every element of the business with everything revolving around the customer.

That means high-value merchandise, seasonal excitement and merchandise energy.

It means operating great stores -- full, fun, friendly and convenient; a positive shopping experience.

It means reinventing and expanding product categories that are more frequently shopped, creating new product categories based on demand, driving sales through merchandise adjacencies, space allocation and suggestive selling and creating greater brand awareness.

We have a very flexible merchandising model which we use to our advantage.

We build our assortments with two requirements in mind to offer the greatest value to the customer for one dollar, 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.

We're not locked into any specific item.

We don't use planograms at Dollar Tree, and that gives us the flexibility to move quickly from item to item.

We decide what to sell.

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

We continue to be confident in our ability to offer customers the best value for one dollar while managing our margins.

This strategy has been validated by results.

History shows that Dollar Tree has consistently managed through inflationary and deflationary cycles by changing the product or changing the source.

Our margin in the fourth quarter reflects that strategy.

There were many notable accomplishments in 2010.

We have invested in a solid and scalable infrastructure which we continue to upgrade as we provide for continued profitable growth.

And in 2010 we opened a new DC in San Bernardino, California to provide more efficient service and to provide for expanded growth in Southern California and the Southwestern US.

This year we are expanding our distribution center in Savannah, Georgia to support growth in the Southeast.

The expansion will bring the Savannah facility from its current size of 600,000 square feet to 1 million square feet.

This project involves $19 million of capital investment using existing cash and should be completed in the third quarter.

With the completion of this expansion, our network of nine Company-owned DCs will have the capacity to support $8 billion in annual sales in the US with no meaningful additional investment.

Our logistics infrastructure provides efficient service to our stores today, room for expansion and continuing asset leverage.

Every new store that we open makes our network more efficient and we continue to build more stores.

For the full-year 2010 we opened 235 new stores and relocated and expanded 95 stores for a total of 330 projects.

Our plan for 2011 includes approximately 300 new stores and 75 relocations and expansions, for a total of 375 projects.

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

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

Average new store productivity increased once again in 2010, continuing a five-year trend.

Our mix of basic, consumable products -- things you need every day -- and high-value seasonal and discretionary product, all at a dollar, continues to thrill our customers.

Sales growth in the fourth quarter was driven by increases in both basic and discretionary assortments.

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

Our expansion of frozen and refrigerated product continues.

We installed freezers and coolers in 421 stores in 2010, including 124 new stores.

Frozen and refrigerated product is now available in 1844 stores.

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

The plan is to continue to expand this category.

In 2011 we intend to expand frozen and refrigerated capability to an additional 225 stores.

While we're growing our business through the development of new categories and more productive stores, we're also developing additional channels and entering new markets.

Deal$, our multi-price format, continues to gain traction, extending our ability to serve more customers and increasing our growth potential.

We currently operate 164 Deal$ stores.

In fourth quarter both traffic and average ticket increased.

We opened 15 new Deal$ stores in 2010 and we intend to open about 35 new Deal$ stores in 2011.

The Company is also expanding into new markets.

During the fourth quarter we acquired 86 Dollar Giant stores in Canada.

In 2011 we intend to expand the store count by about 20% while establishing an infrastructure of storage teams, systems and logistics to support more aggressive store growth in the following years.

Over the long-term we believe the Canadian market can support 900 to 1000 Dollar Tree stores.

This is in addition to the 7000 store potential for Dollar Tree in the United States, plus additional growth in our Deal$ format.

Dollar Tree Direct, our e-commerce business, is an opportunity to reach new customers through an additional channel of distribution.

We had over 3.5 million visitors to our site in the fourth quarter.

And that was up over 30% over the fourth quarter last year.

And we now offer more than 2000 items online; that is nearly double the number from this time last year.

We see great potential in Dollar Tree Direct and I'm pleased with the progress being made here.

Now I would like to turn the call over to Kevin, who will give you more detail on our financial metrics and provide guidance.

Thanks Bob.

As Bob mentioned, our diluted earnings per share increased 27.7% in the fourth quarter to $1.29.

The increase resulted from our strong sales, a 50 basis point improvement in gross profit margin, and a 50 basis point reduction in total SG&A expense compared to the fourth quarter last year.

Starting with gross profit, our gross profit margin grew to 37.6% during the fourth quarter compared with 37.1% in the fourth quarter last year.

Several factors contributed to this performance.

Merchandise costs, including freight, decreased 50 basis points.

This was driven by lower markdowns, increased IMU on many product categories driven by continued improvement in our sourcing, continued improvements in shrink and operating efficiency, as well as the benefits from the new retail stock ledger.

This new process was implemented at the beginning of fiscal 2010.

And for the second half overall, the impact to margin was essentially neutral.

These improvements offset pressure from increased freight costs and changes in our product mix, as basic consumable products continue to increase as a percentage of our mix in the fourth quarter compared with the same period last year.

SG&A expenses overall were 22.6% of sales for the quarter, which is a 50 basis point improvement from the fourth quarter last year.

This was driven primarily by a 40 basis point decline in payroll related expenses, reflecting lower incentive compensation and leverage on comp store sales, a 20 basis point reduction in depreciation and lower utility costs.

These reductions offset increases in advertising, debit credit card fees and legal expenses related to the acquisition of Dollar Giant.

The increase in debit and credit card fees reflected continuing growth in the usage of these types of tender.

In the fourth quarter, compared to the fourth quarter last year, debit card penetration increased 80 basis points and credit card penetration increased 130 basis points.

And SNAP penetration, although small, continues to grow.

We accept SNAP, or food stamps, in over 3500 stores or about 86% of the chain.

Operating income increased $40 million compared with the fourth quarter last year.

And operating margin was 15%, an increase of 100 basis points from the fourth quarter last year.

For the full year, excluding the charge in the first quarter, operating income increased $143.5 million and our operating margin grew to 11.2% -- up 140 basis points from last year's 9.8% operating margin.

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

The tax rate for the quarter was 37% versus 37.8% in the fourth quarter last year.

The lower rate primarily reflects additional state tax credits recorded in the fourth quarter of 2010.

For the full fiscal year the tax rate was 36.9%, consistent with the prior year.

Cash and investments at year-end totaled $486 million versus $599.4 million at the end of fiscal 2009.

Cash net of debt was $219 million at year-end 2010.

During the fourth quarter we invested $123.9 million to repurchase 2.3 million shares of Dollar Tree stock.

For the full year, we repurchased 9.3 million shares at a cost of $414.7 million.

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

As of year-end we have $345.9 million remaining in our authorization.

The diluted weighted shares outstanding at year-end were 125.8 million.

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 $32 million in the fourth quarter of 2010.

This compares with $51 million in the fourth quarter last year.

For the full year of 2010, capital expenditures were $178.7 million compared with $164.8 million in 2009.

The majority of capital expenditures in 2010 were for new stores, remodels and relocations, and the addition of frozen and refrigerated capability.

For fiscal year 2011, we are planning capital expenditures to be in the range of $215 million to $225 million.

Capital expenditures will be focused on new stores and remodels, the addition of frozen or refrigerated capability to 225 stores, IT system enhancements, and approximately $19 million for expansion of our distribution center in Savannah, Georgia.

Depreciation and amortization totaled $42.1 million for the fourth quarter versus $41.3 million for the fourth quarter last year.

For the full year depreciation was $159.7 million, a 30 basis point decrease from last year.

For 2011 depreciation and amortization is estimated to be in a range of $165 million to $170 million.

We anticipate depreciation expense as a percent of sales will continue to decline in 2011.

Our inventory turns increased in 2010 for the sixth consecutive year to 4.17.

Inventory at year-end was $803 million, an 18% increase over the same time last year.

This includes a $30 million increase in prepaid merchandise, comprised primarily of goods in transit for the Easter season, as well as $21 million of inventory for the acquired Dollar Giant stores.

In addition, the higher inventory levels include merchandise to support Valentine's Day sales, our upcoming Dollar Days promotion, St.

Patrick's Day, and inventory in our distribution network ready to flow to stores for Easter.

We expect continued improvement in our inventory turns in 2011.

Our guidance for 2011 includes the following assumptions.

First, we expect the ocean freight rates and diesel prices will be higher throughout fiscal 2011 than they were last year.

Second, Easter is three weeks later this year.

This represents about a $15 million sales opportunity in the first quarter.

Our guidance also assumes a tax rate of 37.7% for the first quarter and for the full year.

Weighted average diluted share counts are assumed to be 124.7 million shares for the first quarter and 125.1 million shares for the full year.

While we still see share repurchases as good use of cash, our guidance assumes no additional share repurchase.

With this in mind, for the first quarter of 2011 we're forecasting sales in the range of $1.48 billion to $1.52 billion.

This implies a low to mid-single digit comparable store sales increase and 8.2% square footage growth.

The Company's earnings per diluted share for the first quarter of 2011 are expected to be $0.71 to $0.77, an increase of 16% to 26% for the first quarter of 2010 earnings of $0.61 per share excluding the charge associated with the retail stock ledger.

For the full fiscal year 2011, we're forecasting sales in the range of $6.43 billion to $6.6 billion based on a range of low to mid-single digit increases in comparable store sales and 6.9% square footage growth.

Diluted earnings per share -- expected to be in a range of $3.55 to $3.76, representing an increase of between 10% and 16% of our record EPS of $3.23 in fiscal 2010, excluding the non-cash charge in the first quarter last year.

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

Thanks Kevin.

I have just a few summary remarks and then we will turn it over to you for some questions.

I will say again that 2010 was another great year for Dollar Tree.

Sales grew by 12.4%; comp store sales increased 6.3%.

Operating margin expanded by 140 basis points to 11.2% and that's the highest in 10 years.

And earnings per share increased 36% on top of a 41% increase in 2009.

In addition, in 2010 Dollar Tree opened 235 new stores, expanded or relocated 95 stores and we surpassed 4000 stores in operation.

We opened a new distribution center in San Bernardino on time and on budget.

We've increased our growth potential with our expansion into Canada.

Our Deal$ model is gaining traction and growing, and our e-commerce business provides access even more customers.

In 2010 we executed a 3-for-2 stock split and repurchased 9.3 million shares for nearly $415 million.

By any measure, it was an outstanding year and we can do even better.

As I look to the future I see a great opportunity.

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

The Company has a strong, flexible and proven business model that can adapt to a changing environment.

Dollar Tree is positioned to be relevant to customers of all economic circumstances because we offer a compelling mix of frequently purchased high value consumer basics -- things you need every day -- and our unique assortment of fun, compelling, seasonally correct, discretionary product.

And it is all just one dollar.

Our stores are strategically located to serve Middle America.

They are bright, convenient and fun to shop.

Dollar Tree has a solid and scalable infrastructure that we're leveraging for better inventory management, increasingly efficient supply-chain logistics, more productive stores and crisper overall execution.

The Company generates substantial free cash and we use our capital for the long-term benefit of our shareholders.

Dollar Tree has invested more than $1.6 billion for share repurchases since 2004.

Dollar Tree had another terrific year in 2010 and we're off to a great start in 2011.

The Valentine season was outstanding with record sales and sell-through.

Our stores transition quickly and we're ready for an exciting spring season.

Looking forward to the rest of the year, we continue working to keep our values high and we have exciting plans for 2011.

Our buyers recently concluded their fall and Christmas buying trips.

The trips were very successful with higher initial markup, better values an exciting merchandise selection.

We will now address your questions.

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

(Operator Instructions) Joseph Parkhill, Morgan Stanley.

Wondering if you could talk a little bit more about your inventory levels and why they grew 18%; I know you mentioned some incremental holiday.

But are you expecting inventory growth to continue to exceed sales growth on a go forward basis?

Obviously we did point out the fact that we were bringing goods in for the spring season here.

And obviously the other big factor is we acquired Dollar Giant, which we pointed out as well, which makes the comparison not quite apples to apples.

No, we would not necessarily expect inventory growth to go higher than sales.

I would tell you if you look back at the last two years we've done a very, very good job of controlling our inventory.

It has been down on a selling square footage basis for the last two years.

So, [we see this as] nothing other than just a temporary situation as we move through the spring season.

As we said, part of it was to support things like Valentine's Day as well, which those are important seasonal aspects for us.

Hey Joe, this is Bob.

We had the inventory because we needed it to produce the sales, is the short answer.

It's up 18%.

But we have a lot of new stores.

We have an additional 86 stores from Canada that we added in fourth quarter.

So, we need inventory for them.

Easter is the latest that it has been in a long time.

I don't know if it is the latest ever, but April -- it's mid-April this year.

Whenever we have a later Easter, we always look for increased sales for Easter.

I think we shifted about $15 million more in sales just because it is a later Easter this year.

So the quick answer is that our inventory turns, we have a history of improving our turns every year and I'm personally very proud of that.

And we intend to improve our turns for this year.

We have the inventory, but we have it because we need it to support the sales that we're coming into in the first quarter.

And just for further clarification, are the inventory levels spread evenly through discretionary and consumables?

Or are they more focused on certain subcategories?

It is appropriate.

It is spread appropriate.

We've got both because with Easter as late as it is this year, we have a Dollar Days promotion coming up.

Who better to do Dollar Days promotion than Dollar Tree, by the way?

But we added in a new promotion this year between Valentine's and Easter, and we named it Dollar Days.

And we bought extra goods for that and the goods are already selling as they are hitting the stores.

If you were to look at our store inventories per foot right now, it is about flat to last year I think.

So what you've got is a lot of merchandise in transit; some of it is still on the water.

Because of the later Easter you have some things still coming in, and you have things in the DC that are about to be allocated to the stores to support these promotions.

So it is spread appropriately.

We are planning our discretionary business up this year as well as our nondiscretionary basic business.

Okay thanks.

And just talk a little bit about some of your IT initiatives that you're going to do in 2011.

Yes, obviously we highlighted that in talking about capital expenditures.

And (multiple speakers) -- probably the biggest change has been the fact that we have allocated about $10 million to start replacing older POS equipment.

So it's equipment that is seven, eight, nine years old.

So we basically will have a plan to do that over a three-year period of time and so this is kind of -- wave 1 of that.

So that is probably the big increase there.

Otherwise, beyond that, it is fairly normal IT infrastructure; typical yearly type stuff that we would have.

So that is the change there.

Alan Rifkin, BofA Merrill Lynch.

This is Curtis Nagle filling in for Alan.

Just a couple of questions.

I was just curious why you guys are slowing down, I guess, the rate of adding freezers to your existing stores just given the benefit you guys are seeing in both comp and even margin.

Then just another follow-up question after that.

Curtis you may remember that last year when we started the year, I think we gave guidance of about the same number of stores with frozen or refrigerated in it.

So we're starting out with basically the same kind of plan.

We ended up doing more last year.

I don't know if we'll end up doing more this year or not, but we're always looking for ways to provide this product to more stores.

It's very much a function of our new stores and where we locate them and our ability to provide the product in those new stores.

So there's -- some of the equation is still sort of up in the air about where we may end up with frozen or refrigerated.

We know we're going to do this amount.

We're not holding back, though.

We like it.

We like the category.

It does require the proper location without restrictions.

And also we have to be able to supply it efficiently.

It's not something we supply out of our nine DCs, so we have to factor all of those things in.

And then you add that to the fact that we're still working on this year's, as always, new store locations and where they are going to be and the sizes and the demographics.

And there are some questions still to be answered on that.

Great, that's very helpful.

And then just one last question.

I guess weather impact aside during the quarter, did you guys see any change in your customer shopping patterns or even customer mix, given I guess sequentially improving economic outlook for the year?

We really didn't.

Our demographic mix of customers, the income demographics really was not that much changed in the fourth quarter from what it had been running.

Other than the impact of weather, sales were consistent throughout the quarter.

So I think the big change was we were having those snowstorms blow through the upper Midwest or the Northeast.

That would be the only unusual impact, I would say.

Adrianne Shapira, Goldman Sachs.

Thank you.

Just staying on the comp conversation, maybe if you could give us some color on the traffic versus tickets?

Well, it was driven by traffic, our comp, and it was consistent throughout the quarter.

I really -- frankly, it was a terrific quarter with a 3.9% comp.

Some of the questions are around, well, it's less than the sixes that you were running.

But then again, I will tell you I think it would be a mistake to think that was -- had anything to do with the strength of the core business.

Because where we didn't have weather in the fourth quarter in the Southwest and in the Southeast, and even all across through Texas into the Southeast, our comps were consistent to where we have been running.

On the times when we did not have the blizzards, the comps were higher.

So the strength of our business was there.

And then we came out of fourth quarter and moved into Valentine's Day.

And I'd share this with you; I don't report by week.

We're only three weeks into the quarter.

But I am sharing with [you] because it was -- last year was our best Valentine's week ever.

And this week -- this year's Valentine's was better than last year, so we had a terrific Valentine's sales.

February started off very strong.

The comps in Q4 at Dollar Tree, again, it would be a mistake to read them as a weakness in the core business.

It was purely a factor of the weather.

I appreciate it.

Just in the past, you have helped us quantify specifically traffic versus ticket, and I know ticket has been improving the last few quarters.

I'm just wondering if that showed a little bit of a reversal this quarter.

It did not.

It was virtually all traffic in the fourth quarter.

But again, I think -- our highest average tickets are in the Northeast, for example.

Some of our highest volume stores are in the Northeast.

And that area was, if you remember, the week before Christmas and two weeks before Christmas really the most impacted by the weather.

So I see that as being the kind of leveling effect on our average ticket.

But our comps were driven by traffic in the fourth quarter.

That's the first time in a while it has just been traffic, by the way.

Meredith Adler, Barclays Capital.

Thanks very much.

I was wondering, you did talk about having gone -- and I'm assuming you have bought all your imported product, your seasonal product, through Christmas of 2011.

I was wondering if you could talk a little bit about domestic product.

I think people have concern about inflation.

And I think we understand what you do for those seasonal goods, but could you talk a little bit about how you handle the basics, if you are seeing rising costs?

Yes, and that's a good question Meredith.

But it's really the same answer.

We don't have planograms even in our basics.

So we provide the best product possible in a category of basics, like dental.

Everyday toothpaste and mouthwash and all of the things we sell for one dollar every day, we give our customers the most value and the brands that we can offer for a dollar and still hit our margin.

And if prices move out of our range, then we move on to the next product.

And with our size we're able to manage that.

The real driving factor at Dollar Tree over the past few years since we started moving to the bigger stores, and providing more of the basic everyday consumer products that are faster turning but a little lower margin -- by the way, we still make money on this stuff, but they're a little lower margin.

The real impact on our gross margin has been on the mix.

As we added the product in, of course it has gained share of the total mix which has dampened our overall margins.

But how we're going to measure it -- how we are going to manage through inflationary times we're going to do it the same way we've always done.

Whether it is import or whether it's domestic, we're going to offer the best value to our customers for a buck.

And we're going to change the product if we need to and we're going to move to other items if need be.

If you look back at the last time we saw some of these things, 2008 -- remember when sort of the world stopped turning in 2008 for many people; well, our margins actually increased in 2008.

If we go back and look at our gross margin during that period we had terrific comp store sales gains.

We had increased margin.

And by the way, we're the top performing Company in the Fortune 500 that year.

So I would take that one again in 2011 if we can work that out.

But it's the same strategy whether it is domestic or import.

And then I just have a second question about the investments in technology, the new point of sale system.

Does that give you increased functionality?

And it sort of relates to a question I get often about -- you do have a very high operating margin.

Is there -- can you explain to us why that isn't going to go back down again or what would allow you to keep moving it up?

Well, the only thing that's going to -- we're not planning it to go down again.

Our operating margin was at 11.2% this past year.

It is the highest it has been since the year 2000, I think; maybe somewhere in that range.

It has been increasing year over year especially in the last three years.

We're planning it to continue to rise and we have included that in our guidance as we have given for the year.

How do we do it?

We do it by improving our SG&A.

We do it through margin improvements.

It's first thing where you can see opportunities is through smoothing of our inventory receipts as we bring them into our distribution centers.

We're a little spiky still, so using the sales data to bring them in -- bring inventory in, in a more timely manner.

Smoothing those receipts really helps the operational effectiveness of our distribution centers.

It also helps put the right product in the stores, faster when it gets to the stores, the stock rooms are empty, goes to the sales floor faster, makes our stores more efficient which reduces payroll, which makes our payroll more efficient.

But it also makes our customers happy because we're better in stock with the things that they want when they need them.

So we're using technology to help us do those kinds of things.

In addition, we're using technology to look at the cost of the things that we buy.

Not -- the things that we buy, expenses in our business.

We're doing a lot of putting things out for bid, using technology to help us to find -- get visibility of what were spending our dollars on and then get the best bid price on those commodity items that we use in our business.

And then of course it is all about processes in our stores, labor scheduling.

If we know when our sales are, we can better schedule our labor in our stores.

And if you look back at our labor productivity over the past five to ten years it is continually getting better, and I would expect that to continue as we go into 2011.

John Zolidis, Buckingham Research.

Question on the new stores; by my calculation, new stores did the best they have done in a really long time in 2010.

But I did see a slight deceleration in the productivity of new stores as the year progressed.

I also saw that you opened up slightly larger stores in 2010.

As we look into 2011, what are you targeting for your average size for new stores?

And how do you feel about the recent locations that you have been opening up?

In 2011 we're still targeting around the 10,000 square foot range; a little larger for our Deal$ stores, or about 11,000 square feet.

We feel really good about the locations that we have opened.

I think the dampening in your calculation probably is the effect of the Canadian acquisition.

Obviously when we acquired them in the fourth quarter, their productivity is not as high as our Dollar Tree stores.

So what you're seeing I think is the dampening I think of the -- 86 stores went into our new store base all at once there in the fourth quarter and at a lower productive rate.

So you saw a little bit of that.

If you took the Canadian stores out, you would see that it was very consistent and better than previous years in fourth quarter.

Thanks for that color.

On the Canadian stores how long is it going to take to kind of convert those over?

Or what is -- can you give us a little more color on the plan to integrate those stores into the Dollar Tree?

That's a good question.

We're working real hard right now, making some good progress.

Our plan this year is to open up about 20% more new stores in Canada.

But the bigger vision is that in addition to grow by 20% this year, is to integrate and get in the infrastructure that we need to profitably ramp up the growth in later years -- next year and the year after.

For example, we've got to [interim] process of getting our logistics in place.

We are in the process of getting our point of sale terminals in place and our MMS in place, and all of the technology that we're going to need to have visibility of what we're selling there, and our inventory levels and our flow of products and all of the things we do at Dollar Tree.

We're also building our store teams and training.

I'm thinking that some time mid-year in the third quarter we will have gone through a big portion of the store team building and training on the new systems.

Sometime in the third quarter we're going to have, I believe, our MMS and our POS terminals and all the power that that brings to us for Canada.

We're starting to receive more and more new merchandise into Canada as the year goes by.

Some merchandise now will flow up there.

As we get later into the year more and more product has been bought through Dollar Tree for the Canadian stores.

So this year is a year of transition.

It is a year of building infrastructure.

It is a year of training and really positioning Canada for the growth we know that is there.

All the while we're still going to grow about 20% this year.

Charles Grom, JPMorgan.

Thanks.

Good morning.

Just a question on the guidance for the full year; if I look at the midpoint of $3.65 it looks like your guidance implies about 15 basis points of leverage, which if I used the midpoint of your depreciation guidance it looks like you're just anticipating operating margin expansion from depreciation.

Which, given low to mid-single digit comps, seems a bit conservative or a bit guarded.

I'm just trying to get a little bit of a sense for your outlook for gross profit margins this year and also what your fixed cost rental rate looks like for this year as well.

As we look at it, I think we do look to -- look at the SG&A side as having more potential, probably, than the gross profit margin side at the end of the day.

Obviously within gross profit margin we all know what is going on with fuel and things like that.

Obviously we have opportunities to continue to improve our product margin and markdowns and shrink and all those types of things.

But there is enough headwinds there just from the fuel that if -- I don't know that we're looking for huge gains on a gross profit margin side.

SG&A is where we potentially have the opportunity, and so that is where we look at it as we sit here today.

And some of the things that Bob talked about a few minutes ago about how we can change processes and how we flow goods and different things potentially create opportunity for us.

But I think just -- your numbers, the way you created them or [factored into it] probably makes sense.

I don't know that it would all be based upon depreciation at that point, but I think it would be -- that midpoint is just minimal gross operating margin improvement.

The one thing I would say as well is the fact that Canada won't have the same operating margins as we do in the US, so there will be a little bit of a drag from Canada on the overall operating margin.

Okay.

Just to follow-up, so in gross profit margins, how much was the IMU lift in the fourth quarter?

And are you basically saying you think gross profit margins will be flat for 2011?

Or do you think it could be down a little bit?

Yes, I think we would like to believe it could be no worse than flat.

And hopefully there is upside at the end of the day, but that is still to be proven.

I think that is how we look at it going into the year with what we know today.

Dan Wewer, Raymond James.

When you look at the high-end of the EPS guidance for the first quarter, and it's an outlier compared to the guidance for the year, does that solely reflect the benefits of a late Easter and the $15 million of extra revenues?

Or does it also reflect -- it sounds like you got off to a great start in Valentine's promotion.

We did.

We started off the quarter -- it's only three weeks into the year, but we really were pleased.

Even with the bad weather that sort of drifted through early in February, we were very pleased with how we started off the year.

Our Valentine's sales were terrific.

We had a terrific weekend for Valentine's.

As we look forward we had added -- our merchants in their wisdom had looked at how late Easter was, and it was just too early to start setting Easter in a big way right after Valentine's.

So they added another promotion in there called Dollar Days, and that is starting now and we're seeing some great results from our Dollar Days promotion.

Every time we have a late Easter it does a couple of things.

First of all, our Easter product sells better because it is later in the year and not hampered by the possibility of bad weather.

But also the Easter traffic goes on longer and it lifts all of the other business.

The basic businesses rise too because of that Easter traffic as it goes longer and later in the year.

So the calendar is really positive.

We're well-positioned and it's a little of everything, really.

I feel better opening up this year with our basics than I felt last year, for example.

So (multiple speakers)

Is there any risk that the benefits of the late Easter, which benefits your first quarter, does it dilute any of the promotions you have scheduled early in the second quarter?

No, I don't think so.

I think second quarter is -- it doesn't have the big holidays in it that you have in first quarter or fourth quarter.

So, second and third quarters typically are driven by basic business.

And then you've got some of the smaller holidays -- Mother's Day, Father's Day is not even hardly worth a mention, frankly.

But Fourth of July then and into back to school, but really no major holidays.

So, it is really driven by basics in the second and third quarter.

There's nothing going away from that.

One other question, you noted at the beginning of your presentation that you control the [depth in] your gross margin rate by adjusting mix, adjusting the items in your stores.

Can you remind us the rate you are changing over your SKU count and your discretionary items year over year?

As I recall, a few years ago you talked about turning does items maybe 50% every two years?

I don't remember if that is correct or not.

But has that changed any?

That's about the same.

We change about 50% of our mix every year.

We change it as a strategy.

We want our stores to be new and fresh especially with that seasonal product.

We want to see that change like the leaves on the trees, is sort of the way I have always described it.

We like to -- if an item was good last year and it might be okay this year, we think the third year we ought to be finding something new.

Or else it will be as good as it was the first two.

So we, as a strategy, are always trying to change about 50% of our product.

If you look at the discretionary versus basic mix, it has grown.

We're up in -- let's see; fourth quarter is about 45% in the basics and 55% discretionary.

That has grown over the years, and as we go into 2011 that may even approach closer to 50%.

As we get into the year the seasons, of course, first and fourth quarter drive more discretionary product.

Okay, great.

Thank you.

David Mann, Johnson Rice.

Thank you.

Good morning.

In terms of the Deal$ business, it looks like you are accelerating your store growth there.

I know you have been asked a lot about at what point do you feel that you've got it to a point you can accelerate, that it's -- that the margins and returns are more comparable to Dollar Tree.

So can you just give an update on how you feel about the business and what some of those relative metrics look like?

We're real excited about our Deal$ business.

And they actually led our Company on many levels, on many lines throughout the year.

They're still not as profitable as the Dollar Tree; nothing in the market is as profitable as the Dollar Tree.

(laughter) But the Deal$ are gaining traction and we see a real opportunity as we get into some of the higher density markets, geographic markets.

Deal$ here in the fourth quarter, some of the top categories were household cleaning supplies and food, but also toys and electronics and healthcare products.

We continue to see excitement in our home business and our domestics categories at Deal$.

We're expanding into some categories at Deal$ including small appliances and automotive products like antifreeze and motor oil that you just don't find in a Dollar Tree store.

So there's new categories in there.

We have just started accepting coupons in our Deal$ stores and that has been accepted widely by our customers.

Just to give you some of the metrics, we have 164 stores at the end of the year.

Our average ticket at Deal$ was $10.28 at all Deal$ stores.

That is up from -- Dollar Tree average ticket is less than $8.

Our average ticket when we sell an item that is more than $1.00 is $15.59 -- was $15.59.

So that is, I think, a key metric.

The number of transactions where we had a basket with an item more than $1.00 up to 52.3% last year, so customers are accepting the multi-price strategy at our Deal$ stores.

Our average unit retail is about $3.28.

If it is not a dollar, it is about $3.28 to give you some color on that.

But we're very excited about our Deal$ model.

We plan to open more stores this year.

We're finding more of the real estate that is desirable for our Deal$ locations and we're excited about our growth potential over the long haul.

And the new stores that you're opening, are they still all in existing markets or are you expanding markets there as well?

We're opening this year within existing markets.

Now, when I say existing markets, most of it was in new markets as compared to what -- where the stores were that we bought.

A lot of stores were in the Northeast that we opened this past year.

Brent Rystrom, Feltl and Company.

Just two quick questions and then if you could just repeat; at the beginning of the call, you made comments about the best performing categories.

Two quick questions, how many have stores have lease restrictions on having frozen and refrigerated?

And then is there a geographic focus for store openings in 2011?

Thanks.

I don't know how many have lease restrictions, but a lot.

And as we open up new stores, that is one of the things that we are looking at as we're building our store list for the coming years.

I really don't know that I can tell you how many have lease restrictions though.

And when you say lease restrictions, as you know, there are many different kinds of lease restrictions.

It's not always just frozen food.

Sometimes it's other kinds of food.

Sometimes is not food it all.

It's crazy world out there; sometimes it is (inaudible) goods and other categories too.

So there are a lot of -- we have something we have to work through.

We're capable of doing that, but it is something that is a somewhat limiting factor as we go forward.

Growth as we go into 2011, we like the Southeast.

We're still growing in the Southeast.

One of the reasons we are expanding our Savannah distribution center is because the performance is terrific in our Southeast stores and we see more opportunity as we go forward.

We still see great opportunity in the Southwest and in Southern California.

Neil Currie, UBS.

Thanks for taking the question.

I just wanted to ask a couple of questions.

Most of them have already been asked.

But first of all on Canada, it's still quite early but I'm sure you have got your feet under the table a little bit.

And I'm wondering if you're seeing anything -- any further opportunities in Canada that you didn't see during the due diligence process.

There's always things you find once you get in, and nothing that is discouraging in the long run.

It's a lot of hard work.

Canada is not the United States and we're not approaching it that way.

We have Canadian operators up there.

The people that we bought the Dollar Giant stores from are still employed up there, still running the business with the help of our Dollar Tree people.

The big opportunity that we have, we think, is that our buying power does bring a lot of opportunity on value.

Opportunity -- more value for our Dollar Giant stores as well as higher margins for our Dollar Giant stores.

We have the balance sheet that will enable us to grow as the real estate of avails itself as we find it.

We have the balance sheet to be able to take advantage of that.

We are not limited by access to the capital.

We have all of the systems ready to be employed in Canada that we're using in the US.

So, we're very excited about Canada.

2011 is going to be a year of integration.

It's going to be a year of building the infrastructure.

We're going to grow about 20%.

But more importantly we're going to get ready to expand our growth into the out years.

The opportunity is still 900 to 1000 stores.

We take a look at the Canadian market just like we do the US market in looking at population density and resale concentrations, and how many stores we think an area can support.

We are very much still excited about our Canadian opportunities.

Thanks and I'm just wondering if I could just -- very specific about comp sales and just ask if we were to exclude the bad weather storm periods, what you're basically saying is that you would have been in the 6% plus area again this quarter.

5.5% to 6% is what we model.

We look at it in two different ways.

We look at the stores in the South versus the Northern.

And then we looked at the days as the weather was passing through, and it would have been in that 5.5% to 6% comp.

Scott Ciccarelli, RBC Capital Markets.

This is [Austin Paul] sitting in for Scott.

Just a quick question on share buybacks.

Could you just remind us how you are thinking about the prioritization of capital allocation as it pertains to share repurchases, given that you have the various initiatives with deals and Dollar Giant as well as your core Dollar Tree stores?

Thanks.

Yes, well, when we look at capital allocation we look at the capital expenditures for next year.

Obviously that takes into consideration expansion and infrastructure additions that we need to do to support Canada as well as Deal$, as well as Dollar Tree as well.

So those numbers are out there and set aside and you kind of know what those are.

So obviously, then, from the rest of the free cash flow that we generate, we can go down our list.

And we have talked about these in the past.

You've got buying back shares.

You have the potential to -- we have a $250 million term loan.

We could pay that back.

We have the ability to -- the Board talks about dividend.

Doesn't believe it's an appropriate use at this point in time.

We have used cash for acquisitions in the past.

Obviously we made a small one this past year.

So, those are all the things that we typically look at.

And to this point, we have determined that the best way to return value to our shareholders is through the repurchasing of shares and that is kind of where we have been at.

Obviously the Board has been supportive of that.

We have $346 million outstanding on our current authorization.

So we have plenty of room.

And I think that -- so it typically rises to the top as a use of cash at this point in time, is kind of how we have looked at it.

And that concludes the question and answer session today.

At this time Mr.

Reid, I will turn the conference back over to you for any additional or closing remarks.

Thank you Yvonne, and thank you all for participating in the call today.

Thank you for your continued interest in Dollar Tree.

Our next sales and earnings release and conference call are scheduled for Thursday, May 20, 2011.

Thank you.

That concludes today's conference.

Thank you for your participation.