美元樹 (DLTR) 2012 Q3 法說會逐字稿

Good day and welcome to the Dollar Tree, Inc.'s third-quarter earnings conference call.

Today's conference is being recorded.

At this time I would like to turn the conference over to Mr. Tim Reid, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Roxanne.

Good morning and welcome to the Dollar Tree conference call for the third quarter of fiscal 2012.

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

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

Before we begin I 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.

One other note.

As reminder, on September 28, 2012 Dollar Tree sold its ownership and interest in Ollie's Holdings, which further will be referred to as Ollie's.

The Company originally acquired its Ollie's ownership interest in 2003.

The sale had a favorable impact on third-quarter earnings, with an increase to net income of $0.17 per diluted share.

Unless otherwise noted, all net income and earnings data presented today will exclude the impact of the Ollie's transaction.

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.

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

Bob?

Thanks, Tim, and good morning, everyone.

This morning we announced our sales and earnings for the third quarter of 2012.

Total sales increased 7.8% to $1.72 billion, driven principally by increases in traffic.

Our comparable store sales increased 1.6% compared with a 4.8% interest last year, and an 8.7% comp the previous year.

Earnings for the third quarter were $0.68 per diluted share.

This includes $0.17 from the sale of our interest in Ollie's.

Excluding the sale of Ollie's, our earnings for the third quarter were $0.51 per share.

This represents an 18.6% increase over last year's $0.43 per share.

And was at the high end of our $0.47 to $0.51 range of guidance.

Operating margin for the third quarter of 2012 was 10.7%, an increase of 40 basis points over the third quarter last year.

Net income rose 48.6% to $155.4 million, versus $104.5 million last year.

Excluding the income derived from the sale of Ollie's, net income rose 12.2% to $117.3 million.

Year-to-date through three quarters of 2012, total sales were $5.15 billion, an increase of 9.9%.

And comp store sales increased 3.9%.

Year-to-date operating income has increased by $76.5 million.

Operating margin was 10.8%, an increase of 60 basis points compared with the same period last year.

Net income rose 30% to $390.7 million.

And earnings per share were $1.69, an increase of 37.4% compared with $1.23 per share reported last year.

Excluding the income derived from the sale of Ollie's, net income rose 17.4% to $352.6 million.

And earnings per share were $1.53, an increase of 24.4% compared with $1.23 per share reported last year.

Sales increases in the third quarter came from growth in both basic and variety categories, with basic consumable categories growing at a slightly faster pace.

Our top-performing categories included housewares and home products, healthcare products, and food and beverages.

Customers responded enthusiastically to our Halloween seasonal product.

And our sales in third quarter met expectations.

Sales were particularly strong in Halloween home decor.

Seasonal changes were executed in a timely manner.

And we're now ready for fall, Thanksgiving and the holiday season.

In terms of the sales cadence in third quarter, comps were positive every month.

And we saw sequential improvement from August through October.

In terms of geography, performance in the third quarter was relatively consistent across the country.

With the highest comps coming from the Mid-Atlantic, Midwest and New England, followed closely by the Southwest and the Southeast.

Dollar Tree remains a destination for high-value consumer products, and customer traffic was up throughout the quarter.

When customers are in our stores shopping for the basics, we give them every reason to stock up on our terrific assortment of high-value and high-margin variety merchandise.

Even in a difficult economy, at Dollar Tree you can still splurge since everything is only $1.

Looking to the future, we're excited about our growth potential and continued relevance to the customer.

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

Dollar Tree is uniquely positioned to take advantage of this trend.

Our goal is to provide more value to a broader range of customers.

And we are doing this in many ways.

By opening more stores.

By opening better, more productive stores.

And by developing new formats, new markets and new channels.

During the third quarter this year we opened 111 new stores and relocated and expanded another 16 stores.

Through three quarters of 2012, we have added 298 new stores, and expanded or relocated 81 stores.

Selling square footage has increased 7.1%, and we ended the quarter with 4,630 stores.

We are on track with our new store opening plan for the full-year 2012, which includes 315 new stores.

And we have surpassed our plan for 75 relocations and expansions in 2012.

We now expect to complete more than 395 total projects across the US and Canada in fiscal 2012.

I'm particularly pleased by the productivity of our new stores.

Sustained improvement requires a coordinated effort across the organization.

It requires a strategy.

And it requires team work between real estate, merchants, planning, stores and logistics.

Our teams are concentrated on improved site selection, on right-sizing our stores, expanding our assortments, improving staffing, and building the bench of qualified store management.

And on opening new stores earlier in the year.

We believe these are the key elements to increasing our new store productivity., and we're having success.

I'm very pleased to report that average new store productivity has increased in each of the past six years.

And the trend has continued through the third quarter 2012.

Efforts to increase sales per square foot are not limited to new stores.

And elements of the strategy to increase store productivity can be seen throughout the chain.

In all stores we are developing more powerful seasonal presentations.

Stores are emphasizing more effective customer engagement.

And working to drive sales of related items through cross merchandising and suggestive selling.

We are expanding assortments at the front end of our stores to create more merchandise energy.

And to drive impulse sales.

And merchants are expanding our assortments in candy, stationary, health and beauty care, and home and household products.

Which was our fastest-growing category in the third quarter.

As part of our strategy to broaden assortments, our expansion of frozen and refrigerated product continues.

We installed freezers and coolers in 67 additional stores in the third quarter.

And now offer frozen and refrigerated product in 2,467 stores.

We remain on schedule to roll this product out to a total of approximately 325 installations for the full year.

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

Specifically that means Deals, Dollar Tree Canada and Dollar Tree Direct.

Our Deals format extends our ability to serve more customers with more categories, and increases our unit growth potential.

Deals delivers low prices on every day essentials, party goods, seasonal and home product.

By lifting the restriction of the $1 price point, at Deals we're able to serve more customers, with more products, at value prices every day.

Customers are responding favorably to the strategy.

Customer awareness of the Deals brand is growing and the concept is building momentum.

Overall, in the third quarter, as in the past several quarters, comp store sales in our Deals stores continued to lead the Company.

We're excited about the growth potential of Deals and particularly the opportunity that it provides to grow profitably in the higher-cost-of-operation urban markets.

We ended the quarter with a total of 194 Deals stores.

Our Canadian integration and expansion continues.

We initially entered the Canadian market through the acquisition of Dollar Giant stores in November of 2010.

Our goal is to be the leading retailer in Canada at the single price point of $1.25, just as we are in the US at the $1 price point.

Last year, our first full year, we installed retail systems, we integrated processes, merchandise assortments and store teams.

And we laid the foundation for future profitable growth in the Canadian market.

Just one year ago, in the third quarter of 2011, we completed the installation and training of store level POS and enterprise-level merchandising systems.

Today, for the first time, we have consistent year-on-year data on which to base our sales and assortment planning.

We have visibility to our on-hand, on-order and sales, along with the trailing history by store and by SKU.

These are all key factors in the management of an efficient supply chain and improving customer satisfaction.

Merchandising teams are 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 and beyond.

Our focus is on more efficient store operations, continued building of store teams, and improved product flow to the stores.

We're working very hard to increase the service level and in-stock position of basic products while improving the shopping experience through a more powerful seasonal presence and a higher level of merchandise energy.

Meanwhile, we are expanding our Canadian store base.

We opened 12 new stores in the third quarter, 30 stores year-to-date, and we ended the quarter with 129 Canadian stores.

We had begun the year with a plan to grow our Canadian store base approximately 25% under the Dollar Tree brand.

We will likely exceed this plan and end the year with 135 stores in Canada.

In addition, we've rebranded all the former Dollar Giant stores in Ontario to Dollar Tree Canada this year.

And will do the same for stores in the western provinces in 2013.

As we grow and improve, 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 Deals format.

I'm extremely excited about the opportunity for Dollar Tree in Canada and proud of what has been encompassed in a short period of time.

Our current commitment to build infrastructure, develop store teams and improve the consistency of our offering across the chain will be worth the efforts.

Dollar Tree Direct, our e-commerce business, continues to grow.

This additional channel of distribution provides an opportunity to broaden our customer base, drive incremental sales, expand the brand, and attract more customers into the stores.

Traffic exceeded 4.5 million unique visitors in the third quarter.

That is a 19% increase over the third quarter last year.

Additionally, over 28 million e-mails were sent to individual consumers, businesses and organizations.

We are expanding the available market to more consumers in several ways.

First, Dollar Tree Direct now has over 2,600 items available online, including 825 items for sale via our website, that can be purchased in less than case quantities.

An increase of over 65% versus the same time last year.

Additionally, we continue to work to enhance the customer's experience on their mobile devices, improving the ease of navigation and speed on our mobile e-commerce site.

Over 1.5 million people chose to interact with Dollar Tree via their mobile devices during the third quarter.

Through these initiatives, Dollar Tree Direct is gaining customers every quarter, and I am pleased with their progress.

Investments in new stores, more productive stores, additional formats and expanded geography all increase our ability to grow our business, expand our concept and serve more customers in more ways.

In order to achieve consistent and profitable growth, our practice has been to add infrastructure and distribution capacity to support our growth ahead of the need.

In that regard, construction is proceeding according to schedule on our new distribution center in Windsor, Connecticut.

DC10 will be one million square feet.

It will be automated and highly efficient, providing capacity and cost-effective service to our stores as we continue to expand in the Northeast.

We're on schedule for a third-quarter 2013 completion.

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, excluding the non-operating income from the Ollie's transaction, our diluted earnings per share increased 18.6% in the third quarter to $0.51.

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

Our gross profit margin was 34.9% during the third quarter, compared with the 35.1% reported in the third quarter last year.

Several factors contributed to this performance.

Freight costs increased, driven by higher tracking rates and diesel fuel prices that averaged $0.23 per gallon above the same period last year.

Our product mix continued to shift in the third quarter as basic consumable products increased by 32 basis points as a percentage of sales.

In addition, mark-down expense increased slightly as a percentage of sales relative to the third quarter last year.

These factors were partially offset by higher initial markup across many categories.

Occupancy and distribution expenses were flat as a percentage of sales, reflecting the 1.6% comp store sales growth and the addition of 295 new stores compared with the same period last year.

SG&A expenses were 24.2% of sales for the quarter, which is a 60 basis point improvement from the third quarter last year.

Operating expenses declined by about 45 basis points.

This was driven by a realized gain of $3.8 million relating to the favorable resolution to a legal matter.

And reductions in legal fees, advertising expense, repairs and maintenance, utilities, and debit and credit card fees as a percentage of sales.

Payroll-related expenses declined by approximately 15 basis points due to lower incentive compensation expense compared with last year.

We expect that credit card penetration will grow in the fourth quarter.

We have just completed the rollout of MasterCard acceptance to an additional 3,500 stores.

We now accept Visa and MasterCard in all of our stores chain-wide.

And we also accept American Express and Discover in all of our stores in the United States.

Operating income increased $19.3 million compared with the third quarter last year.

Our operating margin for the quarter was 10.7%, a 40 basis point improvement compared to the third quarter last year.

Year-to-date through the third quarter, operating margin is 10.8%, an increase of 50 basis points from the same period last year.

The tax rate for the quarter was basically unchanged at 36.3%, compared with the third quarter last year at 36.4%.

The tax rate was lower than the tax rate anticipated in our guidance for the quarter, due to favorable provision to return reconciliation adjustments and the lower tax rate on the Ollie's gain.

Cash and investments at the quarter end totaled $222.4 million versus $280.2 million at the end of the third quarter 2011.

During the third quarter, we invested $149.8 million for share repurchase, and repurchased 3.3 million shares.

During the first three quarters, we invested $235.3 million for share repurchase, and repurchased 5 million shares on the open market.

At quarter end we had $965 million remaining in our share repurchase authorization.

The diluted weighted average shares outstanding for the third quarter was 230.0 million.

Over the past four quarters we have invested $535.3 million for share repurchase.

We will update you on additional share repurchases, if any, at the end of the quarter in which they may occur.

Our consolidated inventory at quarter end was 12.7% greater than it was at the same time last year.

Selling square footage increased 7.1%.

Consolidated inventory per selling square foot increased by 5.2%.

The increase reflects a higher amount of inventory in our distribution centers at the end of the third quarter.

And an increase in goods on the water.

This is to support planned holiday and post-Christmas sales and new store openings.

And it is consistent with our strategy to smooth the flow of inventory through our logistics network.

Inventory turns increased in 2012 through three quarters.

And we expect this trend to continue for the full year, as it has for the past seven years.

Capital expenditures were $96.6 million in the third quarter of 2012, versus $75.5 million in the third quarter last year.

For the full-year we are planning consolidated capital expenditures to be the range of $320 million to $330 million.

Capital expenditures are focused on new stores and remodels, the addition of frozen and refrigerated capability to approximately 325 stores, IT system enhancements, and approximately $70 million towards our new distribution center in Windsor, Connecticut.

The total capital investment anticipated for this facility is approximately $100 million.

Depreciation and amortization was $43.6 million for the third quarter, versus $41.1 million in the third quarter last year.

For the full year we expect depreciation expense of $170 million to $173 million.

Our guidance for the fourth quarter of 2012 includes several assumptions.

First, Halloween shifted two days deeper into the fourth quarter this year from the first Monday of the quarter last year to the first Wednesday this year.

We believe that this did, in fact, shift approximately $5 million of sales from the third quarter into the fourth quarter compared to last year.

Second, we have been asked about the impact of Hurricane Sandy on our fourth quarter.

We are grateful to report that it appears the storm will not have a material impact on our fourth-quarter results.

Also as previously disclosed, due to the retail calendar, 2012 will include 53 weeks, and the fourth quarter will consist of 14 weeks.

This is expected to add $120 million to $130 million of incremental sales, and $0.07 to $0.08 earnings per share for the fourth quarter and full year.

Our guidance also assumes a tax rate of 38.1% for the fourth quarter and 37.2% for the full year.

Weighted average diluted share counts are assumed to be 228.6 million shares for the fourth quarter, and 231 million shares for the full year.

As always, our guidance assumes no additional share repurchase.

With this in mind, for the fourth quarter of 2012 we are forecasting sales in the range of $2.2 billion to $2.26 billion, based on a flat to a low single-digit comparable store sales increase, and 7.2% square footage growth.

Diluted earnings per share is expected to be in the range of $0.97 to $1.02, an increase of 21.3% to 27.5%.

This fourth quarter guidance includes the impact of the extra week.

For the full fiscal year 2012 we are now forecasting sales in the range of $7.35 billion to $7.41 billion, based on a low to mid single-digit increase in comparable store sales, and 7.2% square footage growth.

Diluted earnings per share is expected to be in the range of $2.65 to $2.70, representing an increase of 31.8% to 34.3% over our record earnings per share of $2.01 in fiscal 2011.

This includes the impact of the 53rd week.

The full-year guidance also includes $0.16 earnings per share from the Ollie's sale in the third quarter.

Excluding the impact of the Ollie's transaction, we would expect full-year earnings per share to be in the range of $2.49 to $2.54, representing an increase of 23.9% to 26.4% over last year.

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

Thank you Kevin.

In the face of a very challenging and uncertain environment, Dollar Tree's traffic grew, our reach is expanding, and we continue to deliver record profitability.

Operating margin increased by 40 basis points to 10.7%.

And I'd like to point out, that's the highest third-quarter operating margin in the history of our Company.

Earnings per share increased by 18.6% on top of a 19.2% increase last year.

Our inventory is balanced and more productive than ever.

Our turns increased again through the first three quarters of the year.

And we entered the fourth quarter well prepared for new store growth and customer demand.

Through the third quarter this year, we have opened 298 new stores across the US and Canada.

And the productivity of the new store plans has been performing ahead of last year.

In addition, the Company invested $235 million for share repurchase, buying back 5 million shares over the first three quarters, including 3.3 million shares for $150 million in the third quarter alone.

I believe that Dollar Tree is singularly positioned to do even better in the future.

The customers are focused on our stores and our product.

They are strategically located to serve middle America.

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

Our balanced mix of high-value consumer basics, and our unique assortment of fun, compelling, seasonally-correct discretionary products, positions us to be relevant to customers in all economic circumstances.

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

The Deals brand is gaining traction.

Both traffic and average ticket are growing.

Dollar Tree Direct continues to broaden its reach.

And we're building and expanding our Canadian business.

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, which we use for the long-term benefit of shareholders.

We're having a great year.

We've transitioned quickly from Halloween.

And our stores are now set with our best merchandise value 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

With a little bit more benefit of hindsight, can you help us better understand the causes of, let's call it, the slower comp growth that we saw towards the end of the second quarter and certainly into the third?

Yes, good morning, Scott.

Sure, the Q3 had some sales pressures.

It was a solid quarter.

We are pleased that our sales were up 7.8%.

Our comp sales grew 1.6%, and that was as a result of driven by traffic.

Our sales were within our range of guidance.

And it was an extremely profitable quarter.

Our operating margin was the highest ever in Q3 at 10.7%.

So it was really a strong quarter.

Net income up 12.2%.

EPS up 18.6%.

And, again, earnings at the high end of our guidance.

So, as I sit here and talk about pressures on our business, I am struck a little bit by the exceptional profitability of our quarter.

The pressure on sales were basically, I think you can put them in three buckets.

It was, number one, consumer anxiety from just the continuation of a difficult macro environment, with stubbornly high unemployment.

And continuing high gas prices, and they keep rising.

And continued concerns about the economy and the fiscal cliff.

And all of this was magnified every day as we went through the election.

And that created anxiety and uncertainty in the consumer.

That was one.

Secondly, we had a calendar shift of Halloween from Monday to Wednesday, which moved two more Halloween selling days into the fourth quarter.

That was about a $5 million headwind, and we saw that.

And the third reason is the difficult comparisons.

If you look at what we are up against, we are against a two-year stack comp of 13.5%.

As a comparison, in Q2 this year, we were against a two-year stack of 11.4%.

And if you look back at the three-year stack and the four-year stack, you find pretty much the same spread.

So it was a pretty difficult comparison this year in third quarter.

And especially difficult comparison in our consumable business, which grew as a percentage of total by 170 basis points last year.

And we were up against that this year.

This year consumables grew 32 basis points on top of that.

We had a good quarter, as I said.

We are pleased with the profitability.

We are now focused on fourth quarter.

Our stores are well-prepared for the holiday sales.

We're in stock, we are in business with the best values ever, and we're looking forward to a good fourth quarter.

My confusion stems from the fact that gas prices seemed to ease a little bit as the quarter went on.

And obviously the election wasn't until the end of the quarter, or really after the quarter.

So I'm a little confused why sales was improved during the quarter if these were the main reasons for the softness.

Those are all subjective.

We all saw the same things.

Gasoline prices overall rose throughout the quarter, and I believe continue to rise.

They are higher than they were this time last year, at any rate.

We do well in difficult times.

My point is, all the anxiety played out on TV 24/7 with the election, about the fiscal cliff, about the unemployment, about all the economic concerns.

I believe put pressure on sales in the third quarter.

Secondly, we had the calendar shift.

And, lastly, we were up against really tough comparisons in third quarter.

Especially when you looked at our consumable business last year, growing 170 basis points.

It's grown 200 basis points in two years, 170 of them were last year.

A difficult comparison.

Matt Boss, JPMorgan

Parsing through the flat to up low single digit 4Q guidance, and hurricane not really having a material impact, what are you see in regions that were not impacted by the storm?

Any improvement post the election, as you talked about fiscal cliff worries?

Just trying to parse through ex the storm what you have seen so far.

Matt, obviously, we give guidance but we don't then comment on the forward quarter basically beyond that.

Obviously I don't know that any of the macro environment has changed significantly since that point in time.

Some of those things -- unemployment, high gas prices, and uncertainty around the fiscal cliff -- are still there.

So I don't know that the environment has changed a whole lot.

Obviously we feel like we are ready for a good fourth quarter.

Our stores, our teams are well-prepared.

We have the inventory that we think is well-suited and right on the spot for the consumer.

So our expectations are to go through the quarter, and we believe it could be relatively good.

We are going against some very tough compares from a year ago when we were up 7.3% on a comp basis, with pretty much perfect weather.

So we all know that going into it, though.

Okay, great.

And then on the gross margin line, can you just walk further through some of the puts and takes?

Any changes on the discretionary front?

And how did discretionary fare in the quarter?

And anything you're seeing from a competitive standpoint of note.

Really, if you look at the discretionary versus consumables, both pieces of business were comp positive for the quarter.

So I think that is very positive.

So they both continue to comp positive, which has been the case for many quarters in a row now.

I think that as we go forward we would expect that to continue.

We are well-positioned.

We think that as we go forward, we have seen a slowdown, in a sense, as far as the delta of growth in consumables.

If you look at the quarters this year, Q1 I think we're up about 110 bips in consumables.

Q2 was 40, and then Q3 30.

So we have seen that moderate a little bit.

But overall we feel good about where we have positioned ourselves.

We are of variety store, first and foremost.

That is what our heritage is, and that's what we want to be known as.

That is very important to us.

So as we continue to go forward, we think that's good.

Gross profit otherwise, as we look and talk to maybe some of the pressures from Q3, obviously there was some freight pressure there, as we talked in the prepared comments about trucking rates.

And the fact that, if you look at the industry in general since the economic downturn, there have been many trucking businesses go out.

Less competition, obviously.

If you keep up in that industry, there's a nationwide shortage of truck drivers out there.

So there's definitely some pressure there.

Fuel, $0.23 up for the quarter.

The metric there, as we have always said, if diesel fuel is $1 higher for the full year, it would be about a $0.05 hit to us.

So you can back into what that means to us.

So expect it to still be some pressure as we go forward into Q4 in that area.

We've really seen it all year and I think we will continue to see a little bit of it as we go through the fourth quarter, as well.

Matt Nemer, Wells Fargo Securities.

Two questions.

One, now that we're past the election, and I know that there was some noise or some pressure in swing states, have you seen comps improve faster in those states where you had that noise?

And then, secondly, given the moderation in consumables growth, are you still seeing the same productivity lift when you add freezers and coolers to stores as you have historically seen?

Thank you.

Matt, we don't break it out by state or even by period, our comp sales.

We put that in our guidance, as Kevin described, how he thought about the guidance going forward.

Anecdotally, I will tell you that I think it is a good thing to get past the election.

Anything we can do to have a little more certainty in everybody's life is a good thing.

There is a lot of concern out there still.

And I think we're still in a period of a little bit of uncertainty in the consumer.

Having said that, we're prepared.

We have all the things that we need.

Our people have done a terrific job transitioning from third quarter into fourth quarter preparing for the holiday.

We've got the best assortments ever out there.

And when things are tight, we are still the place to shop.

At Dollar Tree, everything is $1.

We have things you need, things you want.

And we think we're going to get our fair share of the customer.

I am particularly pleased with our merchandise assortment this year.

A lot of it is new, a lot of it has changed.

It is not the same old, same old.

And our customers, I think, are going to be responding in great numbers to our stores and to our merchandise assortment for this fourth quarter.

So we are excited about it.

As we talk about all the headwinds, they're there.

We always plan to get our piece of the business.

And I think we will do so again this year in fourth quarter.

In regards to your question as far as freezers and the lift, as we add freezers and coolers to stores, we are continuing to see, as we have said historically, a 5% to 10% lift across the stores.

So it's not just consumables, it's the lift, it is discretionary and consumables across the board.

So we are continuing to see that.

We're now over 2,400 stores with freezers and coolers.

And we continue to roll out, as we've said, this year 325 stores.

And we continue to look to grow that program going forward.

We do believe, obviously, that it's faster turning, a little bit lower margin, but it does drive footsteps into our stores, and we like the traffic it generates.

Charles Grom, Deutsche Bank.

Just to keep on this topic about the sales.

If you look at the second quarter, you guys were up 4.5%.

And it's my understanding from the Analyst Day that your business in the beginning of August really slowed sequentially.

Last I checked, the economy or gas prices or the fiscal cliff really did not play into the equation then.

So I'm just wondering if you guys have dug a little bit deeper as to try to understand why your business did slow in the quarter.

Just because you guys have been so consistent for multiple years here.

It just seems very odd that your business would slow that much that quickly.

Chuck, I think you just got to take a look.

The macro environment really has not improved.

It is stubborn.

It continues.

And there is uncertainty and doubt out there.

Prove it?

I can't prove it for you.

I can just tell you what I see and what we hear and what we listen to our customers and what they say.

Now, as you look at the third quarter, it was a terrific quarter last year.

We're up against a big two-year comparison third quarter.

It was the largest two-year stack.

And when you look at the difference in the two-year stack between second and third quarter, it is about 200 basis points difference.

So there's a big difference in the last year's performance that we were up against in third quarter.

And a lot of that was consumer products.

We, again, grew our consumer goods 170 basis points in third quarter last year.

This year we grew it again, this 32 basis points on top of the 170.

So those were the facts.

It did start off every month was positive, every month grew.

August and September improved over August, October over September.

So it grew through the quarter.

All in all it was a 1.6 comp at the end of the day.

So the three pressures that I listed are the three that we can identify.

And those are the things that we see.

And, again, I will just point, a 1.6 comp delivered, a lot of leverage still on fixed costs, and it was an extremely profitable quarter for us.

Okay.

And then just for Kevin, just on the fourth quarter guidance, $0.97 to $1.02, say $1 at the mid point.

It looks like it implies about 70 basis points of operating margin expansion.

One, is my math right?

And, two, can you walk through the complexion of that?

How much do you expect to get from gross margins versus SG&A?

I think your math is relatively correct.

Obviously, you have to remember we do have the extra week in the fourth quarter.

So we have $120 million to $130 million of sales where no additional fixed cost per se.

Obviously there are some variable costs that go with that.

So that affects it.

And generally with the theme of the year, I think what you would see is, again, the majority of the gains coming from SG&A, potentially gross profit being flat to maybe a little bit of upside.

We continue to see the metrics move in the same direction.

(Operator Instructions)

Meredith Adler, Barclays.

I'm going to beat a dead horse to talk about fourth-quarter sales.

When I look at it, I looked at a three-year stack or three-year average.

Because last year was strong, in part, because of weather but also because the prior year had been certainly well below trend.

And so I'm a little bit surprised, if I added, say, 1% on a three-year basis, would be a really significant deceleration.

The question that hasn't been asked is about competition -- or I think it was asked and didn't quite get an answer.

Do you believe that Walmart, which has certainly been growing sales better than previously, do you think that is having an impact on your business?

Meredith, hopefully I am answering the question about competition as best I can.

We stay so focused on what we do.

We look at the competition.

I can't tell you that I can relate one or the other of the competitors to a reason that we factor anything into our guidance going forward, anything different into our guidance going forward Because we are so different than the other guys.

Comparing Dollar Tree to a Walmart is just really not a good comparison.

We do what we do.

Everything is $1.

We're small stores.

We create terrific value for customers on things that they need every day.

And we have been growing that business for several years.

As well as the discretionary business.

It's a place to go to find fun and exciting and new and seasonal and trend.

And everything is $1, and it is a fun shopping experience.

So it is just really a lot different model than Walmart.

It's a lot different than the other guys with dollar in their name.

I'm sure they're all doing really well.

But I can't tell you that I see anything that they are doing that is having an affect on us adversely.

We actually like being near most of them because of the traffic they bring into the shopping centers.

But we are just different and we are staying focused on what we're doing.

Great.

And then I have another question, for unrelated.

You did mention that, I believe, if I got it right, that incentive comp was a bit of a help to expenses this quarter.

I'm just wondering, since your guidance has gone down for 4Q comp, does that mean that whatever the field people need to produce, their expectation has gone down?

And so that if you hit a 1%, then incentive comp would be there in the fourth quarter?

Guidance obviously assumes the sales that we are expecting.

And within that is built the model of how we build up the incentive comp.

Obviously, if we significantly outperform the guidance, would the sales bonus potentially go up?

Yes.

But it goes up in concert.

That's the way it's built.

Such that it is pay for performance, realistically, is the way we've always looked at it.

So I don't think it is going to significantly shift the fourth quarter one way or the other.

It is really built in accordingly.

And, Meredith, the incentives are still the same.

If they exceed their goals then they get paid more.

But we like that.

If our stores exceed their goal, we all exceed our goal.

So it all goes up in concert.

Dan Wewer, Raymond James

I remember way back in 1999 and 2000, Macon Brock used to say don't invest in Dollar Tree if you want strong same-store sales.

We're small stores, highly efficient, that kind of capacity.

Obviously, there is no price inflation benefits with the $1 format.

And then over the seven years following, the Company rebuilt itself into a chain of larger stores.

Since 2007, the Company has been achieving the strongest same-store sales growth in its history.

So a lot different scenario than what Macon talked about.

But today we're getting sales productivity not quite back to where it was in 2000, measured per square foot.

But quite a bit closer.

Do you think maybe we're at the tipping point where those days of 5% 6% same-store sales gains just mathematically aren't possible, given the big ramp that you achieved in the last four years.

Maybe business can be better than 0% to 2%, but we should be thinking more maybe in that lower single-digit rate going forward.

Dan, going back to 1999, remember, I was there too, and we did have small stores, 4,000 to 6,000 square feet.

And they pretty much opened up at what they were going to do, and comps were stubborn.

As we expanded the size of our stores, one thing I used to like to talk about, and still do, is we expanded our open to sell, which served the customer better, gave us the ability to offer more products and more categories and serve more customers, and a more broad appeal.

And we have had that.

I think your point about since 2007 through 2012 some of our highest comps is valid.

And I think what you're looking at is short term versus long term.

I still believe what I told you back in 1999 about the largest store and where we could go, and the opportunity to serve more customers, and better serve our customers, and increase our same-store and our productivity.

I still believe in that.

But we are going to go through swings from time to time, from year-to-year, from quarter to quarter.

And, frankly, short-term you are going to have a quarter that is up against a really big quarter, or really big two, or in this case five quarters.

And the comparison is going to get a little difficult.

And what about if you get a little bad weather, and, by the way, what about if you get a little sentiment running the wrong way.

I don't see that as long term, though.

So, yes, we can still comp at higher rates, and we intend to comp at higher rates.

I'm really pleased with the 1.6%.

I know that sounds funny, maybe, when I say that because I'm always looking for more.

But in this quarter a 1.6% comp, and the way we converted and leveraged that and converted that to operating margin.

The highest operating margin ever in third quarter from a company that has high operating margins, I think.

And I'm pretty proud of what our folks have done with that.

Can we do better?

Absolutely.

We can do a lot of things to continue to engage our customers.

We can sell more, we can increase our productivity in all our stores.

It's going in the right direction.

You hear me praising that.

Directionally we are going the right way.

We are not at the top, we are not where we are going to be.

There are still things that we can do to drive productivity.

And our teams are working and focused.

So look a little bit longer than one quarter.

I still believe in the concept.

I believe that we are more relevant today than we have ever been to our customer.

Back in 1999 we literally did not have much that you needed.

It was everything that you wanted.

For the most part, small stores.

Now, with our mix, when times are tough, we've got things to sell in tough times.

And you can see the growth in our consumer products from that.

When times aren't so tough, we have discretionary product.

I talk about liking our customers having jingle in their pockets because I really want to sell the full mix.

And that's what we strive to do at Dollar Tree.

It's not just one or the other.

It is selling the mix and it is selling the shopping experience.

And I still believe that when everything is $1 in the store, that makes us different.

And our customers love it and they react to it and they're going to for many years.

I just wanted to follow-up also on Meredith's question about competition, and expand the competitive set to include Family Dollar and Dollar General.

It does appear that Dollar Tree's momentum in consumables began to slow about the same time that Family Dollar began to make a bigger investment in consumable products, whether it is the Pepsi product or the McLane product.

And also, it appears that maybe the business began to decelerate after Coke started downsizing the Coke bottles at Dollar Tree from 20 ounces down to 14 ounces.

I know that there's a lot of leakage in that part of the business based on pricing and value.

Maybe you could talk about those two issues.

I know it may sound like that, and then from afar look like that.

But the facts are they just don't support it.

As we look at our stores that are in the competitors' areas, we see no difference.

We see nothing from what they are doing that is affecting our stores on the store-by-store, market-by-market basis.

Like I said, they're good retailers.

I have great respect for all of them.

But we are different.

We're just not the same.

We're not a Coke/Pepsi predominantly driven name brand, predominantly driven assortment.

And when we do have name brands we're usually a little different.

I think our value on our front end -- we only sell the Coke products at the front end, for the most part.

From time to time we will have it somewhere else.

But it is always impulse, it's always out of the cooler, mostly out of the cooler.

You need one to drink, you pull it out.

It is a great value for $1.

By the way, you can buy the Pepsi and it's a bigger bottle than the Coke product for $1.

That's a position that Coke has chosen to take.

So, we're just like everybody else, we are out there, whatever size they are willing to sell for that price.

So I will tell you that there is no data that supports the fact that the competition is taking away our consumer products business.

It is more us.

It is more we started and went from zero to whatever we have now in the last several years.

And now we are starting to year over year run up against those big numbers.

And we continue to grow, but we intend to grow the whole mix, not just one side or the other.

And as you go into our stores, hopefully this Christmas you will go into our stores, take a look.

And when you walk in, what you are going to see is Christmas.

You are going to see fun, and you're going to see toys, and you're going to see all the things to decorate your house and wrap your boxes and give your presents, and stocking stuffers and all of those kind of things.

Because that is what we think as excitement, merchandise energy, ever-changing mix of product.

What makes us different than the rest of the folks in our sector.

That is the facts.

We are in control of our destiny.

We are going to have times where the comps are more, and times when the comps are less.

And year over year over year, there are going to be times when you have a little different set of circumstances after five years of progressively increasing comps.

Look at the long term, though.

And I don't mean long term next century.

I'm talking about just look at the long-term future of our Company.

We are the best-positioned, we've got the most growth, we've got the most tools to grow.

We have Dollar Tree, we have Deals, we have Dollar Tree Canada, we have dollar Tree Direct.

We have the infrastructure to support that growth.

We know how to run it and I am really pleased about where we are.

It's like playing golf I tell folks if I can take my drive -- instead of driving, if I could place my ball out on the fairway where I want it, this is where I want to place it.

We're exactly where we need to be in regards to relevance to our customer.

And that's the answer.

Stephen Grambling, Goldman Sachs.

Just to follow-up on some of these other questions surrounding the guidance.

Just to be clear, you have had an acceleration in each month in the quarter.

So are you running currently at the high end of the range?

And if so, is it really just the conservatism associated with the tougher comparison that is driving the flat to low double-digit?

Stephen, again, we don't give any information out about the forward quarter.

Obviously everything that we know today is baked into our guidance as we have given it to you.

And that's really where we are at.

I don't know that we believe there is conservatism.

Our guidance, we try to put it together with the best facts that we have in front of us at that point in time.

And we try to be as realistic as possible and put the best numbers forward that we can.

So that's how we look at it.

And that's really all we can speak to at this point.

Great.

And then the follow-up to that would just be the leverage point seems to have come down with the comp.

And it definitely suppressed the upside.

If the comp was to reaccelerate, how does that change the dynamic of the leverage point?

And what would actually flow through?

And what would you think about maybe reinvesting in the business?

I think, obviously, the better the comp, the more leverage we have traditionally seen.

There's no doubt about that.

We continue to work very hard in every aspect of our business to become more efficient.

To find ways to improve processes.

Buy things that are from a non-merchandise point of view.

All those things we work hard on every day.

And obviously we believe there's always continued room to improve there.

I think, as we think about investing in our business, obviously the best thing to invest in is another Dollar Tree Store, as we've said for a long time.

The return on another Dollar Tree store is the best thing we can do.

And we look to continue to grow our business.

We're investing in our infrastructure with our new distribution center, a $100 million project.

So not a small project.

And we will continue to look at those types of things.

We continue to be a buyer of our stock in Q3, with $149 million of stock repurchased in Q3.

So those are the ways that we look at continuing to invest in our business.

And as we continue to create strong quality earnings, that is what we will look to do.

Edward Kelly, Credit Suisse.

My question is on relocations.

Can you talk about the performance of your locations, your relocations more recently versus the last few years?

Are you starting to move further down the opportunity curve there?

And what does the quality of the pipeline look like over the next few years?

We're very strategic in our relocations now.

We rarely close a store.

We are always looking though, we do usually five-year leases with three five-year terms, something like that.

Sometimes longer if we know the market a little better.

But the idea being that, as the market changes, we can move with the market.

Back in the earlier days as we were transitioning from the small store to the large store, our relocation was strategic for the market.

But it was also an increase, usually, of the store size.

Today our relocations are typically to stores strictly for strategic reasons.

Maybe the anchor in the center moved.

Maybe the population has changed.

Maybe we just run out of term and we need to move.

Maybe the landlord is going to scrape the center or something like that.

But the size of the store we are moving from is about the same as the size of the store that we are building.

So there is not much of a difference in that.

It is strictly a relocation based on strategy, based on where we want to be in the market, and how many stores.

And we talk about planning the market.

It's not just one store, it's the entire market that we are looking at.

So in trying to answer your question, I would say that the pipeline, we start looking at opportunities to relocate several years before the lease term expires.

And we are always out there looking at the market and moving things around to be optimal.

I would say that most of the time we relocate strategically.

We're finding the space to move to.

We're finding the right kinds of product.

And, again, we have the ability to take what is there as is, and turn it into a nice Dollar Tree store.

Sometimes we can work with a developer.

Sometimes.

Not as much since 2008.

But a little more now than it has been, to build the right Dollar Tree store for us.

So the relocations are generally there.

And the idea of planning out the market and moving them around is typically the reasons we do it.

Not to get to a bigger store, as much.

The question I'm trying to ask is, has the sales life from relocations changed at all over, let's call it, the last two, three, four quarters?

And would you expect the sales lift over the next couple of years to be similar to what it has been?

Sales lift is about the same as it was last year from a relo.

And, again, we're relo-ing same-sized stores, typically.

A10,000 square foot store to a 10,000 square foot store.

So there's not a benefit from more square footage as there was in the early days moving from a 5,000 to a 10,000.

But we're still, last year, this year, seeing pretty much the same sales lift.

Dan Binder, Jefferies & Company.

I had a couple questions.

First, in your comments about the sequential improvement from August to October, I was just curious if you could drill down a little bit.

What was the comp gap across the worst- and best-performing month of the quarter?

And then, also, as you have seen the comps slow a little bit here, do you think that you are inclined to do more types of promotions, like two-for one kind of thing, to try to get the business reaccelerating a little bit?

I can't tell you the comp gap from month to month.

We just don't report that.

But it's really more about August last year was a bigger period than September was last year.

So we were up against a bigger number in August.

As we went through the quarter, we comped positive every period and it rose throughout the quarter.

But it was more in relation to what we did last year by period than it was anything else, to get to the 1.6%.

And, no, we are not going to do two-for-ones.

Everything is $1 at Dollar Tree.

And we put the most value in it we can put for $1.

And it is worth more than $1.

So it is not the value of our products, as we see these things.

And we're not planning any dramatic promotions.

And I'll point too, one more time, we had the highest operating margin in third quarter we have ever had in third quarter.

Our goal is to make money.

Our goal is to drive sales, drive productivity, leverage the fixed costs, leverage our infrastructure, and make money for our shareholders.

And we're going to do that the best way.

Sales is not something that we do.

We don't do.

Clearance is the only thing we do.

After Christmas we'll sell some things two for $1, Christmas items.

But, no, we don't plan any price promotion.

We're already a price promotion.

The whole store at 10,000 square feet is $1.

Okay.

My other question was regarding store growth versus comp levels.

When you're comping solid mid-single 7% type square footage growth, it makes a lot of sense.

One data point is not a trend, obviously.

But if we look out over the next, call it, two, three quarters, and you are more low single-digit comp versus mid single, do you think you need to rethink square footage growth and how that plays into the model?

No, I don't think so.

Our best use of $1 invested is to build a new Dollar Tree store.

The returns are terrific.

Our goal is to keep making them even better, more productive.

And we are having success in that.

The new stores are opening up at historically higher rates, by productivity.

Sales per square foot are up.

And we think we can drive that higher.

So our returns should be going up.

And we are happy with continuing to grow and open more stores.

The number of stores that we are opening, the number of stores that we think we can open profitably, with the infrastructure that we have built, with the people and the store teams that we have and that we can develop profitably.

So we are subject -- we have plenty of room for growth.

We can run, we think, 7,000 Dollar Tree stores.

We've got a lot of room to go towards getting to that number.

And our goal is to continue growing pretty much at this rate.

We have not announced what next year's rate is but I'm still bullish on Dollar Tree.

We still have the same idea, we're going to grow what we think we can do based on our ability to do it profitably, not get ahead of ourselves.

That concludes today's question-and-answer session.

Mr. Reid, I'll turn the conference back to you for any additional or closing remarks.

Thank you, Roxanne.

And thank you all for your participation on the call this morning.

And for your interest in the Company.

And most of all, thanks for your investment in Dollar Tree.

Our next sales and earnings release and conference call are scheduled for Wednesday, February 27, 2013.

In the meantime, have a great and happy Thanksgiving and a joyous holiday season.

Thank you.

Thank you for your participation.

That does conclude today's conference.