美元樹 (DLTR) 2011 Q1 法說會逐字稿

Good day.

Welcome to the Dollar Tree, Inc.

first-quarter 2011 earnings release conference.

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

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

Tim Reid, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Alicia.

Good morning and welcome to the Dollar Tree conference call for the first quarter fiscal 2011.

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

Kevin Wampler, our Chief Financial Officer, will provide a more detailed review of our first-quarter financial performance and provide our guidance for the remainder of 2011.

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

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

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

In addition, as we have previously disclosed, in the first quarter last year, we recorded a nonrecurring non-cash charge of $26.3 million or $0.13 per diluted share relating to a change in retail inventory accounting.

Diluted earnings per share for the first quarter last year were $0.49 including this charge.

You are advised that all earnings or margin comparisons in today's remarks from this point forward will exclude the charge unless otherwise noted.

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

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

Bob?

Thanks, Tim, and good morning, everyone.

Welcome to the earnings call and thanks for your interest in Dollar Tree.

This morning, we announced our sales and earnings for the first quarter 2011.

Comparable store sales increased 7.1% and I would add that that's on top of a 6.5% comp in the first quarter last year.

And our total sales increased 14.3% to $1.55 billion.

First-quarter 2011 earnings per share were $0.82.

This is an increase of 34.4% compared with first-quarter 2010 earnings per share of $0.61, excluding the charge to last year's earnings.

Operating income increased by $32.8 million, and operating margin was 10.5%, an increase of 100 basis points compared with the 9.5% operating margin in the first quarter last year.

And just to note here, even with the huge increase in diesel fuel costs, this is our best first-quarter operating margin ever since we've been a public company.

With that, net income increased 26.3% to $101 million.

This was another strong quarter for Dollar Tree.

It speaks to the power and flexibility of our model, our strategy and a day by day execution of thousands of associates across the organization.

Our stores, our merchants and support teams are guided by a strategic vision that involves every element of the business.

At Dollar Tree, everything revolves around the customer.

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

It means operating great stores, stores that are full, fun, friendly, and convenient.

Our customers continued to respond positively.

They like our merchandise value and our fun and friendly shopping experience.

We are gaining new customers all the time.

Our traffic was up 5% in the first quarter.

And when they are in the store, they like what they find.

They are buying more.

Our average transaction increased by 2% in the first quarter.

First-quarter sales were driven by increases in both basic and discretionary merchandise.

The best-performing categories were food, housewares and home, health care, and party supplies.

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

As you might recall, last year, we had a very strong sellthrough on both Valentine's Day and Easter seasonal merchandise.

And this year was even better.

As expected, the later Easter provided about a $15 million lift to our sales.

Additionally, we created a new event called Dollar Days that generated merchandise energy and additional sales between Valentine's Day and Easter.

All of this was the result of coordinated efforts across the company.

Our merchants delivered an exciting assortment of products with the best values ever, and our allocations being directed it to the right stores.

Our store teams continued to consistently deliver on the promise of a clean, bright, and fun place to shop.

Seasonal transitions were well executed.

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

I have every reason to believe that we can continue to grow and improve on our performance.

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

As we build our assortments, our requirements are two -- first, to offer the greatest value to the customer for $1, and two, to do so at a cost that delivers our desired merchandise margin.

We're not locked into any specific item at Dollar Tree, and that gives us the flexibility to move quickly from item to item.

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

I'm always asked about the outlook for prices going forward.

I recently returned from the 2012 spring and Easter buying trip with the merchants.

The trip was very successful with higher initial markup, tremendous values, and an exciting merchandise selection for next spring.

We have built a solid and scalable infrastructure at Dollar Tree which we continue to upgrade and to support our growth.

The expansion of our distribution center in Savannah, Georgia is proceeding on schedule.

The expansion will bring the Savannah facility from its current size of 600,000 square feet to 1 million square feet, and will support continued growth of our business in the Southeast.

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

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

As we look to build on our success, our goal is to find ways to provide more value to more customers.

We intend to do that through opening new stores, operating better stores, developing new formats, entering new markets and new channels.

During the first quarter this year, we opened 83 new stores, relocated and expanded another 41 stores and grew total square footage 9% relative to this time last year.

We ended the quarter with 4,177 stores.

We're on track with our plan for the full year 2011, which includes 300 new stores and 75 relocations, expansions for a total of 375 projects.

Along with opening new stores, we're focused on offering more productive stores.

Our efforts have been concentrated on improved site selection, on right-sizing our stores and opening new stores earlier in the year.

Average new store productivity has increased in each of the past five years.

And while it is still early, I'm pleased with the productivity of this year's new store class.

New store sales are ahead of plan.

Our expansion of frozen and refrigerated product continues.

We installed freezers and coolers in 122 stores in the first quarter and now offer frozen and refrigerated product in 1,962 stores.

We are now planning a total of 325 installations for the full year.

And you will note that we have increased our original plan by 100 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 product.

In addition to expanding the availability of frozen and refrigerated product to more stores, we continue to refine our frozen, refrigerated assortments to provide more value and more excitement.

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

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

In first quarter, traffic, ticket and average unit retail continued to increase.

We currently operate 174 Deal$ stores.

We opened 10 new Deal$ stores in the first quarter and we're on schedule to open 35 new Deal$ stores for the full year 2011.

Our expansion into Canada is proceeding on schedule.

During the fourth quarter 2010, we acquired 86 Dollar Giant stores in Canada.

This year we expect intend to expand the store count by about 20%, while establishing an infrastructure of store teams, systems and logistics to support more aggressive growth.

In first quarter, we opened two new stores and relocated one store.

We established an agreement with our third-party logistics partner and are now supplying product to our stores through distribution centers in Delta, British Columbia and Mississauga, Ontario.

The merchandise team has been integrated to leverage Dollar Tree's buying power, particularly on imports.

Customers will see broader, more exciting assortments and better values beginning in the second half of the year.

The implementation of in-store and merchandising systems is proceeding on schedule and will be operational during the third quarter, in time for our holiday season.

Store teams are already receiving training on these systems, learning the systems and the Dollar Tree processes.

Over the long term, we believe the Canadian market can support up to 1,000 Dollar Tree stores.

This is in addition to the 7,000 store potential for Dollar Tree in the United States, plus additional growth in our Deal$ format.

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

Customers are expressing their approval of Dollar Tree Direct in many ways.

The site has consistently earned ratings of 4.5 stars out of a possible 5 stars and consumer ratings and reviews, putting us in the top tier of retailers for overall customer satisfaction for products offered both in-store and online.

Dollar Tree Direct continues to gain new customers.

Traffic on the website increased 34% compared with the first quarter last year.

We now offer more than 2,000 items on line, including many great seasonal items.

For example, our Spring Fling category is providing an opportunity to showcase events such as luau, spring toys, spring flowers, and gardening supplies.

We have a huge potential to serve more customers, expand the brand, and increase sales and profits through Dollar Tree Direct, and I'm pleased with our progress 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.

Kevin?

Thanks, Bob.

As Bob mentioned, our diluted earnings per share increased 34.4% in the first quarter to $0.82.

The increase resulted from our strong sales, along with expense controls, which resulted in a 100 basis point improvement in operating profit margin compared to the first quarter last year.

Our gross profit margin was 35% during the first quarter compared with 35.2% in the first quarter last year, excluding the charge related to the change in inventory accounting.

Several factors contributed to this performance.

Freight costs were significantly higher than last year, reflecting higher rates for ocean freight and diesel prices that were more than $0.90 per gallon above the same period last year.

The freight increase was offset by improvements in IMU, reflecting continued improvements in sourcing.

Also, our product mix continues to shift, which creates some additional pressure on margin.

Basic consumable products increased by about 100 basis points as a percentage of our mix in the first quarter.

Buying, distribution and occupancy costs improved by 15 basis points, driven by the positive sales leverage in the US, which more than offset higher operating expense relative to sales in our Canadian stores.

SG&A expenses were 24.5% of sales for the quarter, a 120 basis point improvement from the first quarter last year.

This was driven primarily by a 75 basis point reduction in payroll expenses and insurance benefits, a 35 basis points reduction in depreciation, and a 15 basis point reduction in store operating expense due to leveraging of the comp store sales increase.

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

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

We also accept SNAP or food stamps in 3,656 stores, or about 88% of the chain.

In the first quarter compared to the first quarter last year, debit card penetration increased 120 basis points and credit card penetration increased 130 basis points.

And SNAP penetration, although small, continues to grow.

Operating income increased $32.8 million compared to the first quarter last year and operating margin was 10.5%, an increase of 100 basis points compared to the 9.5% operating margin in the first quarter last year.

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

The tax rate for the quarter was 37.5%, slightly lower than the 37.7% tax rate in the first quarter of last year.

Looking at the balance sheet and the statement of cash flow, cash and investments at quarter end totaled $510.3 million versus $390.1 million at the end of the fiscal first quarter of 2010.

Cash and investments net of debt was $243.8 million at the end of the first quarter.

During the first quarter, we repurchased 1.7 million shares of Dollar Tree stock for $88.6 million.

At the end of the first quarter, the diluted weighted average shares outstanding was 123.5 million.

At quarter end, we had $257.4 million remaining in our share repurchase authorization.

Our consolidated inventory at quarter end was 9% greater than at the same time last year, which was consistent with total selling square footage growth.

Our US inventory increased 5.6% as of the end of the quarter, while selling square footage in the US increased 6.8%.

Inventory per selling square foot in the US decreased 1.2% year over year.

The inventory levels reflect our strong sales in the first quarter and are sufficient to support our ongoing sales.

Inventory turns have been increasing for the past six years, and we expect this trend to continue for the full year 2011.

Capital expenditures were $58.4 million in the first quarter of 2011 versus $45.1 million in the first quarter last year.

For the full year, we are planning capital expenditures to be in the range of $220 million to $230 million, an increase of $5 million from our original guidance.

Capital expenditures will be focused on new stores or re-models, the addition of frozen and refrigerated capability to 325 stores, IT system enhancements, and approximately $19 million for expansion of our distribution center in Savannah, Georgia.

Depreciation and amortization declined 35 basis points in the first quarter and totaled $39.3 million, which was similar to the first quarter last year.

We expect depreciation expense of $165 million to $170 million for the year and that depreciation expense as a percentage of sales will continue to decline in 2011.

Our guidance for 2011 includes the following assumptions -- first, we expect that diesel prices will be significantly higher throughout fiscal 2011 than they were last year and higher than our original expectation.

Second, regarding ocean freight, we are pleased with the overall results of our May 1 contract negotiations.

The new rates are incorporated in our guidance.

Third, our guidance also assumes a tax rate of 37.7% for the second quarter and 37.7% for the full year.

Weighted average diluted share counts are assumed to be 123.1 million shares for the second quarter and 123.3 million shares for the full year.

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

With this in mind, for the second quarter of 2011, we are forecasting sales in the range of $1.51 billion to $1.55 billion, based on low to mid-single-digit comparable store sales increase and 9% square footage growth.

Diluted earnings per share are expected to be in the range of $0.68 to $0.75, an increase of 11.5% to 23% over second-quarter 2010 earnings per share of $0.61.

For the full fiscal year 2011, we are raising our guidance.

We are now forecasting sales in the range of $6.5 billion to $6.63 billion based on a range of low to mid-single digit increase in comparable store sales and 7% square footage growth.

Diluted earnings per share are expected to be in the range of $3.69 to $3.85, representing an increase of between 14.2% and 19.2% over our record EPS of $3.23 in fiscal 2010, excluding the non-cash charge in the first quarter of last year.

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

Thanks, Kevin.

We, indeed, had a great first quarter.

We are all very proud of the numbers, and I in particular, am very proud of all the people, the thousands of people, that work very hard to deliver those numbers.

We're off to a great start in 2011.

We are on track to accomplish our goals.

To summarize, first-quarter sales grew 14.3%.

Comp store sales increased 7.1% on top of a 6.5% comp last year.

Our traffic was up 5% and average ticket increased 2%.

And earnings per share increased by 34.4%.

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

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

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

Our stores are strategically located to serve middle America.

They are bright, convenient, and fun to shop.

We have a solid and scalable infrastructure that we are leveraging for better inventory management, increasingly efficient supply chain logistics, more productive stores, and crisper execution overall.

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

And we use our capital for the long-term benefit of shareholders, including the investment of $89 million for share repurchases in the first quarter this year.

The company has a series of initiatives in place to drive the business to higher levels in 2011 and beyond.

We're focused on expanding our store base, improving store productivity, developing new retail formats, expanding into new markets, and adding new channels of distribution.

Dollar Tree's values have never been better, and our future has never been brighter.

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.

(Operator Instructions).

Adrianne Shapira, Goldman Sachs.

Thank you.

Congratulations on the quarter.

Bob, I was just wondering if maybe you could help us think about the margins.

Obviously, we saw a bit of the gross margin down 25 basis points, but I'm just wondering -- it sounds as if you are pleased with the ocean freight negotiations and as we kind of get closer to lapping the Canadian acquisition in the fourth quarter, maybe help us think about when we could start to see margins perhaps start to re-expand.

Well I can give you some color on the margins, Adrianne.

The -- we just talked about the pressure on the margin; the main pressure was from diesel fuel, number one; number two, the effect impact of our ocean freight contracts, which we have now renewed as of May the 1, but we were still under the old contracts in the first quarter.

So those were two of the main pressures.

Canada was a little bit of a pressure on gross margin.

On the tail wind side, though, our initial markup was improved, so our merchandise margin was higher, which offset much of that change.

And the other tailwind or headwind that you see was the mix.

We continued to see more customers.

As you can see, our traffic was up.

Our average ticket was up 2%.

Our traffic was up 5%.

We're getting more customers, more frequently.

And because of the economy and driven by the flight to value, we are selling more of the consumer products.

That's faster turning and it serves our customer.

We're going to continue to deliver that to our customers.

That is growing a little faster than the overall business, although our variety mix was also up.

As far as the Outlook going forward, gosh, it really depends on what the diesel prices do.

I don't know any more than you.

We have guided -- in our guidance, we have contemplated the diesel prices to continue to be high throughout this year.

If we could get a little break there, that would be a big help, in seeing the margins -- gross margins turn around a little bit.

Great.

And then just to follow up, it sounds as if you are obviously continuing to be very encouraged with the performance of the freezer/cooler rollout.

It sounds as if we're looking for an acceleration.

Maybe remind us the kind of comp lift you see, and what you've been learning and what, again, gives you the confidence to accelerate that rollout?

Well, it serves our customers, and it thrills our customers, and we see a 5% to 10% comp lift in the stores when we put the freezers and coolers in.

And then that's just the first year, and then they continue to comp higher in the chain for years after that.

It's sort of the gift that keeps on giving.

So we have added another 100.

We have guided 225 new freezer stores in the beginning of the year.

Now we're saying it's at least 325.

And we're doing it for that reason -- more traffic in the stores; it provides better comp across all categories; and our customers like it.

Great.

Best of luck.

Dan Wewer, Raymond James.

To follow up on your comments about ocean freight, that it sounds as if it may have peaked during this cycle for you.

If you could just confirm that; and perhaps give us some sense as to the kind of gross margin benefit this new contract could give you during the next year?

Dan, I'm going to turn it over to Kevin, but I will tell you that we were -- in a nutshell, we were happy with our ocean freight negotiations.

And the ones -- the contracts began May 1 and you will start seeing some of the improvement and impact for that as we go into more towards the end of second quarter and especially in third and fourth quarter.

Okay.

Yes, as we look at it, you know, obviously, I think people are aware there was some capacity issues last summer.

That has alleviated.

We've seen capacity become not the issue that it was.

Obviously as everybody was aware, we were in up to renew these as of May, beginning of May.

Really don't see any true benefit really till Q3 and Q4, is the way the freight works through our system as it's capitalized into the inventory.

So you see more of it in the -- much more of it in Q3 and Q4.

Now that being said, we've seen some relief, but it's not like it was -- we didn't go back to 2008 rates when things were probably as good as they've been.

So some relief; and then -- and so directionally we see some relief, but if diesel fuel stays at $4 a gallon, it's not going to come close to offsetting that is what I want people to realize.

So, that's the headwind that we face at the moment.

Okay.

There's just a follow-up question, focusing on SG&A.

You called out that labor -- payroll and costs dropped 75 bps, and this is surprising.

You think about Dollar Tree by definition has no inflation.

The number of items you are selling per store increased 7%.

You are having to wait on 5% more customers than a year ago.

Your number of cards you are unpacking per store are up I guess about 7% from a year ago.

How is the company able to chisel the payroll cost down when you have so much more volume going through the stores?

Well, as we look at it, Dan, obviously a 7.1% comp helps.

That always helps us bring some leverage, but at the same time, the metrics you gave us there are accurate; we are handling more goods.

We're obviously working towards efficiency.

We've talked to that the last year, year or two, in the sense of working to smooth our flow of goods through our systems from the time we start to buy, to the time it comes through the DC, to the time it reaches the store and then gets to the floor.

We've done a lot of work around that, a lot of work around productivity and standards.

And you know the store operational teams deserve a lot of credit for taking those programs and bringing them to bare.

So I think that's been big.

The other area that -- it was payroll and insurance benefits.

We also saw some benefit at this point in our health insurance costs this quarter.

There's --anecdotally, some -- there's been some news out there that says because of gas prices and people are going less to the -- for treatments just because they don't want to spend the money as well as the gas money as well as the additional dollars for the co-pays and things like that.

We will see if that continues.

That's a help this quarter.

That is obviously not necessarily expected to continue on a go-forward basis.

Okay, great.

Thank you.

(Operator Instructions).

Meredith Adler, Barclays Capital.

Thanks.

Actually first just very quickly want to clarify something that you said, Bob, about just having come back from your spring buying trip.

When you were talking about spring merchandise, that's spring of 2013 you're talking about, right?

No, next year, 2012.

'12.

Okay.

Okay, thank you.

And then I just wanted to ask you a question a little bit about -- you didn't talk much about Deal$, and I understand that the best return at this point is still opening another Dollar Tree store.

But it seems to me that the Deal$, by going into the denser, more urban areas, is going to be competing more with some of the efforts that Dollar General and Family Dollar have in urban areas.

And I'm just wondering whether that makes you feel like there's a limited amount of real estate and you should accelerate that rollout so that you have -- you actually get a foot into the door in those areas.

Well, Meredith, we have been entering some of those high cost urban markets with our Deal$ stores.

The Deal$ model is, we think, a higher -- ultimately higher volume model.

We think that we can enter some of these higher cost areas better with a multi-price format and serve the customers better in those areas with the Deal$ stores than with the Dollar tree stores.

We can sell more categories.

There's more things that we can offer.

For example, in our Brooklyn and Bronx stores, we're starting to sell a lot of fans.

And in the winter time we sold heaters, and we sold Christmas trees and we sold blankets and we sell those types of things that you need that we can't sell at a Dollar Tree store.

You're not going to find fans for a buck.

So, by developing this Deal$ model as an urban strategy in particular, and as not solely an urban strategy, but mostly, we think we can provide better values to the customer.

We can serve them better.

We think we can drive higher volumes and higher productivity per foot.

We think we can leverage fixed costs better with the Deal$ model in these higher, tougher-to-operate markets, and that's the strategy that we are pursuing there.

We've gotten -- we are getting a lot of traction on the Deal$ and I'm very excited about where we are.

We had a good first quarter.

Our average ticket was up.

Our traffic was up.

Our average unit retail was up in Deal$.

The customers are accepting the over $1 product with great gusto.

Their -- our baskets are larger when the over $1 product was in the baskets.

So we're very pleased with what we are doing.

We still -- our Dollar Tree model is the envy of all, not just the envy of Deal$.

It outperforms, on return basis, pretty much everything out there.

So we are continuing to grow that model.

We're continuing to improve that model, and it is the best use, number one, of dollar invested.

In addition to that, though, we see the Deal$ model as something that can help us as we grow into the future especially in some of these high-cost markets.

So I guess what I'm still not clear about is, is this, given there is more competition and this format is doing so well, do you allocate more capital to expanding Deal$ to make sure that you don't miss out on the growth percentage?

Well you know, we're going to open 35 Deal$ stores this year.

That's about 20%, in addition to the Dollar Tree stores that we are opening.

And right now, we think that's the right amount.

We are looking for good real estate.

I mean we're just not out there taking real estate.

So there is an economic model that we look for.

There's a location, a street corner that we are looking for and we are being somewhat -- we're looking for the best place to be with our Deal$ model.

Growing both is, I think, what -- the way I look at taking market share and expanding the brand and the combination of Deal$ and Dollar Tree that we are excited about.

Great.

Thank you very much.

Joseph Parkhill, Morgan Stanley.

Congratulations on a good quarter.

I was just first of all just wondering if you could quantify the negative impact on Canada on your gross margins this quarter, and also if this will continue at a similar headwind for the rest of the year; should that improve as the year goes on?

Yes, Joe, as we look at it, the main headwind related to Canada was really in the occupancy costs.

And I think we've had some discussions around the fact that the real estate costs in Canada are significantly different than they are here in the United States.

So, it's a bigger part of the overall cost structure.

And so that's -- while directionally it was a little bit of a hit, it wasn't huge, but that's probably the area where we see the pressure at.

I mean I think we look at it from an SG&A perspective, we don't really see the pressure and maybe a little bit on margin at this point, but the biggest pressure point is the occupancy.

Right.

So I mean normally when you comp in a 6 to 7, you get say 40 basis points of occupancy.

And buying and occupancy leverage this quarter you got 15, right?

So is that whole delta Canada?

Or is there something else?

Your 40 may be a little high, so it would be a little less than that delta that you just described there.

Okay.

And then also just a bigger picture question.

Aside from Deal$, some of the research that we've done has seen that you're opening more new stores in more densely populated area; again that's Dollar Trees, not Deal$.

So just wondering if this is part of your strategy on a go-forward basis, if the weaker real estate markets allowed you to do that and do you think those opportunities will continue over the next several years?

Well, you know, I think so, Joe.

We are getting better real estate and more highly populated markets, then we're seeing more better real estate than we saw several years ago and lower costs on some of this better real estate.

So we're taking advantage of it and we will continue to take advantage of it, and that's going to be a big piece of our strategy going forward.

All right, great.

Thank you.

Scot Ciccarelli, RBC Capital Markets.

Hey, guys.

How are you?

I guess my first question is, any chance you can give us a little bit more -- I know we've touched on the margin subject and the diesel subject, but any chance you can give us a little more color on the size of the impact either in the fourth quarter, the balance of the year?

You said you've raised your own forecast for what diesel is going to cost this year.

I'm just trying to get an idea how much of a hit that might be, incremental to what you've already thought about.

I think, directionally, Scot, the way to think about it and the way we have kind of always talked about it is if diesel remains $1 higher a gallon year over year for a full year, it's probably a $0.07 hit headwind to us roughly for a full year.

So, that's -- and we were -- we obviously were projecting when we gave guidance coming into Q1 that diesel fuel was going to be at $4 a gallon.

So, it's all been the guidance now.

It's very impactful.

The good thing is, as we talked about, we have been able to do some things to -- with our sourcing and we feel good about that and are able to offset that.

So, I think it's more the same.

We can't predict it.

We do some hedging, but it's not our full use, so it's one of those things that we kind of bounce along with the market a little bit as we watch it, and hopefully we can see some relief there as we go forward.

All right, that's helpful.

And then obviously this was another very good quarter, good traffic, ticket, raised guidance despite, let's call it a still sluggish economy, rising gas prices.

Have you seen any change -- whether it's kind of -- what people are buying or any kind of change in the consumer purchasing patterns in your stores?

Or is it just kind of still more the same of what we've seen over the last let's call it two years?

You know, it's probably a continuation of two years, but a lot like last year.

I mentioned in earlier comments that our consumer products is growing faster than our GM.

So if you looked at the 7 comps, the consumer products grew almost 10% and the GM grew almost 5% and that's how you kind of get to the 7%.

It's growing overall, but we are seeing a flight to value.

We are seeing new customers; that is evidenced by our increase in traffic.

Even with the higher fuel prices, our traffic is growing.

And if you look back at the last time that happened in 2008, it was the same phenomenon.

It's back in 2008 when gas prices hit all-time highs at that time.

The -- our comp sales were driven entirely by traffic.

And we attributed that to more customers and new customers visiting our store.

Now we have a little bit of a combination, so not only are we getting new customers and we're getting more repeat business because of the consumer products that we have, and while they're in the stores, they're buying more of the variety merchandise, and that's helping us raise our average ticket.

So that's -- I don't know if you call it a new phenomenon.

It's a continuation of the downturn in the economy.

It's a result of higher gas prices, taking probably $20 a week out of the average consumer's pocket.

They're looking for value.

We have value.

They're looking for convenience.

We are certainly convenient.

So we are the beneficiary to a large degree of that increased traffic.

Very helpful.

Thank you.

Michael Exstein, Credit Suisse.

Add my congratulations.

Wonderful, incredible run of your business.

Can you sort of talk strategically about when you think or how you think of your operating margin?

Is there a point at which you wouldn't let it grow any further for competitive reasons?

Is there any limit to what you think your operating margin can do?

Can you just talk about conceptually that?

You know, Mike, I guess there is limits, but we think there's plenty of room to improve our operating margin.

Last year was the highest that it's been in many, many years and it's continuing to grow.

So we think there's more room to improve our cost structure to get more efficient in our stores and get more efficient in our supply chain to take costs out of the business.

We think there's opportunities to sell the mix of product and increase our gross margins.

So there is -- I guess there is ultimately a limit, but we are not near it right now.

We think we can continue to grow for years to come.

That's great to hear.

Thank you so much.

Aram Rubinson, Nomura Securities.

I appreciate that you guys don't want to build future buybacks into your guidance, but I'm hoping you can help us just philosophically on that.

Last year you bought back stock with all of your free cash flow and then some.

Absent any acquisitions, just curious what would prevent you from using all your free cash flow in a year like this to buy back stock.

Well, you know, as we look at our capital structure, we obviously -- as we've always said, one of the things that's very good about it is very flexible.

We have a lot of things we can do.

We were able to make an acquisition -- a strategic acquisition last year and entered the Canadian marketplace which we think is going to be a really big opportunity for us as we go forward.

Obviously we did buy back about $415 million of stock as well.

And as I've said before, we always go down the list of the other things we could do.

We could pay back the minimal debt we have, but it doesn't seem to make a lot of sense the way it's currently priced.

We could -- the management and the board talks about a dividend every meeting basically.

We've determined we're really a growth company and not really ready to go there at this point in time.

So we still view share repurchase as a great use of our cash to return value to our shareholders, and it's something we continue to look at.

And could we use free cash flow again this year?

We can, to buy back shares and we will continue to look at it.

And as we said, we will report on it each quarter and let you know how we're progressing.

Okay.

Thanks for that response.

Good luck, guys.

Joe Feldman, Telsey Advisory Group.

I wanted to ask about -- to go back to that IMUs for next spring; you just kind of throwed out that it would be a little higher.

We're just kind of curious if you could give a little more color behind that.

What would drive it?

Is it because of the mix of what you are buying or is it you're actually building up more buying power or using fewer vendors or something?

Joe, what I was speaking to was next season, next Easter, next spring, next Valentine's and you know the trip we just finished -- I'm always asked about rising prices, and I'm always asked about inflation.

And I know you guys hear a lot from other retailers about cost increases and the like, but in our business, with our mix of product, first of all, we're not in the apparel business, so the pressures on cotton and those things, the raw materials that you've heard aren't as intense on us.

We don't face as much of that.

But, we are growing.

We're a larger company.

We have a flexible model.

We don't have to have anything.

So when our buyers go to market, they are empowered to make the best decision to offer the most value for the dollar to our customers at a price that we're willing to pay.

So that may mean buying from the same vendor as last time.

It may be not even buying that item and buying a different item or a new item and remixing the product, or it may be changing vendors on a particular item.

So we use all of the tools that are at our disposal.

At the end of the day, though, we always -- we go with a plan and we always come back with having achieved the plan.

We, again, we have a flexible model.

We don't set any expectation to our customers that we will have anything year over year.

As a matter of fact, we have a strategy and we try to change about 50% of our product year over year because we like that ever-changing mix of high-value product and the idea of changing and what can you find at Dollar Tree today is a big idea.

Our customers like that ever-changing mix.

That's how we're able to manage through tough times.

And by the way, when things improve, when costs are going the other way, we tend to give back more value to the customer and not take it into our margin.

So when costs are going down, we put more value in our product.

When costs are going up, we may change our product and reduce a size here and there.

I will tell you on this buying trip that I returned from, though, it wasn't really changing the product to a smaller or less value.

It was actually more value.

And because of our buying power and because of our strategy, we've put together -- our buyers did a terrific job as they always do at putting together a mix of product that not only delivered the value to the customer, but also delivered the margin to the company.

That's helpful.

Thanks for that answer.

And just another sort of separate question.

Have you guys -- I know the penetration for the credit card is up and the debit card and obviously you rolled out the POS to handle that.

But We were all kind of wondering, is that saying anything about the consumer -- maybe a shift away from kind of having cash in hand, or especially on the credit side.

And then also, are you seeing anything different on the paycheck cycle?

Is that more pronounced, less pronounced, or any other comments on that?

With regard to the credit and debit cards, one of the reasons credit cards increased as much as they did, we did put American Express cards as a tender type that we now accept in our stores last fall.

So that's part of that increase at the end of the day.

So that may be skews that a little bit from a comparison standpoint.

But I think just in general, I think the general public is shifting away from cash.

It's becoming very common to pay by card.

And obviously that's changed over -- if you look at the fact that many of your QSR locations are now accepting cards and things like that, so it's just become a common public use.

So I think that's just part of the normal course of action there.

As far as paycheck cycles, I think, obviously, we see a pickup at the beginning of the month like most retailers probably do that are into -- have good basic consumable product selection.

I think the only thing that may be changing is some of it is becoming, in some states, maybe a little bit more spread out evenly through the month as opposed to everything being delivered to that person at the beginning of the month.

So that may be the only thing that's maybe a little different.

Okay, that's helpful.

Thanks very much, guys.

Good luck with this quarter.

Dan Binder, Jefferies.

I was curious if you could just give us an update on how the ROI for the Deal$ stores is progressing relative to your overall company; how is that gap closing if it is closing?

And secondly, whether you have any new events for the second quarter from a promotional standpoint that would be new versus last year?

Dan, we don't break out the Deal$ numbers, but I will tell you that the Deal$ sales are gaining momentum.

The customer acceptance is strong.

We have great expectations for that productivity of those Deal$ stores to continue to improve.

As far as the second half, we don't have any additional promotional vehicles.

We've changed some things around because of timing of calendar and the like, but there's really nothing -- no new major promotions going into our second half.

Thanks.

David Mann, Johnson Rice.

Looking at your second-quarter comp guidance, if we look at the midpoint, that's a little bit slower on a one-, two- and three-year kind of stack.

Just curious if you could comment on that and any elaboration on how May has gone thus far and how that sort of is input into your guidance?

Well I'll I get -- we started off the quarter; there's -- second quarter really doesn't have a big holiday in it that you can sort of point to.

You have Mother's Day and graduation and Father's Day and of course Father's Day doesn't really count most years, but there's really not a big quarter -- a big seasonal event in the second quarter.

We're only about three weeks into the quarter.

I will tell you that there's nothing so far that gives me pause or cause for concern with our guidance going forward.

You know, look, we're developing guidance as best we can in somewhat uncertain times.

We look at how we've been doing and the momentum that we have and we are inspired by that, and then we look out into the future and we look at the things that we know, the things that we control.

We feel very confident about being able to manage our merchandise margins.

We feel very confident at being able to manage our costs, especially the big SG&A costs with people and payroll and those kinds of things.

And we've put that into our forecast.

And then there are things that we don't know that cause the uncertainty.

And the biggest thing that causes uncertainty in our go-forward for the rest of the year -- and by the way, we had the same uncertainty when we gave first-quarter guidance, if you'll remember; and it was the cost of diesel fuel and the impact of higher oil prices overall.

So we take what we know and the momentum that we have, and then we look at some of the tailwinds we might feel from that, and then we look at the headwinds.

And gosh, I just don't know what to say about diesel fuel.

We're planning it to be high for the rest of the year.

And so given that, if there's a change, then we will benefit from it and we will manage accordingly.

If you could clarify in terms of the higher gas prices and how that affected your consumer; as the prices were going up during the quarter, what was the impact on your traffic trend?

Did you see anything discernible there?

Not really, David.

It was -- our business was consistent throughout the quarter.

I will tell you that late Easter in first quarter was a real big -- as we said last conference call, a late Easter.

We really like late Easters.

We anticipated a $15 million lift from the later Easter and we got it.

We also anticipated a lift on other products in our stores because with Easter being late and the traffic and the people shopping longer, that lifts all the other businesses as well.

And we saw that improvement too.

So the sales were pretty solid throughout the quarter.

Our best region of the country was the Southeast.

Our slowest region, but not by much, was basically the Northeast.

But all in all, it was pretty close.

Even if you look at geography it was plus or minus a bp here and there.

So it was very consistent across the geography.

It was very consistent throughout the quarter by month.

And one other comment -- you asked about gasoline.

This is something that we have done some quite a bit of looking back.

And I mentioned earlier that the last time we saw this rapidly rising oil prices and fuel prices and gasoline prices and the pressure that puts on the consumer was 2008.

And when you look at 2008, what we saw was increased traffic.

And all of our sales comps were due to increased traffic in 2008.

That was, I think, the flight to value that we speak to.

I think we were getting a lot of new customers.

I think a lot of those new customers have stayed with us since that time.

And what we're seeing now is an increase in traffic and also an increase in our average ticket in the first quarter.

So, we are -- we're excited about our ability to -- as we roll into second quarter, but as far as putting together guidance from that, I think we're -- it's in our -- we should consider the fact that there are some uncertainties out there.

Mike Baker, Deutsche Bank.

Thanks, guys.

I think on my math at least as I try to look at your margin guidance using the high and low points of your sales and earnings, I sort of back into up 15 basis points on the operating margin as a guidance for the year, which is about flat for the next three quarters.

If that's even close to right, then I guess my question is, do we think about that as being gross margins maybe down a little bit because of the diesel, and some leverage on the SG&A on a solid comp and then some of the expense savings that you talked about?

Is that the right way to think about your margin expectations for the next three quarters?

Well, I think as we look at it, Michael, from the standpoint of -- obviously we have talked a lot this morning about diesel costs and that's where it is going to create pressure.

There's -- as we see it today, as the world stands today, it is going to create pressure, obviously more than we initially thought, so that's the pressure point.

And as we've always said, we do believe we can control things within our control, so a lot of the SG&A items are within our control.

We think we can affect those and we will address them accordingly.

And, one of the things we've always talked about before -- you might have heard Bob say it before you have got to operate with a little stick and a little rudder, and that's really kind of where we're at.

Right now we know where the pressure point is and we know we've got to react accordingly in other areas of our business to offset that.

And that's really what the management team and all the associates are working hard at right now.

So, yes, I think realistically, directionally, you are right that there's going to be a little pressure on gross margin and we hope to be able to offset that and maybe a little more with our SG&A.

Okay.

And then as a follow-up to that and also following up on Dan Wewer's question earlier, the way I look at SG&A is SG&A per foot, and it's been about flat the last two or three quarters or so.

I guess, again, following up on Dan's question, how can you take that down any further?

Is it an elimination of hours, or is it non store operating costs?

What are the big drivers there?

Well, it's a little bit in a lot of areas realistically.

I don't know if there's any one big area, but as I said, I think the key to it because it touches so many points in our business, is how we flow our goods through our company.

And because it starts with the buying, the allocation after it gets to the distribution center, and then flows to the store.

It has so many touch points where we can streamline that process, it makes a big difference.

And it frees up resources for -- to redeploy for helping customers or other items that we think need to be addressed.

So I think that's probably the biggest thing we can do to continue to work on improving that.

And it's been a big focus in the past and will continue to be a big focus as we go forward.

Okay.

Thank you.

Anthony Chukumba, BB&T Capital Markets.

Yes, I just had a question on your coolers.

You mentioned the sales lift that you've been getting, 5% to 10% comp lift and the fact that you're accelerating the rollout of the coolers this year.

And I was just wondering if -- what your thoughts were on maybe expanding the coolers to the Dollar Giant concept because my understanding is that they don't have coolers in those stores.

Is that something that you would consider?

And if you would consider that, what your expected timing would be?

Anthony, we're just not there yet with changing the Dollar Giant stores to that degree.

We are currently working really hard getting the infrastructure in place; putting in the store teams; building the technology in the store; getting point-of-sale ready to go in; all of our replenishment systems; putting our real estate processes and function in place and starting to build that.

That's what we're doing this year to -- so that next year we can start really ramping up our growth.

As far as remixing the product, be getting -- starting sometime in the second half of this year, you're going to see a lot more Dollar Tree product in those stores as mostly going to be the variety merchandise that we sell, the imports that we sell as well as a lot of the consumer product that you find.

We have no plans this year to put in coolers and freezers.

As we look at the long-term strategy, that's something we could and would consider, but right now, we just -- we don't even have a plan for that right now.

Okay.

Thank you.

That's all the time we have for questions.

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

Reid for any additional or closing comments.

Thank you, Alicia.

We want to thank all of you for your participation in the call today, particularly for your interest and investment in Dollar Tree.

Our next sales and earnings release and conference call for the second quarter are scheduled for Thursday, August 18, 2011.

Thank you again.

That does conclude today's conference.

We thank you for your participation.