美元樹 (DLTR) 2011 Q3 法說會逐字稿

Good day and welcome to the Dollar Tree, Incorporated, third-quarter 2011 earnings conference call.

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

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

Tim Reid, Vice President of Investor Relations.

Please go ahead.

Thank you, Elizabeth.

Good morning and welcome to the Dollar Tree conference call for the third quarter of 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 the third-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 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 of last year, 2010, 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 in the first three quarters last year were $1.82 including the 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 you that you limit to one question and one follow-up question, if necessary.

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

Bob?

Thanks, Tim.

Good morning, everyone.

This morning we announced our sales and earnings for the third quarter of 2011.

I am pleased to report that against a very strong quarter last year our comparable store sales increased 4.8%.

That is a 4.8% increase over an 8.7% comp last year.

The comp was driven by increases in both traffic and average ticket.

Traffic increased 3.4% and average ticket increased 1.4%.

Total sales increased 11.9% to $1.6 billion.

That is at the very top of our range of guidance.

Earnings for the third quarter were $0.87 per diluted share.

This represents a 19.2% increase over last year's $0.73 per share, an especially strong increase considering last year included the benefit of more than $0.03 per share from unusual items.

Operating margin for the third-quarter 2011 was 10.3%, an increase of 40 basis points over the third quarter last year.

And net income rose 12.1% to $104.5 million.

Year-to-date through three quarters of 2011, total sales were $4.68 billion, an increase of 12.7%, and comp store sales have increased 5.5%.

Year-to-date earnings per share are $2.45, an increase of 25.6% compared with $1.95 per share in the first three quarters last year.

This increase is excluding the charge we took in the first quarter last year.

Year-to-date operating income has increased by $82.5 million.

Operating margin was 10.3%, an increase of 70 basis points compared with the same period last year.

And net income rose 19.6% to $300.4 million.

Our US inventory turns increased once again in the third quarter, as they have consistently for the past six years.

I am particularly proud of this performance.

It has been a team effort, especially driven by planning, allocations, and replenishment department working with their logistics partners.

I have great confidence that we can continue to improve on these items, with our ability to continue increasing our inventory productivity while improving customer satisfaction by having the right product in the right stores.

As I said earlier, I am very pleased with third-quarter results.

This success speaks to the power of the model and the high level of execution across the entire organization.

Today our stores are full, fun, and friendly to shop.

Our merchandise is relevant, a surprising value.

And every item at our Dollar Tree Stores is $1 or less.

Customers love the stores and the product and the concept.

They continue to shop in record numbers, and they are buying more each time they shop.

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

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

Seasons have always been an important part of the Dollar Tree business, and our seasonal assortments this year have been more complete and more compelling than ever.

The sellthrough on Halloween and fall seasonal merchandise was very good, and our store teams have done an exceptional job of transitioning the front of our stores from Halloween to Thanksgiving and Christmas.

And they did it virtually overnight.

I think it has been the best transition ever.

Looking to the future, we intend to continue growing and improving on our performance; and I have every reason to believe that we will.

Over the next several years it appears likely that customers' demand for value will continue to grow and intensify.

Dollar Tree is uniquely positioned to take advantage of this trend by providing more value to a broader range of customers.

In this effort, our stores and merchants are supported by a solid and scalable infrastructure which we continue to enhance.

This year we expanded our distribution center in Savannah, Georgia, from its original size of 600,000 square feet to 1 million square feet in order to support continued growth of our business in the Southeast.

This project was completed on time and on budget with a total of $19.5 million of capital investment, using existing cash.

The expansion became operational in the third quarter.

Our current logistics infrastructure can support sales nationally up to $8 billion.

It provides efficient service to our stores today and continuing asset leverage as we open more stores.

As always, we plan to add capacity strategically to support the growth ahead of the need.

In this regard, we are currently developing plans to increase our logistics capacity in the Northeast, and I expect these plans to be finalized over the next six months.

We are growing our business in many ways, by opening more stores, by opening better stores, and by developing new formats, new markets, and new channels.

During the third quarter this year we opened 98 new stores, and relocated and expanded another 24 stores.

Through three quarters of 2011 we added 257 new stores, and expanded or relocated 88 stores.

Selling square footage increased 8.7%, and we ended the quarter with 4,335 stores.

We are currently completing our store openings for this year.

Consistent with our guidance, the final number of new stores opened this year will be 278, with 91 expansions, for a total of 369 projects and selling square footage growth of about 7% for the year.

In addition to opening new stores we plan to open more productive stores.

I am pleased to say that we continue to make progress in store productivity.

As I am sure you know, sustained improvement requires a coordinated effort across the organization.

At Dollar Tree we are concentrating our efforts on improved site selection, on rightsizing our stores, on opening new stores earlier in the year, through building a bench of qualified store management and by emphasizing and expanding the most productive categories of merchandise.

Our expansion of frozen and refrigerated product continues.

We installed freezers and coolers in 127 additional stores in the third quarter, and now offer frozen and refrigerated product in 2,169 stores.

We expect a total of 375 installations for this year.

This is an important category because it serves the needs of our customers, drives traffic into our stores, and provides incremental sales across all categories including our higher-margin discretionary product.

Another key component of our growth strategy is the development of new retail formats, expansion of our geographic reach, and development of additional channels of distribution to serve more customers.

Deal$, our multi-price format, extends our ability to serve even more customers with more products and more categories.

At Deal$ everything is not $1, but everything is a value.

As we continue to grow and refine the concept we are offering more variety in our Deal$ stores, more brands, surprising value, and customers are responding favorably.

Sales in third quarter were driven by increases in both traffic and average ticket.

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

We ended the quarter with 181 Deal$ stores.

When I speak of new geography in the current time period I am mostly referring to Canada, and our expansion into Canada is proceeding on schedule.

In the fourth-quarter 2010 we acquired Dollar Giant, which was a chain of 86 stores.

And we will end fiscal 2011 with 99 stores.

In this first year especially we are investing in infrastructure, integrating processes, developing real estate plans, and building store teams for the future.

We are working very hard this year to develop compelling merchandise assortments while making strategic investments in infrastructure that will allow us to ramp up and support aggressive and profitable growth in 2012 and beyond.

Our goal in Canada is to operate on an identical platform to the merchandising and productivity systems that support the US stores, and much has been accomplished through third quarter.

Of particular note the installation of store-level POS and enterprise-level merchandising systems has recently been completed.

Systems and equipment have been installed, and stores have been trained.

This was a critical step in our plan.

Sales data from these systems supports our planning, allocations, and replenishment.

We will soon have visibility to our on-hands, on-order, and sales with a trailing history by store and by SKU, key factors in the management of an efficient supply chain and improving customer satisfaction.

Earlier in the year we solidified our logistics model in Canada, and we are now supplying product to our stores through distribution centers in British Columbia and Ontario.

We have integrated the Canadian logistics with our Dollar Tree warehouse management system in the US, improving visibility and increasing efficiency.

The merchandise teams have been integrated to leverage Dollar Tree's buying power.

This has been a big transition, but customers are beginning to find broader, more exciting assortments and better values in the stores.

We expect this to gain momentum as we move through the holiday season.

As I hope you can tell, I am extremely excited about the opportunity for Dollar Tree in Canada and proud of what has been accomplished in a short period of time.

There is still much to do, but the results will be worth the effort.

Over the longer 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.

Last but not least, Dollar Tree Direct, our e-commerce business, is providing an opportunity to reach new customers through an additional channel of distribution.

In the third quarter significant progress was made with Dollar Tree Direct on a variety of fronts.

First, Dollar Tree Direct is now offering customers the opportunity to purchase smaller quantities on over 600 online items, while continuing to offer more than 2,500 items for sale by the case.

Second, Dollar Tree Direct launched a Spanish-language version of the website to serve this important and growing customer base.

Third, Dollar Tree Direct is now available to mobile users.

Customers can view the merchandise, read product ratings and reviews, make purchases, or utilize the store locator to find their nearest Dollar Tree store directly from their smartphones or other mobile devices.

Dollar Tree Direct continues to gain new customers.

Traffic on the website increased 33% in the third quarter last year -- compared with the third quarter last year.

New customers are finding us every day.

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 19.2% in the third quarter to $0.87.

The increase resulted from our strong sales and expense control, which resulted in a 40 basis point improvement in operating profit margin compared to the third quarter last year.

Gross margin was 35.1% during the third quarter, compared with 35.5% in the third quarter last year.

Several factors contributed to this performance.

IMU on many categories increased in the third quarter, reflecting continued improvements in sourcing and the flexibility of our merchandise model.

Also, we leveraged occupancy and distribution costs in our US stores.

These factors were offset by, first, basic consumable products increased by about 170 basis points as a percentage of sales in the third quarter, reflecting the continuing shift in our merchandise mix to meet consumer demand for needs-based products and the expansion of our frozen and refrigerated capability.

Second, the higher cost relative to sales in our Canadian stores as we strengthen the supply chain, develop new merchandise assortments, and invest in growth.

Third, freight costs continued to increase in the third quarter, driven by diesel fuel prices that averaged $0.84 per gallon above the same period last year.

This was partially offset by ocean freight expense, which was down slightly from the third quarter last year, as expected.

In addition, shrink and markdown expense increased slightly as a percentage of sales relative to the third quarter last year.

SG&A expenses were 24.8% of sales for the quarter, which is an 80 basis point improvement from the third quarter last year.

This was driven primarily by, first, an 80 basis point decline in payroll-related expenses due to increased productivity, leverage on comp store sales, and lower incentive compensation compared with last year.

Second, a 15 basis point reduction in depreciation.

These improvements were partially offset by an increase in operating and corporate expenses relative to last year, when we recorded a realized gain of $2.7 million related to the favorable resolution to a legal matter.

That gain contributed $0.01 per share in the third quarter last year.

Debit and credit card fees increased slightly, reflecting growth in usage of these types of tender.

In the third quarter compared to the third quarter last year, debit card penetration increased 120 basis points.

Credit card penetration increased 50 basis points.

And SNAP penetration, although small, continues to grow.

Operating income increased $24 million compared with the third quarter last year.

Our operating margin for the quarter was 10.3%, a 40 basis point improvement compared to the third quarter last year.

Year-to-date through the third quarter operating margin is 10.3%, an increase of 70 basis points from the same period last year.

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

You may note that other income declined in the third quarter relative to last year.

As a reminder, in the third quarter last year, dividend income of $5 million was recorded in other income based on a dividend declared by Ollie's Holding, Inc., of which the Company owns 10.5%.

This contributed about $0.02 per diluted share last year.

The tax rate for the quarter was 36.4%, slightly higher than the third quarter last year and lower than our expected tax rate for the quarter.

For the first three quarters the tax rate was 37.2% compared with a tax rate of 36.8% during the same period last year.

Looking at the balance sheet and statement of cash flow, cash and investments at quarter end totaled $280.2 million versus $392 million at the end of the third-quarter 2010.

During the third quarter we invested $249.1 million for share repurchase, including a $200 million ASR, and repurchased 3.3 million shares.

This ASR concluded in November, which resulted in the Company receiving an additional 100,000 shares.

During the first three quarters we invested $345.9 million for share repurchase and repurchased 5.2 million shares.

The diluted weighted average shares outstanding for the third quarter was 120.7 million.

In October the Board of Directors authorized an additional $1.5 billion for share repurchase.

The decision reflects the Company's commitment to build value for long-term shareholders and our confidence in the future.

Our consolidated inventory at quarter end was 7.5% greater than at the same time last year, and selling square footage grew by 8.7%.

Consolidated inventory per selling square foot decreased by 1.2%.

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

Capital expenditures were $75.5 million in the third quarter of 2011 versus $56.6 million in the third quarter of last year.

For the full year we are planning capital expenditures of about $240 million.

Capital expenditures are focused on new stores and remodels; the addition of frozen and refrigerated capability to 375 stores; IT system enhancements; and approximately $19.5 million for the expansion of our distribution center in Savannah, Georgia.

Depreciation and amortization was $41.1 million for the third quarter versus $38.9 million in the third quarter last year.

For the full year we expect depreciation of approximately $165 million and that depreciation expense as a percent of sales will continue to decline for the full year.

Turning now to our guidance for the fourth quarter of 2011, we are forecasting sales in the range of $1.89 billion to $1.94 billion, and diluted earnings per share in the range of $1.50 to $1.57, which would represent a 16% to 22% increase compared to the fourth quarter of 2010 earnings per diluted share of $1.29.

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

For the full fiscal year of 2011, we are now forecasting sales in the range of $6.57 billion to $6.62 billion, based on a 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 $3.94 to $4.01, representing an increase of between 22% and 24% over our record earnings per share of $3.23 in fiscal 2010, excluding the non-cash charge in the first quarter of last year.

Our guidance also assumes a tax rate of 37.7% for the fourth quarter and 37.4% for the full year.

Weighted average diluted share counts are assumed to be 119.9 million shares for the fourth quarter and 121.8 million shares for the full year.

Our guidance assumes no additional share repurchase this year.

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

Thanks, Kevin.

Once again, I am very pleased with our Company's third-quarter performance.

It was a terrific quarter.

In the face of tough comparisons our traffic continues to grow and our average ticket is increasing.

As a result of this, comp store sales increased 4.8% and total sales grew almost 12%.

Despite high fuel prices, which averaged $3.83 per gallon, operating margin increased by 40 basis points to 10.3%.

That is the highest third-quarter operating margin since 1998, when diesel fuel was less than $1 a gallon.

And our earnings per share increased by 19.2% on top of a 43% increase last year.

In addition, during the third quarter the Company completed the expansion of our Savannah DC, a key element in supporting our continued growth in the Southeast.

US teams installed and trained a major portion of our IT infrastructure in Canada, including POS systems in all stores.

Dollar Tree Direct has launched significant enhancements to Dollar Tree.com, including break-pack, Spanish-language, and mobile capability.

The Company repurchased $246 million of stock and announced a renewed authorization from the Board for an additional $1.5 billion of share repurchase.

And we are singularly position to do even better in the future.

The business model is powerful and flexible, tested by time and validated by results.

We have proven that Dollar Tree can adapt to a changing environment.

Through good and bad economic times over the Company's 25-year history, the Company's record of superior sales and earnings continues; and we have never been better positioned for continued growth and improvement.

The balanced mix of high-valued consumer basics and unique assortment of fun, seasonally correct, discretionary products positions Dollar Tree Stores to be relevant to customers in all economic circumstances.

In challenging times customers can find the values they need on everyday basics, because we have the things they need.

And when times get better and consumers have a few extra dollars in their pocket, the Dollar Tree assortment of fun, compelling, discretionary product can't be beat.

At Dollar Tree, yes, you can afford to splurge.

Those discretionary items are still just $1.

We continue working to keep our values high.

The buyers have just concluded their fall buying trip.

The trip was again very successful, with higher initial markup, great values, and a terrific merchandise selection.

And there is more to come.

Looking ahead there are plenty of opportunities to grow our business.

We have a vision of where we want to go and the infrastructure and capital to make it happen while generating substantial free cash.

And we will continue to use our capital for the benefit of our long-term shareholders.

It is an exciting time at Dollar Tree.

We are having a great year.

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

We are now ready for your questions.

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

(Operator Instructions) Scot Ciccarelli, RBC Capital Markets.

Hey guys, how are you?

A question about the gross margin.

If you were to isolate the impact of the mix shift, what was the gross margin impact just from that?

Well, you know, we don't necessarily break those things out specifically, Scot.

But I would love to give you a little direction overall as it relates to gross margin.

So obviously we are down a little less than 40 basis points for the quarter; but again IMU was higher.

The values that the team has put together continue to be extremely good.

This was the -- in this quarter our consumables did shift by about 170 basis points.

That is the largest shift we have had this year.

I believe the first half of the year was closer to maybe 120 points of shift.

So that is the biggest shift, and for the most part it did offset the IMU gains that we saw.

The other things that went into this is the fact -- that Canadian effect in a sense.

We have talked a little bit about the idea that the occupancy costs in Canada are higher.

And you have got to -- well, the other thing you need to remember is really we have Canada costs included in the current year, and there were no costs for Canada in the prior year.

So from a comparison standpoint that has an effect as well.

But again, it is a big investment in Canada and we believe it is the right thing.

And there is a payday somewhere down the road, but this is what we really need to do at this point in time.

And a significant change really in logistics as well when you think about the fact that historically the model for them had been a direct store delivery model, where now we are going to third-party distribution centers, one on each side of -- one in Toronto and one in Vancouver.

Lastly from the standpoint of fuel, diesel fuel up $0.84 -- as we have spoken before, increase of $1 for diesel fuel for a year is probably $0.07 to $0.08 of hit for us.

We were able to offset that a little bit by ocean freight; but again it was a headwind for the quarter.

And then just a tiny bit of shrink and markdown effect for the quarter.

One thing I would mention as it relates to the fourth-quarter guidance is the fact that it basically assumes that gross profit will be flattish to slightly up, and we feel pretty good about that.

Obviously within that you assume IMUs to be up; fuel will still be a bit little bit of a headwind; Canada will be fully comparable in the sense that I think it was this day a year ago we announced the closing of the Canadian acquisition.

So I think that's -- don't want people to think that the 40 bps is ongoing.

We feel pretty good about where we are headed from a gross profit standpoint.

That is very, very helpful.

Then can you just give us a feel for the relative growth rates at Dollar Tree versus Deal$?

I know you don't break out Deal$ specifically.

But is it comping at about the same rate as the Dollar Tree chain?

A little bit better, a little bit worse?

That would be helpful.

Thanks.

Scot, we don't break it out, but I am very pleased with the comps in our Deal$ stores.

The opportunity as we go forward is for higher volume stores in the Deal$ format, and we are seeing evidence that we can do that now.

All right.

Thanks a lot, guys.

Charles Grom, Deutsche Bank.

Thanks, good morning.

Just on the 4.8% comp, can you remind us how it trended over the past few months?

And how much do you think the Halloween shift impacted sales?

And I am just curious; did it also hurt gross profit margins at all during the quarter?

The sales were pretty consistent across the quarter.

The Halloween shift did -- we lost that day of Halloween selling, and that went into the fourth quarter.

And that is a big day by the way, so there was an effect from that.

But sales were pretty consistent across the quarter.

And when you look at it by region, it was very consistent by region of the country.

The Southeast led but only slightly, followed by the Midwest.

So sales were consistent.

The Halloween shift impacted us somewhat.

And the other thing was we did have some bad weather; we had a hurricane and the snowstorms in the Northeast right there that final week of the quarter.

So that was the other unusual thing I guess that happened in the quarter.

Any sense for -- could you quantify the shift plus the weather for us, since it was significant?

You know I don't believe we have actually quantified it.

The shift of Halloween, of course, we will get that into our fourth-quarter numbers.

But we didn't lose it; it just moved over one day.

The weather, I will tell you that snowstorm that last week impacted our stores probably more than the hurricane did.

It was sort of a surprise to everyone, and we lost more stores and more stores with electricity in the Northeast than we ever did with the hurricane that was earlier in the quarter.

But I can't quantify that for you.

We still think it was a great quarter; 4.8 comps; it was very consistent.

And it was up against a terrific quarter last year.

We went in thinking that it was going to be an opportunity to really show our stuff against a strong quarter, and I was real pleased with where we came out.

The 25-year anniversary was very strong.

I guess you remember we had our 25th year anniversary this year, and we celebrated with a lot of 25% more, same low price, merchandise during the quarter.

We drove a lot of sales with that.

And it was right in tune with what the customers are looking for now in their search for value.

They are looking for ways to balance their budget.

So again, very relevant to the times and drove some sales, drove some traffic in a quarter up against a really terrific quarter from a year ago.

Okay, great.

Then second question, just curious on what your buyers are seeing on the cost front for the back half of next year.

You commented they just returned from overseas and they are seeing higher IMUs.

I was just wondering if you could flesh out what they are seeing and potentially quantify how much you think costs are going to be dropping in the back half of next year for you.

Thanks.

Chuck, the buyers as you know, they just returned from buying their fall.

And again their initial markup is higher than last year, higher than planned on that buying trip.

They do that because of our flexible model allows them to, first of all, change the product not the price.

We change the product from season to season for many reasons.

One is to keep -- stay relevant.

One is to continue to create more excitement.

And the other is to manage our margins.

So we are always going to be able to manage our margins especially on these import buying trips.

Frankly, though, with demand being down in China -- business is not that good around the world and the Chinese makers that we are working with are incented to do business.

So while we are a big buyer in China and while we can change our product, we are actually seeing the opportunity to create even more value as we go to market on these trips.

So I think I can't quantify it for you, but I can tell you that our initial markup on that buying trip is higher.

And I believe the values are better than ever.

(Operator Instructions) Joseph Parkhill, Morgan Stanley.

Hi, good morning.

I was just wondering if you could talk a little bit more about the shift towards consumables.

Do you think that that -- I mean, you mentioned it a little bit in your opening comments.

But do you think you are pushing more of the consumables?

Or do you think it is the consumer that is pulling forward the demand?

Joe, I think that is a good question, and we are always focused on the customer.

I will tell you that from our standpoint we are excited about selling more of the consumables, because we are also selling more of the variety too.

The customer is searching for value.

They are trying to balance their budget.

Unemployment is, as you know, at all-time highs.

And we have found new customers.

They are looking to us to help them as they search for the things they need every day -- our HBC products, high-value merchandise, very -- they need that right now.

Our household supplies, cleaning supplies, paper, chemicals, all of those things -- all the things that you need in everyday living our customers are looking for.

We have that.

And as our customers more and more are coming to us for that, we are giving them what they want.

So in that regard it is very much a reaction to what the demand is from the customers pulling more and more of that product.

Now while they are in there, they are still buying our variety.

We had good Halloween; we had a terrific sellthrough; we are now set for Christmas, and I expect Christmas to be the same results.

They like our surprising value and our party supplies and all the things around the fall parties, the Christmas and holiday parties.

They like our stationery.

They like our party.

They like all the toys and all the things for the kids.

And those are all high-margin things that we sell.

So that is increasing along with the consumer products.

Also in the quarter -- the third quarter, you know, you have Halloween in there.

But basically it was an opportunity to highlight our 25th anniversary and give customers even more of what they wanted.

We had some terrific values in cleaning supplies and HBC and really across the store -- 25% more, same low price, same price as 25 years.

And the customers really, really liked that and they responded favorably to it.

You can see that in our traffic.

So that is a long answer to your question, but I believe if you think about what customers are looking for that is what we are giving them.

And they really are looking for value on basic consumable products.

Great, thanks.

Then my follow-up would just be on the fourth quarter for sales guidance.

How do you think about the compare from last year, since you were impacted with the snowstorms?

How do you take that into account when guiding for this year, when the weather is uncertain in the fourth quarter as well?

As we look at that, Joe, we basically -- every year you could have weather; you might not; you don't really know.

You can plan your sales and your merchandise assortments, and you build that out, and weather is either going to happen or not.

Now, we are in all 48 lower states, so it is -- there is likely to be weather somewhere.

That is just a fact of nature.

That is just part of doing business.

So I don't think we look at it any differently.

Can it potentially -- if the weather is really great from a shopping perspective, could it be a benefit?

It could; but that is not a given in any way.

We are not counting on any better weather than we had last year, frankly, in our guidance.

If we get better weather it will be just better.

Peter Keith, Piper Jaffray.

Hey, good morning thanks for taking the question.

I had a question on the gross margin, the impact you highlighted from the higher cost, the Canadian stores.

It sounded like that may have been attributed to revising the distribution model.

Is that a cost now that we should expect to flow through your gross margin for the next couple of quarters?

Obviously, really, we have had a lot of infrastructure and investment up there, and there is a cost to do that and it is a change in model, and it takes a little while to get everything as efficient as you would like it to be.

And that will continue to get more efficient as we open more stores, as we go down the road.

So as I said we don't really break these parts down individually, just try to give you some color on them.

They're -- because of their size their cost structure is not going to be as efficient as Dollar Tree's at the end of the day.

So that is really the way we look at it.

It will not be that efficient.

So on an overall basis it might pull it down a little bit.

But now it is comparable, and I think that will kind of take care of itself.

Peter, we bought the company for a couple of reasons.

One, because the opportunity to expand our growth, there is huge opportunity there.

But also for the opportunity to improve the economics of that company.

They were less profitable than Dollar Tree when we bought them.

We bought them in fourth quarter last year, not in third quarter.

When you are looking at third quarter this year you're seeing the effect of Canada in this year's third quarter, against no Canada last year in third quarter.

So that is two things to consider.

But look, we think we can improve it.

That was the reason we bought it.

Opportunity for more growth; 1,000 stores in Canada.

We think we can do that.

And we think we can bring more value and improve their operating economics of those Canadian stores.

Okay.

Certainly I can see the opportunity going forward.

I guess I am curious now that the Canadian stores have been in your results for the last year, you had highlighted at last year's analyst day you thought it would be accretive.

Has it turned out to be accretive after all the investments?

Or has it been a slight drag on the earnings for the last 12 months?

It has been a slight drag, Peter.

Okay.

All right, thanks a lot, guys.

Good luck for the holiday season.

Meredith Adler, Barclays Capital.

Thank you very much.

I would like to maybe just talk a little bit about real estate.

You guys have seemed to be not having any problems getting stores.

If you could just maybe talk about the environment.

Is the weak consumer economy and the weak economy in general really changing the availability or the cost of the stores you are leasing?

Or are things the same?

And I guess I would ask about regionality too, because I think some parts of the country have become more expensive.

But maybe you could talk about that.

Sure, Meredith.

Obviously I think from an availability standpoint, if you look over the last three years in a tough economic environment, we have been one of the companies out there that has consistently been opening significant number of stores.

That does create some opportunity, in the sense that developers know, one, that we have a great balance sheet.

We are going to be there for the 10, 15, 20 years, whatever our lease and option terms are, to be able to make those payments.

So there are centers that we might not have gotten called on before, or we might not have been the first people that they would've called, that we get those calls earlier now.

So we potentially get to see some centers that are maybe a little better than we might have saw in the past.

So I think there is from an availability standpoint some opportunity that we have been able to take advantage of.

At the end of the day it is still about profitable growth for us.

It is really making sure we are selecting the right stores, the right places, where we are ready to grow.

So that we can make sure and continue to return the kind of financial returns we have been able to over the last several years.

So could we grow faster?

Well, we have grown a little faster this year and maybe we will look to grow a little faster next year as well.

But we have these opportunities, but it is really important for us to really look at each site and go through that process.

Then just to follow up, does the fact that you are adding coolers and freezers make it harder to get a site that is anchored by a supermarket?

Are you getting more pushback?

Or is it just not a big enough part of the mix for anybody to be concerned?

I think it is always something you have to look at, at the center.

It is dependent center by center as to whether there is a lease restriction related to freezers and coolers, or in some points just food in general.

So those don't necessarily directly affect our decisions.

It is really dependent on the center.

We like to go obviously where we have the opportunity to put in our full mix of freezers and coolers.

We think it is a great shopping experience for our customers when we are able to do that.

And we do look to do that wherever we can.

But we are in plenty of centers where maybe we can't have some freezers and coolers; but it all works out at the end.

Meredith, we are not a grocery store and we are not going to be a grocery store.

Restrictions are something we have always had to deal with, whether it be grocery stores with freezers and coolers or party stores with our party, or with other stores with our picture frames.

So it is something that is not new.

The freezer and coolers are new for us, but dealing with restrictions is something we have always had to do.

Great, thank you very much.

Dan Binder, Jefferies & Co.

Hi, good morning it's Dan Binder.

I had two my questions for you.

First one is on incentive comp; you mentioned it was a little bit lower.

I was just wondering if that is a function of it shifting from one quarter to the next, or is there a better reason for the incentive comp to be down given that you have been outperforming this year?

Then second question is related to inventory.

Really phenomenal job on controlling that.

But as we head into the holiday season I just want to understand how much inventory you have coming down the pike here.

It's up 7% and change on the kind of sales increase you had; can you just give us a little idea on how you are getting that productivity to improve so much?

Well, as far as the incentive comp piece, address that one first.

Obviously we have -- if we look compared against a year ago, a year ago we had a knockout year as well.

Basically 100% of the targets were met, and we knew that fairly early on.

So this year we are not at 100% of the targets.

We are building upon good years upon good years, so the targets go higher, and we are not achieving at quite the same level this year.

So that is really the reason for that change in incentive comp.

As far as inventory we feel really good about our inventory position.

Obviously we continue to work with our planning and allocation team, continue to work with looking at stores.

We have more stores and more items on replenishment now than we ever have.

We have gotten more efficient in those regards.

We have gotten better with looking at stores as far as clustering them and determining how to open them up, what inventory categories are going to be important store by store.

So a lot of it is technology that we have been able to implement and continue to gain efficiencies with, that have continued to help us.

It has obviously been a -- it has been a big point that we have tried to work on because we think it is a very important thing.

Obviously the thing is we have had less inventory for the past two or three years now, and really it has not hurt our sales at all.

So it really does show that you can gain these inefficiencies and not hurt your sales.

Great, thank you.

David Mann, Johnson Rice.

Yes, thank you, good morning, great quarter guys.

First question, Bob.

You talked earlier about IMU going up on this recent trip.

Can you just compare how that increase in IMU would look against the recent trips earlier in the year?

Are you seeing it getting a little better, or a little deceleration?

It is a little better, David.

I think this whole year our initial markup trip to trip has increased.

Now, that is always something that we balance.

But there is balance between cost and value.

And so as we get better cost we tend to sometimes invest that into more value for the item.

At the end of the day we are not pushing really hard to increase initial markup remarkably year over year, trip over trip, because we want to make sure that we maintain relevance to the customer, the highest value product that we can possibly deliver, at the margins that we like for our P&L.

So buyers have just done a terrific job.

I've got to tell you the merchandise is better than ever, and I have been here a while now.

So this is going to be the best fall and Halloween season that you have seen at Dollar Tree, and in this tough world economy we are at Dollar Tree using the power of our buying.

We are open to buy.

Our buyers are really good at putting together assortments for that dollar price point; that is what their focus is.

Nobody does a dollar price point like Dollar Tree does, and that is what you are seeing when you go into our stores.

I think when you see it in our fourth-quarter assortment, our holiday assortment that is coming up here, you are going to say -- wow, it is even better than last year.

And I'm seeing that going into next year as well.

Then, Kevin, in terms of operating expenses, great leverage this quarter.

How should we think about the leverage or growth of SG&A in the fourth quarter?

And if you just -- can you call out what the extra legal fees were last year that were in operating expenses?

Yes.

Last year the -- are you referring to Q3, David?

I thought there were some in Q4; would that not be correct?

That I don't remember.

We had a benefit in Q3 a year ago from the settlement of a legal matter.

I'm sorry.

I was referring to any legal fees that were tied in with Dollar Giant or any other professional fees.

Yes, there would have been some, but they were fairly small and they would not have materially moved the needle is the way I would look at that, I guess.

From an overall, as we look at our SG&A -- and we saw great leverage in our payroll expenses this quarter, this past quarter, and really give a lot of credit to the store teams.

They did a real nice job with increasing their productivity.

As I have said before it is our largest SG&A line that we have.

So when we can do that, that is really important.

It really ties back to a great extent to some of the things we have talked about in the past, which was flow of product across the chain, making sure we are being efficient in how we move that product into the stores, which helps them on their end run better stores, move product from the back room onto the sales floor, and then drive sales.

So we look at that as very positive and we hope we can continue to see some benefits there.

On an overall basis, obviously we think depreciation will continue to leverage.

I think our payroll we can continue to leverage.

But we have still got to execute to it at the end of the day, and driving sales always helps that in any given quarter.

Thank you.

Aram Rubinson, Nomura Securities.

Hey guys, good morning.

Two questions, one around seasonality and then a follow-up.

When you look from Q3 to Q4, I am just wondering.

How much does the mix change of consumables recede into Q4 from, say, prior quarters?

Sorry for the silence.

I was actually looking it up here for a second, Aram.

But it is fairly significant in the sense of the overall mix.

You would basically see consumables that has been running above 50%, it falls down basically to closer to the mid-40%s basically in the fourth quarter.

So it is a fairly significant shift in our mix of fourth quarter comparably.

Aram, it is not so much that the consumables fall off and go negative; it is that the other -- the variety increase faster.

So with Christmas people are buying more of the party supplies and the trim-a-tree merchandise, and the wrap and the bows, and the toys, and all those things.

The variety things for stocking stuffers and all those things that you want for Christmas.

Then the follow-up; thanks for that.

The follow-up is if I look historically, I guess I see that your sales per square foot in the fourth quarter used to be higher than they are now.

But your sales per store are actually higher now than they have ever been in the fourth quarter.

So the question is -- to drive that relevance seasonally are there either shifts and reallocation of space to Q4 to drive even more of that seasonal discretionary business?

And also wondering if there are things on a throughput basis to do to be able to even push greater seasonal relevance in Q4.

Well look, there is a lot more Christmas, trim-a-tree and Christmas merchandise in fourth quarter.

If you go into our stores in fourth quarter -- we like clean and neat and orderly and aisles clear and all those things.

But when you walk into a Dollar Tree in fourth quarter, we stack it higher and deeper because the demand from the customer is there.

It makes it more exciting.

It makes it more seasonal.

There is more color.

We do endcaps, the front wall, the front windows, the side stacks, all the things -- they turn into red and gold and silver and all the things for the holiday season.

So the throughput?

I got to tell you, I was just talking to our head of stores from the West Coast last night, and he says the back rooms in the stores -- right now we are going into peak inventory time at Dollar Tree historically, going into the -- towards the Thanksgiving week.

And he says the back rooms are in terrific shape.

The stores, the sales floors are in great shape.

So we are getting it into the store and through and onto the shelf and into the selling area a lot cleaner and quicker and more efficiently now.

Which speaks to a high degree of the more efficient smoothing of the inventory flow into our stores.

Some of the things Kevin was talking about earlier -- knowing what we own, and what stores sell what, and giving it to them closer to the need.

So I am not sure.

The question was -- can we do even more in the fourth quarter?

The answer is yes.

Our sales per square foot, although I am happy with the productivity increases that we are having, we can do more.

There is a whole lot of opportunity in increasing our sales per square foot.

The reason for going from -- going back way back in history from the small 4,000, 5,000, 6,000 square foot stores into the 10,000 to 12,000 square foot stores, initially it lowered our sales per square foot.

But it gave us open to sell, basically.

So since that time, mid-2000s, we have been rebounding in our sales per square foot and do continue to improve year over year.

Ladies and gentlemen, we have time for one to two more questions.

Joe Feldman, Telsey Advisory Group.

Hi guys.

How are you?

Congratulations on the quarter.

I wanted to ask about California a little bit.

Your two other deep value competitors plan to enter there next year.

I was just wondering if you guys are planning anything or focusing more of your growth next year there to defend market share, or how you're going to approach that competitive incursion.

Will thank you for the question.

Look, they are terrific stores, terrific competitors.

I admire both of those folks very much and I think they do a nice job.

California is not new for us.

We have been there since 1998.

We currently have over 350 stores right now in California.

And if you counted the West Coast including Oregon and Washington, it goes up over 500 stores.

We have been there for a long time.

We have got two DCs in California alone.

We have three distribution centers on the West Coast.

We have management oversight.

We have got store teams.

We have got real estate relationships, property management skills.

And we love of California and we are going to continue to grow in California.

We have expanded our logistics capacity out there over the last couple of years, and we intend to continue growing in the state of California as well as the whole West Coast.

So look, there is a lot of business to be done.

I guess enough for everyone, but we are going to stay focused on what we do.

We certainly have made a commitment to California and the West Coast.

Got it.

That's helpful.

Thank you.

Then if I could follow up with another separate question.

I was just thinking, if you look at the trends within your debit and credit card usage, I mean the penetration keeps going up.

Which makes sense, I mean that is obviously how people tend to shop these days or increasingly so.

Curious if you are seeing any difference in the mix of what you are selling as a result of that, or if it is actually helping to drive the average ticket.

Because people feel like -- well, I am just swiping a card instead of handing over $7 or something.

Well, we have had debit and credit in almost three years now I think completely.

It continues to grow, and I think you are right.

It is just the way people shop today.

I mean even younger people that would have been a cash consumer now carry debit and credit cards pretty regularly.

As we look at it, it is obviously a higher ticket item for us at the end of the day.

So our average ticket runs $7.80; but if you basically take a credit or debit transaction it is almost double that.

So people do buy a larger basket when they use that method of payment.

And that is why it was an important part of our business, when we were able to roll that out across the chain.

So I think it is something that we will continue to operate in that manner, that we will continue to see it grow as an overall part of our business.

Michael Exstein, Credit Suisse.

Thanks very much.

Can you -- just following up on the real estate issue and California, the only group in retail that looks like it is really accelerating in square footage right now are the value chains, as you call them.

Is there any concern that you all collectively will overbuild the segment in the short term?

I guess there is -- I guess you could do that.

We feel that we are different than the other guys.

We sell everything for $1.

We are extreme value.

Our customers like to shop with us because they can find the things they need, the things they want, and a little bit of a shopping experience.

So that is really how we are focused.

We look at where our opportunities to grow our stores, which corner and which markets, and we are trying to maximize our real estate in that way.

As far as overbuilding, we have got a long way to go.

We think we can operate up to 7,000 stores in the US and then the Deal$ model adds to that.

So we are excited about continuing our growth.

I don't see any overbuilding from us in the near future.

Okay, that's great.

One more question.

In terms of Canada profitability going forward, does it have the same sort of seasonal characteristics as the US?

Yes, pretty much.

They have pretty much the same seasons and the same type of seasonal characteristics.

And profitability going forward is a huge opportunity, from where they were when we bought them to what we can bring with the power of our buying and with the infrastructure that we know how to do, that we are currently installing.

We are going through a period of investment in Canada.

And I will say again, if you look at third quarter we have the Canadian numbers in our third-quarter numbers this year.

They weren't in there last year and -- we didn't buy them until fourth quarter last year, so you are looking at sort of a comparison that is not apples-to-apples.

But the opportunity is high there.

We think the customers will respond positively to all the great things that we sell at Dollar Tree.

Our imports, our seasonal imports are very desirable for the Canadian customers, and we are beginning to see some of the new product showing up in those Canadian stores now.

And that is all the time we have today for questions.

I will turn the call back over to Tim Reid for any closing comments.

I just want to thank you all for participating in the call, for your interest in Dollar Tree, and particularly for your investment in our Company.

Our next sales and earnings release and conference call are scheduled for Wednesday, February 22, 2012.

That is when we will release results for the fourth-quarter and full-year 2011.

In the meantime have a great Thanksgiving and a great holiday season.

Thank you.

Once again that does conclude today's conference call.

We thank you for your participation.