美元樹 (DLTR) 2013 Q2 法說會逐字稿

Good day and welcome to Dollar Tree.

Inc's second-quarter earnings conference call.

Today's conference is being recorded.

At this time.

I'd like to turn the conference over to Mr. Tim Reid.

Please go ahead, sir.

Thank you, Aaron.

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

Our call today will be led by Bob Sasser, our 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 second-quarter financial performance, and will provide 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, our 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 up the call to your 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, CEO of Dollar Tree.

Bob?

Good morning, everyone.

Thank you for joining us.

This morning we announced our sales and earnings for the second quarter of 2013.

Comp store sales increased 3.7%.

This was on top of a 4.5% comp increase in the second quarter last year, and it was driven principally by a 3.1% increase in traffic, and a 60 basis points increase in average ticket.

Total sales for the quarter grew 8.8% to $1.85 billion.

Earnings for the second quarter were $0.56 per diluted share.

This represents a 9.8% increase over last year's $0.51 per share.

Operating income was $201.3 million, an increase of $16.9 million, or 9.2% over last year.

Operating margin for the quarter was 10.9%, an increase of 10 basis points over the second quarter last year.

This was our highest second-quarter operating margin ever as a public Company.

And net income rose 4.6% to $124.7 million.

For the first half of 2013 compared with last year, total sales were $3.72 billion, an increase of 8.5% compared with last year.

Comp store sales increased 2.8% for the half.

Earnings per share were $1.15, an increase of 13.9% compared with $1.01 per share in the first half last year.

Operating income increased by $45.4 million.

Operating margin increased 30 basis points to 11.2%, another first-half record, and net income rose 9.7% to $258.2 million.

I'm pleased with our performance in the second quarter.

Both top line sales and earnings were near the upper end of guidance, and comp store sales momentum is building.

Most importantly, we provided value to our customers and brought a record level of second quarter earnings to the bottom line.

We believe that our model is right for all times, and our current economy, with customers facing stubbornly high unemployment, unpredictable fuel prices, and higher taxes, people continued to look to Dollar Tree as a destination for a balanced mix of high value consumer products and a terrific assortment of fun, high value and high margin variety merchandise.

Sales increases in the second quarter came from growth in both basic and variety categories, with our discretionary categories growing at a faster pace.

Performance in the second quarter was relatively consistent across the country, and all zones achieved positive comp store sales.

The highest comps were in the Midwest followed closely by the Southeast.

Our comps were positive every month, with our strongest performance in June.

I'm especially proud of our Dollar Tree associates from every department in the Company, 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.

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 second quarter this year, we opened 81 new stores, relocated and expanded 32 existing stores, and grew total square footage 7%.

Through the first half, we've added 175 new stores, and expanded or relocated 48 stores.

We ended the quarter with 4,842 stores, and were on track with our plan for the full year 2013, which includes 340 new stores and 75 relocations and expansions, for a total of 415 projects across the US and Canada.

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

We continue to see strength in new store productivity.

Last year, new store productivity reached its highest level since 2001, and through the first half our 2013 class is tracking at a similar pace.

This has been the result of a coordinated process, concentrating on an improved site selection, right-sizing our stores, expanding our assortments, improved staffing, and building the bench of qualified store management.

Efforts to increase sales per square foot are not limited new stores In the past few quarters, we have described some of our category-specific initiatives to drive sales.

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

We have remerchandised our check-out lanes and expanded assortments across the front end of our stores to create more merchandising energy and to drive impulse sales.

We continue to rationalize and expand assortments across the chain in stationery, candy, health and beauty care, and home and household products, to maintain relevance to our customers.

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

In all stores, we're developing more powerful seasonal and party presentations to create interest and a fun shopping experience, and we're rolling it freezers and coolers at a faster pace.

In the second quarter, we installed freezers and coolers in 215 additional stores, for a total of 444 store installations in the first half.

We now offer frozen and refrigerated products in 2,993 stores.

With this increase, we've raised our installation plans to 550 stores for the full year.

This will be the most installations we have ever done in a year.

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

Reflecting all of these initiatives, our top performing categories in the second quarter were our check-out products, stationery, frozen and refrigerated products, candy, and party supplies.

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.

Deal stores deliver low prices on every day essentials, party goods, seasonal and home product.

By lifting the restriction of the $1 price point of 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.

We opened seven new Deals stores in the second quarter, ending the quarter with a net total of 206 Deals stores, and we're on track with our growth plan for 2013.

Our Canadian integration and expansion continues on schedule.

Leveraging the buying power of Dollar Tree, our merchants are sourcing higher value product and our Canadian customers are finding broader, more exciting, assortments and better values in the stores.

The service level and stock position of basic products is increasing.

The shopping experience continues to improve, as our stores develop a more powerful seasonal presence, and through our investments in infrastructure, systems and training, we now have consistent year-on-year data on which to base our sales and assortment planning decisions.

At the same time, we're aggressively expanding our Canadian store base.

We opened nine new stores in the second quarter, and ended the quarter with 160 Canadian stores, well on our way to achieving our plan to grow our store count by 25% for this year.

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

We now have completed our planned rebranding of former Dollar Giant stores in Ontario, British Columbia and Alberta.

We will complete the rebranding of Dollar Giant stores to Dollar Tree Canada in the third quarter.

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 at the US in the $1 price point.

Dollar Tree Direct, our online business, continues to expand and develop.

DTD is providing an opportunity to broaden our customer base, drive incremental sales, expand the brand, and attract more customers into our stores.

We've expanded our online offering by 30% this year.

Dollar Tree and Deals Direct now offer more than 3,300 items online, including more than 1,500 items in less than case pack quantities.

Traffic on the site exceeded 5.4 million visitors in the second quarter, a 34% increase over the second quarter last year, and we continue to expand the Dollar Tree brand through social media with fun and engaging contests, and three new YouTube videos in the second quarter.

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

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

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

With an earlier completion of construction, we staffed earlier, and we began receiving and shipping merchandise to stores in the second quarter, well ahead of our planned third quarter start-up.

While the earlier opening increased cost in second quarter, we are able to offer higher levels of service to our stores sooner.

Longer term, DC-10 will provide capacity for growth in the Northeast and increased network efficiencies.

Second, we are currently expanding DC-8 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 Windsor DC are being financed through available cash.

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?

Thanks, Bob.

As Bob mentioned, our diluted earnings per share increased 9.8% in the second quarter to $0.56.

The increase resulted from our sales growth, and a 10 basis point improvement in operating profit margin, compared to the second quarter last year.

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

Several factors contributed to this performance.

Distribution expenses increased 20 basis points, reflecting the incremental expense associated with the ramp-up of our new DC in Windsor, Connecticut and maintaining a high level of service to stores as we realign DCs consistent with our added capacity.

In addition, shrink expense increased by 15 basis points, but remained below 2% of sales.

These factors were partially offset by higher initial markup across many categories, reflecting continued improvements in sourcing and the flexibility of our merchandise model.

Discretionary product grew by 35 basis points as a percent of our total sales, compared with the second quarter last year.

SG&A expenses were 24.1% of sales for the quarter a 30 basis point improvement from the second quarter last year.

Operating expenses declined by about 20 basis points, due principally to reduced expenses for inventory services, insurance and utilities, which offset increases in legal fees and store supply.

Payroll-related expenses declined by 10 basis points, as leverage on field management payroll and lower expenses for retirement plan contributions offset increases in workers compensation and health insurance benefit expenses, relative to the second quarter last year.

Operating income increased $16.9 million compared to the second quarter last year, and operating margin was 10.9%, an improvement of 10 basis points on top of the very strong 10.8% operating margin in the second quarter last year.

The tax rate for the quarter was 37.9%, compared to 35% in the second quarter last year.

The current year rate negatively affected EPS by $0.025, compared with the lower tax rate in the second quarter last year.

As a reminder, the lower rate last year was primarily the result of statute expirations and the settlement of a state tax audit.

Looking at the balance sheet and the statement of cash flow, cash and investments at quarter-end totaled $413.7 million, versus $379.8 million at the end of the second quarter of 2012.

During the second quarter, we repurchased 886,000 shares of Dollar Tree stock for $43.7 million.

At quarter end, we had $748 million remaining in our share repurchase authorization.

The diluted weighted average shares outstanding for the second quarter was 224.3 million.

Our consolidated inventory at quarter-end was 14.2% greater than at the same time last year, while selling square footage increased 7%.

Consolidated inventory per selling square foot at cost increased 6.7%.

This reflects primarily an increase in goods in our supply chain, including inventory for our new DC in Windsor, Connecticut, and merchandise to support our initiatives in stationery, check-out and party.

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

Capital expenditures were $96.4 million in the second quarter of 2013, versus $74.7 million in the second quarter last year.

The majority of the increase is in our two distribution projects this year.

For the full year, we continue to plan consolidated capital expenditures to be in 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 550 stores, IT system enhancements, approximately $37 million towards the new distribution center in Windsor, Connecticut, and $25 million for the expansion of our DC in Marietta, Oklahoma.

Depreciation and amortization was $46.6 million, compared to $43 million in the second quarter last year.

We expect depreciation expense of approximately $190 million to $195 million for the year.

Our guidance for the second half of 2013 includes several assumptions.

First, Halloween shifts back into the third quarter this year, reflecting the retail calendar.

We believe that this will shift approximately $5 million of revenue into the third quarter from the fourth quarter last year.

Comparable store sales are not impacted by this shift.

Second, the third quarter last year included $0.17 of earnings per share from the sale of our interest in Ollie's.

Third, in the third quarter last year, we recorded a realized gain of $3.8 million, relating to the favorable resolution of a legal matter.

Fourth, there are six fewer selling days between Thanksgiving and Christmas this year, which presents a $25 million sales challenge in the fourth quarter.

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

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

And finally, our guidance assumes a tax rate of 37% for the third quarter and 37.7% for the full year.

Weighted average diluted share counts are assumed to be 224 million shares for the third quarter, and 224.4 million shares for the full year.

As always, our guidance assumes no additional share repurchase.

With this in mind for the third quarter of 2013, we are forecasting sales in the range of $1.87 billion to $1.92 billion, based on a low to mid single digit comparable store sales increase, and 7.2% square footage growth.

Diluted earnings per share are expected to be in the range of $0.54 to $0.59, an increase of 5.9% to 15.7%, compared with the $0.51 of earnings per share in the third quarter of last year, absent the gain from the sale of Ollie's.

For the full fiscal year of 2013, we are now forecasting sales in the range of $7.85 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 $2.65 to $2.77.

This would represent an increase of 8.6% to 13.5% over 2012 earnings per share of $2.44, excluding the $0.08 benefit from the 53rd week, and the $0.16 gain on an annualized basis from the sale of Ollie's in the third quarter last year.

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

Thanks, Kevin.

Once again I'm very pleased with our performance so far this year, and I'm excited about our future.

First half sales grew 8.5% to a record $3.72 billion, and comp store sales increased 2.8% on top of a 5.1% comp last year, driven by a combination of increased customer traffic and higher average ticket.

Our operating margin increased by 30 basis points to 11.2%, the highest first-half operating margin in our history.

Net income grew 9.7% to $258.2 million, and earnings per share increased by 13.9% to $1.15.

We're continuing to grow.

We opened 175 new stores across the US and Canada, and so far the productivity of the new store class is very strong.

We expanded frozen and refrigerated product to 444 stores, more than any previous year.

Dollar Tree has a solid and scalable infrastructure, that we're expanding to support sustainable, profitable growth in the years ahead.

We opened our new distribution center in Windsor, Connecticut, ahead of schedule and under budget, and were on schedule and on budget with the expansion of our Marietta, Oklahoma DC.

Looking forward, I believe that we're positioned to do even better in the future.

Our business model is powerful and flexible.

Its been tested by time and validated over the Company's 27-year history.

The Deals brand is gaining traction.

Dollar Tree Direct continues to broaden its reach, and we're expanding our Canadian business according to plans.

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

Over the past four quarters, we've invested $367 million for share repurchases, including $112 million in the first half of this year.

It's an exciting time at Dollar Tree.

We had a great first half.

As we enter the third quarter, our shelves are full of the right product, our stock rooms are in great shape, and our merchandise values have never been higher.

We will now address your questions.

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

(Operator Instructions)

We'll go first to Stephen Grambling with Goldman Sachs.

Given the aggressive cooler roll-out, I thought it was interesting that the discretionary continues to outperform consumables.

Can you maybe talk about the cadence of comps in discretionary and consumables, as the quarter progressed?

And maybe as a follow-up any initial thoughts on the back-to-school season so far?

We don't break any of that out separately, and I can't comment on the back-to-school season, but I'm going to try to give you some color.

The comps were consistent throughout the quarter.

June was the highest comp in quarter.

I believe our variety business comp consistently higher than the consumer business throughout the quarter.

That's a result of plans.

Stephen, we're a variety store.

We've always been a variety store.

We serve a slightly higher demographic than others in our sector, $40,000 and up versus $40,000 and down, so we've always had a discretionary portion to our mix that we aspired to, that one of the reasons we're among the highest in margins in our sector is because of our variety mix.

It's a balanced mix.

It's about 50/50.

Some times it's 51/49, sometimes it varies a little bit, but it's typically a balanced mix.

Our consumable business has grown a lot faster over the past several years for a couple reasons.

One is the roll-out of the cooler program, we went from basically zero to a lot of coolers, a whole brand new business during that time frame.

We added and expanded a lot of the consumer product categories over the past, almost all of them over the past 10 years, and certainly a lot of them over the past five years, so those are newer businesses to us.

But again, we're always striving to strike that balance, not only because it's what we are, it's what we do.

It adds excitement in our stores with the seasonal product and the variety mix and it also contributes a lot of margins, so we're very happy with the balance as it is.

I would expect going forward, you'll see some bouncing back and forth as we continue to drive sales and serve our customers in these difficult times, and you'll see a little bounce back and forth.

But all in all, when you look at the big picture it's somewhere in the 51/49 or 50/50 range.

Okay, that's helpful, thanks.

And I guess one quick follow-up would just be on the gross margin line and on the distribution costs in particular.

Are there still costs that you'll have to incur in the second or into the back half of the year?

Maybe any color you can give in terms of how gross margin is planned in the guidance?

Thank you.

Well distribution cost, Stephen I'll just share with you that I would expect the pressure to continue a little bit through third quarter on distribution cost.

I would expect it to mitigate somewhat in fourth quarter, that's just our feelings right now.

We opened DC-10 earlier, which is a good thing.

We're proud that we opened it earlier and ahead of budget, but we did bring all those costs online earlier than anticipated.

And the other thing is with our distribution, we run a very high level of service, all the way up until the time we bring on a new distribution center.

We don't sacrifice service to our stores or in stock in our stores, or any of that in anticipation of bringing a new DC online.

So what that does is we have DCs running, servicing our stores at a high level, and then we bring a new DC online.

We bring the cost up on that, but we haven't really brought down the some of the costs in the existing DCs, where we're realigning now.

So it's not just bringing a new DC out of the ground.

It's been the realignment of the entire network as it now shakes out with different service areas for different DCs, so that's what you've seen.

This is the first brand new DC we've done probably in five years.

I'm estimating I would get back and get the fact the but the others have been replacements over the past several years.

This is the first brand new one that we've opened in some time, and it's not -- it's something we expected, but again we weren't willing to give up service level to our stores in order to improve the distribution cost.

That's very helpful.

Thanks again and good luck into the back half.

We'll go next to Scot Ciccarelli with RBC Capital Markets.

This is a little bit of a broader picture, but we have seen shaky results in some other retailers, and yet your traffic was up pretty nicely in the quarter.

When you think about what happened to you in the back half of last year, how do you think about how to your stack should flow through?

Is there any reason that you can identify at this point that two-year stack comps should start to slow in the back half?

We certainly are in third quarter against our easiest comparison.

I hesitate when I say easy in this environment, but our easiest comparison to last year is in the third quarter, so our expectation is that we're going to continue to grow our top line, we'll continue to grow our comps.

I haven't really looked at and don't have the stacks in front of me right this minute for the rest of the year, but we are excited about our third-quarter business and the comparison are much easier than they've been in some time.

Can you just comment on cadence at new store openings?

Was it pretty much normal pace or is there anything back-end loaded?

The new store productivity, you commented it was good, but it might be a little bit lower than I think we've been modeling.

There is been a few changes and the jury is still out, and I get to see the granularity and of course we don't report the granularity, and that's where my statement is coming from.

But we did in the first half, we opened a few less stores than we did in the first half last year, opened 175 new stores, and I believe that's 12 less than we opened in the first half last year.

But we also opened 25 new stores in January this year, which are really in last year's numbers.

But ordinarily, this is the first time we would open stores in January, we used to stop before the holidays and pick up with new store openings in first period.

February this year, we were able to accelerate our plans, get stores open quicker, and instead of holding on to them we just opened them up so there was another 25 stores.

If you added those into the first half, I think you'd find that we're actually ahead of the game.

The real question though is for the rest of the year, as I look at the rest of the year, we're on target and on plan to open all of the stores that we guided to.

We opened a few less in the first half than last year, and we opened a little bit later in the first half than last year.

One other thing I just want to point out to you on the productivity, there's a pretty good range now between stores that we open up, productivity in our urban markets, our more densely populated markets and our suburban and rural markets.

So when you're looking at a small number mid year, a snapshot of 175 stores with others on the way, it really -- a few stores can make a big difference if you open -- sales productivity if you open them up a few more urban stores in the mix versus a few less suburban stores, that makes a big difference.

If you do it the other way, that makes a big difference.

As I look at where we are, I'm very comfortable and happy with our productivity so far this year and I expect us to end up with another great year in sales productivity in our new stores.

Very helpful.

Thanks.

(Operator Instructions)

We'll go next to Morry Brown with CL King.

You called out the impulse items at the check-out as the top performing category in the quarter.

Can you give us a few more details around the performance of these items?

I can share with you that the what we've done -- we've lowered the profile on the front of the stores, we've remerchandised the entire front, the check-out stands, the aisles in front of the check-outs, the front end caps in front of the check-outs.

From the time you enter the store until the time you leave the store, those check-outs are a real focal point, and we lowered our profile up there for a couple reasons.

Customer service, now our cashiers can better see the customers and our customers can see the cashiers.

It's cleaner, it's less cluttered looking with a lower profile, and we completely changed the mix.

We got a whole lot of new items on our check-out stands, all aimed at that impulse, that last-minute sale that we can get from the customer, the things in the aisle in front of the check-outs, we've given our customers a little more shopping space there, we have a trend fixture up there that changes and changes and changes.

The hottest items is the hottest impulse item, it's new, it's trendy and we're seeing the return from that as being really remarkable and there's a lot of room to go.

We can do better, but as we talk about the check-out assortment being the highest comp in the third quarter, certainly has been and probably will be for quite some time.

Great.

Thanks.

We'll take our next question from Matthew Boss with JPMorgan.

With the balance sheet pretty strong, and little debt on the books here, can you talk to potential opportunities on the capital allocation front, and your current thinking regarding cash priorities?

Sure, Matt.

I mean I think you've heard us talk to this before.

Obviously, as we think about cash, the first priority is the business and growing the business and opening as many stores as we can, good profitable stores, and I think we're doing a good job there.

It's also building the infrastructure necessary, and we've had some bigger projects here the last year or so, with obviously DC-10 at about $95 million, the expansion of Marietta at about $25 million, so those are very important to the overall ability to service our stores and continue to build our network, for future growth as well.

So obviously that's first and foremost in our minds.

Obviously beyond that, historically, the numbers would tell you that since 2004, we've repurchased $2.6 billion worth of stock and over the last three years, it's closer to about $1.3 billion, $1.4 billion right now, and so we've looked at it.

That's really where our free cash flow has went to at the end of the day.

Historically, we've made acquisitions, most recently is Canada.

So never to say never but there's nothing on the plate at the moment.

So as we've said, we look at our capital structure, we talk to our Board on a regular basis and right now, we're very comfortable with where we're at and we did buy back just about $43.7 million here in the quarter of shares, so I think that's where we continue to see where we've put our cash to work at.

Great, and then can you speak to any in-store initiatives to watch for in back-to-school in the second half, and if you could elaborate on your earlier momentum building comments, I thought that was interesting.

Well the 3.7 comp is certainly momentum building for us.

The first half, we did a lot of great things in our stores, I call them great, our stores really worked hard to get all of the initiatives done, and for example, you asked about stationery in the first half.

We expanded our stationery department.

We started in April and did a portion of the stores, and finished up a bunch in June and just in time for back-to-school.

We felt, going into back-to-school, we had the best back-to-school assortment ever, and we had the best stationery department ever and expanded the stationery department on top of that.

So early or late in second quarter we are already getting good results from our stationery sales, so I'm real proud of what we've been able to do there.

Our merchants have done a terrific job of rationalizing the assortment and creating extreme value in the stationery business.

We think it's a real growth department for us, and our stores really did heroic efforts in getting them re-laid.

And by the way within payroll budgets, you'll notice our payroll was really good in the second quarter, so they did this in addition to everything else that they do.

Other categories we redid, we finalized our check-out, front ends, we've expanded our candy department in the past several months.

We continue to improve on our seasonal opportunities, and used to talk about second quarter as not being much driven by seasons, but now we've made seasons out of things that weren't really big seasons at one time.

You start off and you've got May, Mother's Day which has always been good with our cards and balloons, we had a terrific Mother's Day going into and then Memorial Day, with red, white and blue and picnics and all the things that go along with that, and into June.

And really starting in May and peaking in June is our graduation season, which has always been there but we've chosen to emphasize it and our merchants did a great job of putting together a graduation assortment for parties and all of the things for new graduates.

Our stores have done a terrific job of laying out the stores in an impactful way, and the biggest thing we had going in graduation, the most excitement I've seen for awhile is on our school colors promotion.

So guarantee if you come to Dollar Tree, you can plan your party for your graduate and we'll have your school colors and we expanded our colors.

It was on our website.

We did some outreach through social media.

We promoted it in the stores, and as a result, graduation has become a really important season for us.

Of course Father's Day is buried in there somewhere.

We recognize it, but it pales in comparison to most of the other holidays in the season and then of course you end with in July with the Fourth of July and another patriotic red, white and blue celebration, and picnicking and beverage and paper supplies and all the things you need for the beach and the pool.

So a lot of seasonal excitement in the quarter.

We again tend to create seasons where they did not exist before.

We'll take our next question from Peter Keith with Piper Jaffrey.

Just to follow-up on the earlier question regarding the gross margin trends, that we've seen shrink kind of creep up as a modest headwind the last two quarters, I guess a two-part question.

Should we expect that to continue through the rest of the year?

And then, also related on the gross margin, with the new DCs, would you then expect maybe some distribution expense leverage as we get into next year?

So in regards to shrink, we have seen it creep up a little bit this year, and we're coming off of three years where it was basically at historical lows, so we have had some really great results, and its edged up a little bit.

And we're really basically 90% of the way through our inventory this year, so it's pretty much going to be where it's going to be.

It's kind of settled in.

Again, it's still well below 2% at retail, which we think is a barometer that is important at the end of the day.

So obviously we're addressing it.

There's various things that we think we can do internally to look at it, and create some more focus around it, and hopefully drive it back down to where it needs to go to go into the next year.

In regards to the gross margin as it relates to the DCs, I think as Bob said, I think we expect, within our guidance there's costs associated with it going through the third quarter.

And we continue to work through the changes in the network, that it creates when you create capacity and you realign your stores within your distribution network, so that's built in and we expect it to get a little bit better probably in the fourth quarter but it does potentially create some opportunity for next year.

Okay very good.

I had one quick follow-up.

With the large amount of coolers you've done so far this year in 444 stores, could you give us a break down on what percentage of those are in existing stores?

And what percent is in new stores?

Traditionally we've only spoken to that at year-end so we haven't broken that out at this point in time but I would tell you in general, given the larger number, more of them are going into existing stores than new stores.

Thank you very much.

We'll go next to Dan Binder with Jefferies.

I was wondering if you could discuss two topics.

One, if the six fewer days that we're all aware of in the fourth quarter between Thanksgiving and Christmas impacts the comp or are you just talking about the impact on total sales?

And then secondly, if you could speak to the mark down performance in the quarter?

Sure, as we look at the fourth quarter and the $25 million headwind that we referred to, there is some comp effect at the end of the day.

The bottom line is six less days is just certain amount of -- people will run out of time before they realize it, and they just won't come to the store at the end of the day, they figure out that they'll make it by without maybe picking up that last item, so there is a little bit of effect but that's obviously factored into our guidance.

In regards to mark downs, mark downs remain very, very good.

We have at the dollar price point, we really have minimal mark downs.

We have been able to control those, and from time to time, we'll have seasonal candies after we come threw a season you'll see at the front of our store mark down, but by and large they're fairly minimal and fairly immaterial to the gross margin overall.

If I could follow-up on the calendar shifts.

In the quarter you just reported, the comps came in a bit better than expected but the total sales were slightly below the high end of the guidance.

Was there any kind of effect from the quarter ending later than last year, as you got further into back-to-school?

I don't believe so, realistically.

I don't believe there was an effect from that for the quarter.

Okay, thanks.

We'll go next to Dan Wewer with Raymond James.

Question on inventories, up 6.7% per store.

I understand the reasons you explain for the growth, but regardless, inventories are growing at a faster rate than either revenues or gross profit dollars.

When do you envision that reversing itself?

Is it when we annualize the opening of the Connecticut distribution center?

Dan, if you remember when we reported Q1 we were actually up inventory, total inventories were up 15.4% and were up 7.9% on a per selling square foot basis.

So it's obviously come down, and the expectation is that it will continue to come down as we go through the year.

So I would expect we would be a little bit better shape at the end of Q3 and then again a little bit better at the end of the year so that's how we view that at this point.

And do you think that's the primary reason for the higher shrink, just the fact that you have 7% more inventory in a store, and therefore a bigger opportunity for inventory to disappear?

Realistically, the increase is not all in the store at the end of the day.

Part of it is in the supply chain, IE, they're in the distribution centers a little bit or on the water coming to us, so the increase in the actual stores is something less than that 6.7%, so while there's a little bit more inventory, I don't think that's a major factor at the end of the day.

And Bob, one question for you regarding Deals.

When you acquired Dollar Giant, you're very quick to identify 1,000 store opportunities in Canada.

You've been very clear about the 7,000 store potential for the Dollar Tree brand domestically.

You're obviously very up beat about Deals, but curious as to why it's difficult to determine what's the potential rollout for Deals, and when do you think you might have enough data to be able to give us an idea of how big that could be?

Good question.

It's a little different in the US than it is in Canada.

We bought Dollar Giant, and we don't have another chain up there.

All we have is Dollar Giant and the country of Canada, and we have made plans.

We looked at the market, we looked at how many stores per customer that was already in Canada, and how many more we thought we could do, and we did our analysis and we came up with the 1,000 stores.

In the US, we got Dollar Tree and Dollar Tree and Deals.

At a point in time, my vision is that at a point in time, Dollar Tree will continue to grow but maybe Deals will be growing at a faster pace at some point in time.

Right now, they are both competing for the same capital.

They are competing for real estate, they're competing for all the resources that you put behind with the Dollar Tree brand, and frankly, the best return on a dollar is a new Dollar Tree store, anywhere.

So where there's Deals or anybody else out there, so we're still growing Dollar Tree really fast and we're still growing it very profitably, and we've got a lot of room to grow and we're bringing Deals along.

We still have opportunities to build the brand in Deals.

When we go into market where not everybody really knows what a Deals is, and they know what a Dollar Tree is so we've got to do some things around branding and the margin and the return, while profitable, is still not as good as the Dollar Tree at this point.

At some point it's going to be a push, frankly, but right now, that's the reason I haven't chosen to quantify what I see as the long term potential of the Deals stores in terms of number and that's my reasoning.

Okay, let me ask you about that again at the Analyst day.

I'll give you the same answer at Analyst day.

Ask me again next year.

Okay, thanks.

We have time for a couple more questions.

We'll go next to John Zolidis with Buckingham Research.

A question about the ticket increase in the quarter.

60 BPs, it's a little bit lower than what it was the last two quarters when it benefited, and it should have been benefiting, I believe from the MasterCard rollout, which you don't anniversary until I believe the third quarter, so I was wondering if you could talk about the penetration of credit during the quarter, and whether that slowed, or if there's anything else going on affecting the size of the ticket?

Thanks.

Sure, John.

The penetration of debit and credit grew by 170 basis points year-over-year for the second quarter, and the majority of that was in the credit not the debit side of the house.

So today, roughly 40% of our transactions are either debit or credit.

Again, about two-thirds, or just a little less than two-thirds are debit, with the remaining being credit.

So we are continuing to see an increase in penetration there.

You're right, the MasterCard roll-out where we really saw the effect was Q4 last year, so we are seeing some benefit from that.

I would tell you, just in general, that the average ticket for a debit and credit transaction is coming down, and I think that's just a function of the fact that as a bigger portion of all transactions are debit and credit, on average they are going to come down.

So I think that's just a trend retail in general has seen with the increase of debit cards, and so there's no real surprise there, I guess, but it is just little bit of a change in fact.

So overall I think we feel pretty good about our overall ticket growth, in the sense that it continues to grow.

We continue to focus on things where we can drive tickets, such as the front end and check-out and impulse, as well as just doing a great job of merchandising our stores, so that's kind of the story of the ticket right now.

Okay, thanks and good luck for the back half.

We'll go next to Matt Nemer with Wells Fargo Securities.

So I wanted to touch on the coolers for a minute.

If you could talk to the productivity of this year's class of coolers versus prior years, and then do you have any early view into how many coolers and freezers you plan to roll-out next year?

Well with regards to next year obviously we haven't given any numbers to that, so really won't do that until the beginning of next year realistically.

But this year's class is, some of them are going into maybe a little smaller stores than what we've had than we put them in, in the past, so we've got some traction there.

I think in general we don't see the productivity as being any different than what we've spoke to in the past, and what that has been is what we've said traditionally a 5% to 10% comp lift, and that's across the whole store.

It's not just in the consumable side of the business, so we also see a comp lift on the discretionary side when we add freezers and coolers.

So it's an important aspect to the overall store business, and we continue to like them.

It obviously drives traffic into the stores, more frequent trips.

Little bit lower margin, but at the end of the day, with the overall comp increasing in the store, we like what it does to the overall P&L.

And then just in terms of other store productivity initiatives, I just want to clarify that the stationery, check-out and party expansions are fully rolled out at this point?

And what are you, can you give us any sense for what might be next in the back half of this year or maybe next year in terms of category changes or expansions?

Well it never really ends, does it?

We've rolled out an expanded stationery department, more SKUs, more square footage.

As we go through and analyze our results over the months and quarters we'll see productivity issues and we'll identify the categories that continue to grow, and those are going to continue to get more.

You may end up with another expansion in stationery in the next year, depending on how we do with this one.

Same thing with our party, and also in our food, and our candy, and our snacks and all our salty snacks and beverage and that side of the business.

So it's really a function of how the customer is responding, what are the customers asking for, how they are responding to a category, whether we're over-spaced or under-spaced or under-SKUd or over-SKUd and we continue to make those adjustments throughout the year.

So this year, first quarter and first half, it was the check-outs, it was the front end, stationery, it was candy, it was party.

There is always a few others too, by the way, that we do in our home areas, that may not be the whole department, but could be subcategories that we expand or contract.

Always searching for that sweet spot for the customer today and staying relevant to the customer today so for the past several years we have expanded, we had expanded our consumer products, our cleaning supplies, our HBC, our food, candy and snacks faster, reducing some space in the variety area.

This year, we've chosen to expand some of the variety categories, and we're seeing some good results in that.

So I guess I'm just saying that it never ends.

It's always an ongoing analysis of the business and analysis of the customer, listening to the customer, what do they want, giving them more of what they want to buy.

Great, thank you.

You're welcome.

This does conclude the question-and-answer portion of our call.

I'd like to turn the call back over to Mr. Tim Reid for any additional or closing remarks.

Thank you, Aaron, and as always, we thank you for your participation on this call, for your interest in the Company, and most of all for your investment in Dollar Tree.

I'll remind you that our next sales and earnings increase and conference call are scheduled for Thursday, November 21, 2013.

Thank you all again.

This concludes today's conference.

We thank you for your participation.