美元樹 (DLTR) 2013 Q1 法說會逐字稿

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

As reminder, today's call is being recorded.

At this time, I'd like to turn the call over to Mr. Tim Reid, Vice President, Investor Relations.

Please go ahead, sir.

Thank you, Aaron.

Good morning and welcome to the Dollar Tree conference call for the first quarter of fiscal 2013.

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

Kevin Wampler, our Chief Financial Officer, will provide a more detailed review of our first-quarter financial performance and provide our guidance for the remainder of 2013.

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.

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

Now I'd like to turn the call over to Bob Sasser, our President and CEO.

Bob?

Thank you, Tim.

Good morning, everyone.

This morning we announced the following results for the first quarter 2013.

I'm pleased to report that our comp store sales increased 2.1% in the quarter.

This was on top of a 5.6% comp in the first quarter last year and a 7.1% comp the year before.

Traffic grew 1% and average ticket increased 1.1%.

Total sales grew 8.3% to $1.87 billion.

Operating income increased by $28.6 million or 15.2%.

Operating margin was 11.6%, an increase of 70 basis points over first quarter last year.

Net income increased 15% to $133.5 million and earnings per share increased 18% to $0.59, compared with first quarter 2012 earnings of $0.50 per share.

I'm very pleased with these results.

Gross margin increased 20 basis points, driven by an increase in merchandise margin and leverage of occupancy costs with a 2.1% sales comp.

SG&A expense decreased 50 basis points.

And as result, operating margin increased 70 basis points to 11.6%.

That's the highest first-quarter operating margin we have ever produced, breaking the record set in first quarter last year.

This did not happen by accident and I'm particularly proud of our Dollar Tree associates, who work every day to deliver on our promise of great value merchandise and a clean, bright, and fun place for our customers to shop.

The merchant teams continued to source and develop product that exceeds the customers' expectations of what $1 can buy.

The product selection and assortment day in and day out is of the highest value and more relevant to our customers than ever.

New customers are finding Dollar Tree and Deals to be shopping destinations and our store teams are working very hard to keep these customers coming back by delivering on our promise of a store that is clean, bright, friendly, and full of merchandise energy.

Seasonal transitions in the first quarter were well executed.

Fresh assortments arrived in a timely manner and our stores transition seamlessly from one season to the next, while consistently maintaining high levels of in-stock on basic items that customers need every day, alongside seasonally relevant and fun discretionary products.

Our sales growth in the first quarter came from a mix of both basic consumable and discretionary products.

Our top-performing categories included stationery, candy, party supplies, and healthcare products.

In addition, our Valentines and Easter sale seasonal categories performed very well.

Our sell-through and transition to Mother's Day and Spring Fling was accomplished efficiently.

In fact, altogether this quarter, our discretionary business grew faster than consumables, a differentiating factor for Dollar Tree.

We believe that our model is right for all times.

We offer the customer a balanced mix of needs-based consumer products, alongside high-value seasonal and basic discretionary products and it's all at $1.

You can splurge at Dollar Tree and you can still balance your budget.

In terms of geography, performance in the first quarter was relatively consistent across the country, as all zones achieved positive comp store sales.

The highest comps were in the Southwest, followed closely by the Southeast.

Overall, our comps were positive every month, with our strongest performance in April.

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

Our plan is to continue growing our business by providing more value to a broader range of customers and we're doing this in several ways.

The first way is through organic new store growth.

During the first quarter this year, we opened 94 new stores, relocated and expanded 16 existing stores, and grew total square footage 7%.

We ended the quarter with 4,763 stores and we're on track with our plan for the full year which includes 340 new stores and 75 relocations and expansions, for a total of 415 projects across the US and Canada.

This is in addition to the 25 new stores and 5 relocations that we completed early and we opened in January.

In the past, we've chosen not to open stores in January but through the efficiency of our store development teams, that's changing and we like the results.

In addition to generating incremental sales in fiscal 2012, the stores will be generating a full year of sales in 2013 and improved productivity.

As a reminder, square footage growth this year is planned to be 7.3% over fiscal 2012.

In addition to opening more stores, we have a strategy to open better and more productive stores.

I'm particularly pleased that average new store sales per square foot have increased consistently for seven years.

Last year, new store productivity grew to its highest level since 2001.

While it's still very early, I'm pleased with the productivity of this years' new store class and I'm happy to report that we're ahead of plan.

Increasing sales per square foot requires a team effort.

It requires a focus on improved site selection and right sizing our stores to the market, and it requires developing more productive floor plans, expanding assortments with a focus on the most productive categories of merchandise, and opening stores faster through improved staffing and building the bench of qualified store management.

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

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

In all stores, we're developing more powerful seasonal presentations to create interest and a fun shopping experience.

Across the chain, we're expanding our assortments in candy, stationery, health and beauty care, and home and household products to maintain relevance to our customers.

After Easter and with great success, we have re-merchandised our checkout lanes and expanded our assortments at the front end of our stores to create more merchandise energy and to drive impulse sales.

Store associates are emphasizing more effective customer engagement and working to drive sales of related items through cross merchandising and suggestive selling.

And to satisfy basic needs and to drive increased shopping frequency, we continued to expand our frozen and refrigerated product to more stores.

In the first quarter, we installed freezers and coolers in 229 additional stores.

This is the most installations we have ever done in one quarter.

We now offer frozen and refrigerated products in 2,778 stores.

This category is extremely productive.

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

Our plan now is to expand frozen and refrigerated products to a total of 550 additional stores this year.

This is an increase from our original plan of 475 installations.

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.

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 stores deliver low prices on everyday essentials, party goods, seasonal, and home product.

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

Awareness of the Deals brand is growing and the concept is building momentum.

In the first quarter, Deals had particular success in Valentines and Easter seasonal merchandise, as well as stationery, lawn and garden, automotive, and home decor.

We added eight new Deals stores in the first quarter, ending the quarter with a net total of 200 Deals stores across 19 states and we're on track with our growth plan for 2013.

Our Canadian integration and expansion continues on schedule.

Through our early investments in infrastructure, systems, and training, we now have consistent year-on-year data on which to base our sales and assortment planning.

Our merchant teams are leveraging the buying power of Dollar Tree in Canadian customers -- and our Canadian customers are beginning to find broader, more exciting assortments and better values in the stores.

In first quarter, Canadian customers responded favorably to our Valentine's Day and Easter efforts with high-value Dollar Tree merchandise alongside domestically-sourced Canadian products.

Our Canadian customers continue to be wowed by the product variety and value and we're aggressively expanding our Canadian store base.

We opened 11 new stores in the first quarter under the Dollar Tree Canada brand and ended the quarter with 151 Canadian stores, well on our way to achieving our plan to grow our store count by 25% for the year.

In addition to opening new stores, we're re-merchandising and rebranding existing stores.

Last year, we rebranded all the former Dollar Giant stores in Ontario to Dollar Tree Canada.

Our customers have responded favorably to the rebranded stores that reflect Dollar Tree on the outside and an exciting new merchandise layout on the inside.

We will complete the transition with a rebranding of the stores in the western provinces by the end of the third quarter this year.

We see enormous potential in Canada.

As previously reported, 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.

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.

Adding to our growth strategy, Dollar Tree Direct, our eCommerce business, is exciting and growing.

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

To give you some highlights, in the first quarter, our online traffic increased 23% over the first quarter last year.

Over 1.7 million people visited the mobile version of our site in the first quarter as more and more people are using their smartphones for their online shopping.

In addition to DollarTree.com, in first quarter we launched a world class eCommerce site for Deals.

You can now shop the Deals stores dot-com site where we have over 3,000 items available for sale.

Whether shopping in our stores or online, our focus on engaging with existing and potential customers via social media continues.

We're using YouTube, Pinterest, Facebook, Twitter, and text messages to interact and engage our customers wherever they are.

Feel free to check us out online.

There's always something exciting going on at Dollar Tree and Deals.

One of the keys to achieving consistent profitable results has been our practice of building infrastructure and distribution capacity to support growth, ahead of the need.

In that regard, I want to update you on the status of three projects.

First, construction on our new 1 million square foot distribution center in Windsor, Connecticut, has been completed ahead of schedule and under budget.

We're now receiving merchandise at the new facility and we will begin shipping to stores in early June.

DC10 is automated and designed to increase capacity and provide cost-effective service to our stores as we continue to expand in the Northeast.

Second, we're expanding DC8 in Marietta, Oklahoma, from 600,000 square feet to 1 million square feet.

The expansion is proceeding on schedule with plans to be operational in third quarter.

Both the Marietta expansion and the new Windsor DC are being financed through available cash.

Third, during the first quarter, we entered into a lease on a 350,000 square foot adjacent building in San Bernardino, California.

This additional capacity is already operational and is helping us to meet the growing demand for our merchandise in the Southwest.

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

Kevin?

Thank you, Bob.

As Bob mentioned, our diluted earnings per share increased 18% in the first quarter to $0.59 per share.

The increase comes from our strong sales, a 20-basis point increase in gross profit margin, and a 50-basis point reduction in our total SG&A expense compared to the first quarter last year.

Starting with gross profit, our gross profit margin was 35.2% during the first quarter compared with 35% in the first quarter last year.

Our merchandise margin improved due to higher measure initial mark-up and leverage on occupancy and distribution expenses, reflecting the 2.1% comp store sales growth.

The improvements were partially offset by increased shrink expense and higher freight costs, due to higher trucking rates compared to the same period last year.

SG&A expenses were 23.6% of sales for the quarter, a 50-basis point improvement from the first quarter last year.

Payroll-related expenses declined by approximately 35 basis points, reflecting lower incentive compensation expense compared with last year, improved labor productivity in our stores, and leverage associated with the comparable store sales increase.

Operating expenses declined by approximately 15 basis points, due to improvements in advertising, repairs and maintenance, and inventory service expenses as a percent of sales.

These were partially offset by an increase in legal expenses.

Operating income increased $28.6 million, compared to the first quarter of last year and operating margin was 11.6%, an increase of 70 basis points compared to the 10.9% operating margin in the first quarter last year.

The tax rate for the quarter was 38.1%, consistent with our guidance.

This compares with a 38.4% tax rate in the first quarter of last year.

Cash and investments at quarter end totaled $383.3 million, compared with $382.3 million at the end of the fiscal first quarter of 2012.

During the first quarter, we invested $68.4 million for the repurchase of 1.5 million shares.

At quarter end, we had $791 million remaining in our share repurchase authorization.

The diluted weighted average shares outstanding for the first quarter was 225.2 million.

Our consolidated inventory at quarter end was 15.4% greater than at the same time last year, while selling square footage increased 7%.

Consolidated inventory per selling square foot at cost increased by 7.9%.

This reflects primarily an increase in goods in our supply chain, including inventory for our new DC in Windsor, Connecticut, as well as the inventory in the 312 net new stores that have been added since the end of the first quarter last year, and merchandise to support our initiatives in stationery, check out, party, and graduation.

We believe that current inventory levels are appropriate to support scheduled new store openings and our sales initiatives.

Capital expenditures were $103.2 million in the first quarter of 2013, versus $65.4 million in the first quarter last year, reflecting our investment to expand distribution capacity.

For fiscal year 2013, we're planning consolidated capital expenditures to be in the range of $320 million to $330 million, compared with $312.2 million in fiscal year 2012.

Capital expenditures are focused on new stores or remodels, the addition of frozen and refrigerated capability to approximately 550 stores, IT system enhancements, and approximately $37 million towards the new Windsor, Connecticut, distribution center and $25 million for the expansion of our DC in Marietta, Oklahoma.

Depreciation and amortization in the first quarter totaled $45.1 million versus $41.8 million in the first quarter last year.

We expect depreciation expense to be in the range of $190 million to $200 million for the year.

Our guidance for the balance of 2013 includes the following assumptions.

First, we were pleased with the results of our May 1 ocean freight negotiations which were consistent with the assumptions in our previous guidance.

As we look at ahead to the fourth quarter, this year there are six fewer selling days between Thanksgiving and Christmas which represents a $25 million sales challenge in the fourth quarter.

Also as you will remember, due to the retail calendar 2012 included 53 weeks and the fourth quarter consisted of 14 weeks.

This extra week added $125 million in incremental sales and $0.08 of earnings per diluted share to the fourth quarter in the full year last year.

Finally, our guidance also assumes a tax rate of 38.1% for the second quarter and 37.8% for the full year.

Weighted average diluted share counts are assumed to be 224.9 million shares for the second quarter and 225 million shares for the full year.

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

With this in mind, for the second quarter of 2013, we are forecasting sales in the range of $1.81 billion to $1.86 billion, based on a low single-digit comparable store sales increase and 7.1% square footage growth.

Diluted earnings per share are expected to be in the range of $0.52 to $0.57.

The Company reported second quarter 2012 earnings per share of $0.51 which included a previously disclosed one-time benefit to earnings from a favorable tax rate, amounting to about $0.025 per share.

Our earnings guidance for the second quarter of 2013 represents an increase of 6% to 16% over last year earnings per share when excluding the one-time tax benefit.

For the full fiscal year of 2013, we are now forecasting sales in the range of $7.81 billion to $7.97 billion, based on a low-single digit increase in comparable store sales and 7.3% square footage growth.

Diluted earnings per share are expected to be in the range of $2.61 to $2.77.

This represents an increase of 7% to 14% over 2012 earnings per share of $2.44, excluding $0.08 benefit from the 53rd week and a $0.16 gain from the sale of Ollie's in the third quarter of last year.

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

Thanks, Kevin.

Once again, I'm very pleased with our Company's performance in first quarter and we're solidly on track to accomplish our goals for 2013.

Total sales grew 8.3% to $1.87 billion, a first-quarter record.

Operating margin increased by 70 basis points, also the very best first quarter in our history.

And earnings per share increased by 18% to $0.59 per share, another first-quarter record.

We continue to grow, opening 94 new stores.

We expanded and relocated 16 stores and increased our selling square footage by 7% and our new store productivity continues to increase.

We expanded frozen and refrigerated product of 209 stores, more than any previous quarter in our history.

To support our growth, we completed the construction of a new 1 million square foot DC in Windsor, Connecticut, increased our capacity in San Bernardino California, and broke ground on the expansion of our Marietta, Oklahoma, DC.

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

Over the past four quarters, we've invested more than $400 million for share repurchases, including $68 million in the first quarter this year.

As I look ahead, I believe that Dollar Tree values have never been better and our future has never been brighter.

We have a vision of where we want to go, and the infrastructure and capital to make it happen.

We're opening new Dollar Tree stores and there's plenty of room to grow.

We're increasing the productivity of our stores in both new stores and comp stores.

We're growing through new formats, like Deals and Dollar Tree Direct, and we're expanding our geographic reach.

Canada is a great opportunity for substantial growth.

All of this provides a road map for sustained profitable growth ahead.

We will now address your questions.

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

Thank you.

(Operator Instructions)

And we'll go first to Matt Boss with JPMorgan.

Good morning.

Could you update us on your view for the [health] of the low-end consumer?

Particularly, do believe we're seeing any initials signs of underlying improvement after the fiscal cliff uncertainty?

You talked to improvement in April.

Have you seen this continue into May?

And what are the drivers of the improvement in the back after the quarter?

Starting with the consumers, just anecdotally, I can tell you that we still think they're concerned and burdened and, I would add, just a bit weary from all that's going on.

They're now facing higher taxes and overall less money to spend, and add to that the job concerns that are still there, and the uncertainty around the economy.

Gas prices are down little bit but they're still high.

They're stubbornly high.

So the consumer is under pressure.

At Dollar Tree, again, we think of ourselves as a part of the solution and a destination for those customers.

When you're cash-strapped, you can come to Dollar Tree to balance your budget.

We've got things you need, things you want, exciting place to shop.

Everything is still $1 so we think our stores and our merchandise assortment is more relevant than ever.

Other part of your question spoke to what's driving our business.

In my earlier remarks, we talked about stationery and party and HBC and all those things.

We had great seasonal.

Valentine's Day was a terrific event for us.

As it generally is, Easter was a big holiday, although early.

We had a nice sell-through on our Easter business.

The sales were driven by a balanced mix basically between comps and average ticket in the first quarter.

We were comp positive all three periods of the first quarter, February, March, and April, with April being the best comp of the first quarter.

Great.

Second, can you elaborate on your gross margin performance in the quarter?

Particularly, you spoke to the [IMU] benefit.

Is this something you're seeing from a sourcing perspective?

As we look forward, how should we think about it in back half of the year?

Matt, I think as we look at it, we've talked about hire [IMU] in many categories for a while now.

This is, in my opinion, just the continuation of our merchants continuing to source just unbelievable values out there to help our consumer along.

I don't think that's anything necessarily different.

I think what changed a little bit was, obviously, the mix change little bit from our overall consumable and discretionary.

As Bob noted in his comments, discretionary grew faster than consumables which is the first time we've seen that in a while.

And we think that's a good thing.

We are a general merchandise variety store.

It's where our heritage is.

It's where our roots are.

At the end of the day, that's a good place to be.

So we continue to focus there and believe that can be important for us.

As we look to the year, we'll continue that way.

We think the trend, our guidance, as we look to Q2 take some of that trend into consideration, in the sense that we think our discretionary business will continue to do well.

That doesn't mean we'll try to sell less consumables.

At the end of the day, we have plenty of consumables and we'll continue try to grow that business as well.

Great.

Good luck.

We'll take our next question from Stephen Grambling with Goldman Sachs.

Thanks for taking my question.

Just a follow-up on what Matt was referencing, on the discretionary side, can you expand on, or at least quantify, some the SKU additions there and maybe how that's helped the comp?

In first quarter, we had a terrific seasonal set, again, Valentine's Day, terrific comp on our Valentine's Day this year.

Our balloon business, our party business, all the seasonal things that go with Valentine's, our candy business, we did very well.

Even with early Easter and really the cold weather around Easter day, they responded favorably to our Easter assortments.

We had a nice sell-through on that.

Then we came in after Easter, like the day after, and our stores and our merchants and our distribution people just did a terrific job of really falling in there the day after Easter, on the first, and setting up for Spring Fling which is a new promotion that we plugged in because Easter was so early.

By Easter being early, it makes you farther from Mother's Day so we took that opportunity and put in Spring Fling.

Spring Fling was all the things you needed for spring and it was colorful and exciting and variety, a mix of variety and consumable products that our customers really responded well to.

So that drove sales in April.

That drove sales, drove margin in the quarter and that really got us off to a good start for second quarter.

And then just as a quick follow-up, maybe changing gears, last year you had noted Canada was still in the midst of a transition and was weighing on sales and margins.

Can you maybe update us on the contribution from that region?

Canada cost us probably $0.01 the quarter.

For the year, we think it could be breakeven this year.

We're making great progress we love our stores.

Our customers like what they're seeing.

We're rebranding still.

We're finishing up by the end of third quarter rebranding the West.

Ontario's completely rebranded to Dollar Tree Canada and relayed with new layouts and new merchandise.

The West is underway right now.

But we do have the infrastructure in place.

We've got the technology, the system, the processes.

Our buyers are leveraging the power of the Dollar Tree pencil.

We're adding in things from the Canadian market that are relevant to the Canadian market and the Canadian stores.

We're having great success in that product.

Customers are responded favorably.

We're excited about our business in Canada.

Sounds great.

Thank.

Good luck.

We'll take our next question from Dan Wewer with Raymond James.

Thanks.

Good morning, Bob

Good morning.

Historically, Dollar Tree needed about a 2% same-store sales gain to maintain a flat expense rate just reflecting the inflationary pressures of running the business.

This quarter, the expenses per store actually dropped about 1%.

A question for Kevin.

Can you talk about, on the expense savings, what's sustainable and what's not, going forward?

Sure.

I think we did have great performance here in Q1.

A lot of people focused on expense control and you guys have heard me speak to expenses before, in the sense that we think about it at the line item detail.

We get down pretty deep in the weeds in looking at them and basically thinking about how we can improve them, either through process or through looking at different suppliers and bidding things out and things like that.

I would tell you that on the SG&A side, I believe I said last year at one point [the other two comp] I thought we could get a little leverage on SG&A.

I think that's still probably true, if we can control things the way we're going forward.

Would I expect 50 basis points?

Not necessarily.

That's a little bit better performance than even I would expect.

But we think we run our business pretty well.

We're very focused on those type of things.

When you sell things for $1, obviously, your expense structure's very important.

We have a lot of people, initiatives, around that and people focused on it.

On general, we think we can continue to leverage expenses but I don't know that it'll always be to this extent of the two comp.

Bob, one question for you.

Last night, there were more headlines out of China about slowing manufacturing.

Is this in any way positive for Dollar Tree, to the extent that your manufacturers of your price label product may have excess capacity and they're looking to do more business with a growth company like Dollar Tree?

Dan, they are and they have been.

Again, in the most recent trips in April -- April trip's not the largest buying trip.

It takes us through buying in first quarter, or pretty much through first quarter.

But the market in China for Dollar Tree and for someone with the reputation and the capital and the cash and the open to buy is really good.

We have good relationships that we continue to leverage.

Our values seriously have never been higher on our product and our margins are better.

Those are two milestones points to point to that say that the environment in China is positive for our kind of business and it has been.

I've been saying that for quite some time.

A lot of it has to do with our presence there and the fact that we put down orders and we pay our bills.

And we buy lots of product and we have a history of doing that.

Some of it is the fact that business has slowed down a little in China and they're looking for more people like Dollar Tree up there in the market.

Great.

Thanks and good luck.

Thank you.

We'll take our next question from John Zolidis with Buckingham Research

Good morning.

Fantastic results.

Question on the discretionary growing faster than consumables, can you give us the percentage change in consumables, relative to the total mix?

Then, can you talk about that in light of the continued rollout of coolers?

You actually announced an acceleration of that cooler rollout this morning.

Is there any concern that the coolers and the other consumables component is now driving less traffic than it used to in the past?

Or is there some other dynamic going on?

A couple things I'll share with you, just a little color and anecdotal.

First of all, I think the share of mix variety increased about 40 bips in the quarter, something like that.

A little color on that too, if you look back at first quarter last year, first of all our consumable business grew much faster.

It think it was the highest increase in penetration that we've had last year.

So our consumable business was up against a big bar last year.

Now, we did a great first quarter this year, too, so we grew it again.

We grew our variety business faster.

That's one thing.

The second thing is, this wasn't an accident.

We started last year, talking about driving more variety business, talking about driving our stationery business, driving our party business, changing and remodeling and redoing and re-merchandising our front ends, with margin and with season and with color and excitement and new.

With our July buying trip last year, a lot of focus was put on that buyer [buyers].

I think what you're seeing, and I know you see in the first quarter, is the evidence of a better Valentine promotion, a better Easter promotion.

We were scared because of the early Easter and we doubled down as we always do and we had a better Easter assortment, along side a better stationery assortment, expanded assortment, in our variety category.

So it wasn't an accident.

We planned and, by gosh, if it didn't work.

We had terrific response from the customers in a tough quarter.

And I don't say this -- no weather reports here -- but in a tough quarter, that we all knew was tough.

The calendar was against us and then the weather was cold and rainy and ugly and snowstorms and all that.

But in a tough quarter, we really drove terrific sales on our variety product and it's because of the value of that product.

So, there's the difference.

We still are committed to our consumable business.

We're going to give our customers what they want, more of what they want.

We're going to drive that part of the business too.

Our freezer stores are still very important to us.

I would say that the freezer stores increases have been much like the history of our freezer store increases.

Not much has changed there.

We're excited about it.

We rolled out 229 new frozen and refrigerated stores in the first quarter.

We've increased the number that we're going to rollout for the year, so we are committed to that program and we like the results.

We like what it does in sales.

We like what it does in traffic and we like what it does in raising the sale of our variety merchandise also.

Thank you.

We'll take our next question from Paul Trussell with Deutsche Bank

Good morning.

Bob, could you give us an update on the Deals format?

What's the opportunity there long term?

How are traffic margins and returns, relative to the Dollar Tree format?

And then just maybe a general updated view on multi-price points overall.

One of your top competitors in Canada, a few years back, rolled out multi-price points and just want your updated thoughts on any [test] or integration into Dollar Tree, whether in the US or Canada down the line.

Paul, good morning.

Thank you for the question.

We have a very clear strategy.

Dollar Tree is everything's $1 and in Deals we've lifted the restriction of the price point to offer more variety, more value, and serve more customers.

That is the direction that we're headed.

We are, in Dollar Tree, very pure.

We believe in that model.

It's the best thing going.

The best investment we have is opening a new Dollar Tree store.

Customers love it.

Everything's $1.

That's what sets us apart from others in the market and we've done a pretty good job of understanding how to run that and roll that out.

A lot of room to grow on the Dollar Tree side.

Deals, lifting the restriction, we have a terrific opportunity here to grow that model.

We have about 200 stores.

If you want, I could give you some color on the Deals concept.

It's more consumables.

It's about 60/40 consumable to variety.

It's a higher consumable business.

We believe long-haul, it's going to be a higher volume business, maybe slightly lower margin rate.

But we think we get to the finish line just as well [within the] Deals model.

We opened eight new stores in the first quarter.

To give you a little more color on the business, top categories at Deals were stationery, lawn and garden, home decor, and electronics.

I'm not sure this is a good thing, but the extended winter in first quarter drove a lot of sales of hats and gloves and scarves and thermals, and that type of apparel.

Average ticket at Deals stores was $9.74 for the quarter.

That's higher than our Dollar Tree stores, as you know.

Our average ticket when they bought something that was over $1, was $15.23.

That's an increase from first-quarter last year, and again, that's one of the things that we like about the Deals model.

It gives us a chance to drive that average ticket.

It's almost double what a Dollar Tree is.

Transactions, when we have higher than $1 price point item in the basket, the total was 48.9% of the transactions this year.

That's up from first quarter last year.

Our average unit retail for the higher-than-$1 price is $3.15.

That also was higher than first quarter last year.

Sales of merchandise over $1 was 39% of our sales for all of our Deals stores in the first quarter.

Again, that was up also.

So 60/40 consumable variety, a little bit different way of getting to the model.

We think especially in high densely populated, high-cost markets that this is a model that we can leverage fixed cost better with the higher volumes.

And that's why you see a lot of Deals stores opening up in the Northeast in some of those tight markets.

It was a good quarter for Deals.

I appreciate your question, appreciate you giving me a chance to talk about that.

I enjoy my Deals in Harlem.

Thanks a lot for the Deals.

We'll take our next question from Scot Ciccarelli with RBC Capital Markets.

Good morning, guys.

Can you talk about where you are in the addition of more merchandise, in the front of the store?

And what have the early results been thus far?

We re-merchandised right after Easter.

We re-merchandised all of our check out lanes.

It's the biggest overhaul we've ever done up front, almost all new merchandise.

We lowered the profile up front.

You can walk up now and you can see the cashier and the cashier can see you as a customer.

We wanted to make the front end, which is the last thing they see in our store, more inviting.

We also wanted to make it a place where we can sell more impulse product.

We wanted to give our cashiers a chance to engage the customer better, speak to them, talk to them, maybe even point out a new item that we had.

That was all done right after Easter this year, in April.

And the new assortment is out there.

The customer response has been terrific.

It's doing all those things that I just said.

Frankly, it's early in the year but it is accomplishing all the things that we talked about.

I'm really pleased with that.

Merchandise margin is good on the front end.

It's a better shopping experience and helping us drive some of that variety sales.

Got it, thank you.

Can you just give us an idea of how much incremental spend you're making in Canada?

Is there an expense [layer] that goes away?

Or is it simply a matter of ramping up the productivity of those stores?

Thanks.

I would say from an expense perspective, we made those investments over the last couple years.

There was systems that needed to be put into place.

There was structure around the store teams, as well as training for the store teams, and then there was basically investment to a small extent around our third-party DCs.

That basically has been pretty much taken care of and is embedded in the P&L at the end of the day.

Obviously, from a productivity story, we do need to become more productive up there.

It's something that they're very focused on.

As we've talked about, the assortment of goods continues to get better with each buying trip, being able to leverage what Dollar Tree brings from an import perspective, as well as making sure that we're addressing the Canadian needs, at the end of the day.

For the fact that it is, as we like to say, it's not a 51st state.

It is its own country and you need to respect that accordingly.

I think that's where we sit at the moment.

Okay, thanks, guys.

We'll take our next question from Trisha Dill with Wells Fargo Securities

Good morning.

Thanks for taking my question.

Given the better performance of the discretionary business this quarter, and some of the changes you made to the front of the store, are you planning on even more SKU expansion in the back half in some of those categories, like stationery and candy?

Then maybe as a follow-up, could you just talk about some of the other changes to the stores that you have planned for the back half?

We've done a lot of the changes, the major changes, for the year.

We're always changing something but the whole front end was changed right after Easter this year.

I expect good returns from that for the rest of the year.

Our stationery business is one that we placed a high priority on and a lot of importance.

We've expanded that, probably I'm saying, 75 SKUs right now.

You're always dropping and adding and you're moving things around but we've expanded the space to our stationery department.

We've expanded the SKUs to stationery department.

We really have gone after some of the things, like writing instruments and binders and our office supplies, and that's going to be solid for the rest of the year, especially once we get into the back-to-school season.

We're seeing good response to it now.

Our stationery business is growing faster than most of the rest of the Company and the margins are terrific.

Our party business is one that we've expanded.

Right now, as we go into graduation, we are better positioned for graduation than we have ever been.

We've taken a position in our party to offer more things for the graduate.

We have the balloons and we have all the party supplies and all the things you need to celebrate that graduation.

The most exciting part of that is the solid color program.

So, no matter where you live, no matter what high school, or what place you graduate from, we're going to have your school colors.

Actually, you can go onto our website and you can look and you can see and you can look for your school colors and then you can put in your zip code.

And it tells you exactly which store to go to.

All you've got a do is grab the car keys and out the door and to the store to buy those solid school colors for your party, for that graduate.

A lot of emphasis on our party.

Upcoming, you haven't seen a whole lot of it yet because the weather's been not summer, but our toy department has been redesigned, reflagged.

I'm looking for that to just gain traction throughout the year.

We do need a little warm weather to go to the beach.

Hoping that this weekend, with Memorial Day, that all of that changes and people are out at the beach and having a good time around the pools and the barbecues.

If so, they're going to find great product in our toy department, glow sticks and everything to celebrate Memorial Day.

As we go through the year, and on into fourth quarter, our toy business is part of our variety offering.

I can tell you, we haven't gotten to the selling season yet, but I've seen the merchandise and it's new and it's fresh and basically, didn't start over completely but almost completely.

We overhauled the toy department so I'm looking for good things, continuing opportunities, out of that part of the business.

We have time for a couple more questions.

Our next question comes from David Mann with Johnson Rice

Yes, good morning.

With gross margin up for the last couple of quarters and discretionary doing better, Kevin, can you talk a little bit about the outlook for gross margin?

Are we at a point where this historical range between 35% and 36% maybe starts getting broken, [and] you go above 36%?

You've been following us for a long time, David, and as you said, we've got this consistency in gross margin but there's a reason for that.

Obviously, during times of deflation, we put that money back into the product.

We think that's real important, the value to the consumer, the wow items that we're able to provide.

That's part of the story behind why that is so consistent.

Obviously, within that 10-year period of time, we've had the growth of consumables but as we went through the years, we've actually gotten better with that as well.

And the margins have come up in that business as well for us, on an overall basis.

So I don't expect it to go significantly higher to break out of that range necessarily.

I do think that we're always looking at it and we believe we're in control of our margin and what we sell in our stores.

That's a part of the way we've always looked at it.

It's the way we build out our guidance but I would not expect it to break out substantially above that at this point.

But we could see gross margins continue to improve year over year, as the year goes on?

I think that would be a good thing.

I don't know that we've necessarily modeled a lot of improvement in there, at the end of the day.

As I said, just because discretionary sold a little better this quarter, it's not like we're not trying to sell a lot of consumables as well.

So that could switch back.

That could flip back over the year so we'll just have to see how it goes, although, we do have some great initiatives in the discretionary area.

David, it's all driven by the consumer.

You've heard me say this before but we're here to sell them what they want and when they're wanting to buy more of the fast-turning, lower margin consumer products, then we're there with them to offer that.

At the same time, we're always trying to make our stores more interesting and more fun and that variety merchandise and seasonal product is how we do that.

Kevin's got it exactly right.

We don't change the price, we change the products.

We offer more value or less value but that gross profit, when prices are down, we're likely to invest back into the product to offer more value and drive the top line.

Great.

Nice job this quarter.

Thank you.

We'll take our next question from Joan Storms with Wedbush

Hi, good morning.

Just a couple questions.

In regards to the comps, you've got all these coolers that you're opening up earlier this year plus stores, and then plus the discretionaries doing pretty well.

Do you think, in the back half, it seems pretty conservative to be looking at still guiding for 3% or 4%, or whatever, low-single digit comp for the year?

Well, I hope you're right, Joan.

We're certainly doing everything we can, again, to drive the top line at the margins that deliver the most return for our shareholders.

So we're not holding back.

We're going to keep pushing forward on that.

As I said earlier, we really believe in this consumer products business and our customers have voted for more coolers and they like it, so we're going to install more.

We're going to drive more sales there.

What I'd like to see and what we have seen is, as we drive more traffic with that, more frequency of shop, of course.

They're in the store more and we run better stores.

We have better merchandise assortments and our variety assortments and we've redone our front end.

We've redone our core, our middle of the store, with stationery and toys and all that.

I hope that as we drive more consumer business, we'll also drive more variety business.

That's the magic.

Okay.

Just quickly, you're investing a lot in three DCs this year.

What's the look for beyond this year?

With those big investments done, you've got a couple years where you're going to drive some incremental cash flow and lower CapEx, say, in 2014 and 2015?

Yes, Joan, I would tell you that this is the first new DC we've brought out of the ground since, I believe, 2004 that wasn't a replacement for another existing facility.

We build out the network in the mid-2000s to be able to go across the country.

Over the last two years, we've basically continued to grow and basically continue to get more efficient in those DCs.

We are at a point now where, given the number of stores we're adding, we're pushing as much efficiency as we can out of these buildings.

But we may need to start adding them a little more frequently.

It's likely to not be another eight years before we add another DC at the end of the day.

I think if we would look out three years, is there likely to be another DC at some point?

Yes, I believe there will be.

But we'll continue to look and see what we can do with our existing DCs.

We'd like to expand them as well.

The one in Marietta that we're expanding is going to 1 million square feet.

Those big buildings are really efficient when you can run thousands and thousands of cartons through them at the end of the day.

We'll continue to make sure we basically take the network and make it as efficient as possible.

Great.

Thank you so much.

We'll take our final question from Patrick McKeever from MKM Partners

Good morning, everyone.

Bob, you mentioned the re-merchandising at the front end and the additional impulse items and whatnot, but I was thinking the impulse initiative was more of a late fall 2012 thing.

Are you doing something differently there now?

Have you changed the focus?

Have you added new merchandise?

Maybe you could give us a little more color on that.

Yes, we have and your memory serves you well.

At the end of 2012, we started installing new fixtures in our new stores and we started re-assorting the front ends, basically using product that we had in the stores.

From the existing mix, we were putting [a peg hook] of this, and [a peg hook] of that.

We were finding our way with what should be on those front end, at the same time beginning to buy for a new program.

And that's what I was talking about that we rolled out right after Easter.

We started back in fourth quarter re-merchandising with existing product and buying, actually back in July of last year, new merchandise for the front ends.

We added trend fixture to the front.

The trend fixture is ever-changing.

It's new product.

It's fun product.

It's impulse product.

Some of it's kiddie candy.

Some of it is stationery.

Some of it is from toys.

Some of it's from all over the store.

It's trending, and it's new, and it's fresh.

And it really engages the customer and invites them to buy one more item and to put in their basket.

Then the new checkout assortment that we have, everything has a home on the check out.

We've bought for it.

It's all new merchandise.

It's not the same SKUs.

It's new product.

Some of it's similar but it's all new.

It's laid out in a fashion that's easy to shop and more engaging.

We have made a spot on our check outs now for our drive item, which is the item that our cashiers are selling to our customers or suggesting to our customers each week.

We've done drive item for a while.

Now we have a place for it and we have a program.

We have a flow of product with the drive items and it's enabling us to better train and coach and counsel and really get that program up and running.

A lot of changes, a lot of new product, though.

It was almost entirely new product that we put on these check outs, right after Easter this year.

If you look at your average ticket over at the years, it hasn't changed much.

It's, what, $9 or so?

Not quite, $8.87 or something like that.

How long has it been at that level?

It goes up each year a little bit.

You're right, it's a bit stubborn.

2% is a big idea.

Do you think, first of all, the impulse initiative will drive that average ticket higher?

And where do you think the average ticket can go, over the next several years?

Absolutely, the impulse initiative will drive that average ticket higher.

All the things that we do at the front end of our stores, all the things that we do with our end caps, when we build our end caps, it's basically suggestive selling.

Customers know the price.

Everything's $1, so we always work on getting one more item in their basket on the end caps, last minute at the check outs, drive items, suggestion selling.

It's always a work in progress, Patrick.

Our price point is always going to make it stubborn.

We always want to have a combination of increased traffic and increased average ticket to drive our business.

If you look back at the history, you'll see it's gone up year over year.

Back 10 years ago in the little mall stores, I think it was $5 in those stores.

We've come a long way from 10 years ago.

I don't know that it'll be $5 higher in the next 10 years, or $3 higher, but certainly it's an opportunity for us to continue to drive more sales, to drive more interest, more fun.

People shop Dollar Tree because they like shopping Dollar Tree and that's all part of it, is this idea of suggestive selling and impulse and everywhere I look, there's another challenge to buy something

Sounds great.

Thank you.

That does conclude today's question-and-answer session.

At this time, I'd like to turn the conference back to Mr. Tim Reid for any additional or closing remarks.

Thank you, Aaron, and thank all of you for participating on the call today and for your interest in the Company and of course, as always, most of all for your investments in Dollar Tree.

Our next scheduled conference call will be on August 22, 2003 (sic-2013).

Thank you and have a great Memorial Day and a great summer.

This concludes today's conference.

We thank you for your participation.