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Dollar Tree, Inc. (NASDAQ:DLTR)

Q3 2012 Earnings Call

November 15, 2012, 09:00 am ET

Executives

Tim Reid - VP, Investor Relations

Bob Sasser - President & CEO

Kevin Wampler - CFO

Analysts

Scot Ciccarelli - RBC Capital Partners

Matt Boss - JPMorgan

Matt Nemer - Wells Fargo Securities

Charles Grom - Deutsche Bank

Meredith Adler - Barclays

Dan Wewer - Raymond James

Stephen Grambling - Goldman Sachs

Edward Kelly - Credit Suisse

Dan Binder - Jefferies

Operator

Good day and welcome to the Dollar Tree Inc.’s Third Quarter Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Tim Reid, Vice President of Investor Relations. Please go ahead, sir.

Tim Reid

Thank you, Roxanne. Good morning and welcome to the Dollar Tree conference call for the third quarter of fiscal 2012. Our call today will be led by Bob Sasser, our President and Chief Executive Officer, who will provide insights on our performance in the quarter and recent developments in our business. Kevin Wampler, our Chief Financial Officer, will provide a more detailed review of our third quarter financial performance and provide our guidance for the remainder of the year.

Before we begin, I would like to remind everyone that various remarks that we will make about future expectations, plans and prospects for the company constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors included in our most recent press release, most recent current report on Form 8-K, quarterly report on Form 10-Q, and annual report on Form 10-K, all of which are on file with the SEC. We have no obligation to update our forward-looking statements and you should not expect us to do so.

One other note, as a reminder on September 28, 2012, Dollar Tree sold its ownership interest in Ollie's Holdings, which further will be referred to as Ollie’s. The company originally acquired its Ollie’s ownership interest in 2003. The sale had a favorable impact on third quarter earnings with an increase to net income of $0.17 per diluted share. Unless otherwise noted, all net income and earnings data presented today will exclude the impact of the Ollie’s transaction.

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

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

Bob Sasser

Thank you, Tim. Good morning everyone. This morning, we announced our sales and earnings for the third quarter of 2012. Total sales increased 7.8% to $1.72 billion, driven principally by increases in traffic. Our comparable store sales increased 1.6% compared with a 4.8% increase last year and an 8.7% comp the previous year.

Earnings for the third quarter were $0.68 per diluted share. This includes $0.17 from the sale of our interest in Ollie’s. Excluding the sale of Ollie’s, our earnings for the third quarter were $0.51 per share. This represents an 18.6% increase over last year’s $0.43 per share and was at the high-end of our $0.47 to $0.51 range of guidance.

Operating margin for the third quarter 2012 was 10.7%, an increase of 40 basis points over the third quarter last year. Net income rose 48.6% to $155.4 million versus $104.5 million last year. Excluding the income derived from the sale of Ollie’s, net income rose 12.2% to $117.3 million.

Year-to-date, through three quarters of 2012, total sales were $5.15 billion, an increase of 9.9% and comp store sales increased 3.9%. Year-to-date operating income has increased by $76.5 million; operating margin was 10.8%, an increase of 60 basis points compared with the same period last year.

Net income rose 30.0% to $390.7 million, and earnings per share were $1.69, an increase of 37.4% compared with $1.23 per share reported last year. Excluding the income derived from the sale of Ollie’s, net income rose 17.4% to $352.6 million, and earnings per share were $1.53, an increase of 24.4% compared with $1.23 per share reported last year.

Sales increases in the third quarter came from growth in both basic and variety categories with basic consumable categories growing at a slightly faster pace. Our top performing categories included housewares and home products, healthcare products and food and beverages. Customer responded enthusiastically to our Halloween seasonal product and our sales in the third quarter met expectations. Sales were particularly strong in Halloween Home Décor. Seasonal changes were executed in a timely manner and we’re now ready for fall, Thanksgiving and holiday season. In terms of the sales cadence in the third quarter, comps were positive every month and we saw a sequential improvement from August through October.

In terms of geography, performance in the third quarter was relatively consistent across the country with the highest comps coming from the Mid-Atlantic, Midwest and New England followed closely by the Southwest and the Southeast. Dollar Tree remains a destination for high value consumer products and customer traffic was up throughout the quarter. When customers are in our store shopping for the basics, we give them every reason to stock up on our terrific assortment of high value and high margin variety merchandise. Even in a difficult economy, at Dollar Tree you can still splurge everything only $1.

Looking to the future, we are excited about our growth potential and continued relevance to the customer. Over the next several years, it’s likely that consumers demand for value will continue to grow and intensify. Dollar Tree is uniquely positioned to take advantage of this trend. Our goal is to provide more value to a broader range of customers. And we are doing this in many ways, by opening more stores, by opening better, more productive stores and by developing new formats, new markets and new channels.

During the third quarter this year, we opened 111 new stores and relocated and expanded another 16 stores. Through three quarters of 2012, we have added 298 new stores and expanded or relocated 81 stores.

Selling square footage has increased 7.1% and we ended the quarter with 4,630 stores. We are on-track with our new store opening plan for the full year 2012 which includes 315 new stores and we have surpassed our plan for 75 relocations and expansions in 2012. We now expect to complete more than 395 total projects across the US and Canada in fiscal 2012.

I am particularly pleased by the productivity of our new stores; sustained improvement requires a coordinated effort across the organization, it requires a strategy and it requires team work between real estate, merchants, planning, stores and logistics. Our teams are concentrated on improved site selection, on right sizing our stores, expanding our assortments, improving staffing and building the bench of qualified store management and on opening new stores earlier in the year. We believe these are the key elements to increasing our new store productivity and we are having success. I am very pleased to report that average new store productivity has increased in each of the past six years and the trend has continued through the third quarter 2012.

Efforts to increase sales per square foot are not limited to new stores and elements of the strategy to increase store productivity can be seen throughout chain. In all stores, we are developing more powerful season of presentations; stores are emphasizing more effective customer engagements and working to drive sales of related items for a cross merchandizing and suggestive selling. We are expanding assortments of the front end of our stores to create more merchandized energy and to drive impulse sales and merchants to expand in our assortments in candy, stationery, health and beauty care and home and household products, which was our fastest growing category in the third quarter.

As part of our strategy to broaden assortments, our expansion frozen and refrigerated product continues. We installed freezers and coolers in 67 additional stores in the third quarter and now offer frozen and refrigerated product in 2,467 stores. We remain on scheduled to roll this product up to a total approximately 325 installations for the full year.

Another key component of our growth strategy is the development of new retail formats, the expansion of our geographic reach and the development of additional channels of distribution to serve more customers. Specifically, that means Deal$, Dollar Tree Canada and Dollar Tree Direct. Our Deal$ format extends our ability to serve more customers with more categories and increases our unique growth potential.

Deal$ delivers low prices on everyday essentials, party goods, seasonal and home product. By lifting the restriction of the $1 price point, Deal$ were able to serve more customers with more products at value prices everyday. Customers are responding favorably to the strategy, customer awareness of the Deal$ brand is growing and the concept is building momentum.

Overall in the third quarter as in the past several quarters comp store sales in our Deal$ stores continued to lead the company. We are excited about the growth potential of Deal$ and particularly the opportunity that it provides to grow profitably in the higher cost of operation in urban markets.

We ended the quarter with a total of 194 Deal$ stores. Our Canadian integration and expansion continues. We initially entered the Canadian market through the acquisition of Dollar Giant stores in November of 2010. Our goal is to be the leading retailer in Canada at a single price point of $1.25 just as we are in the US at the $1 price point.

Last year, our first full year we installed retail systems. We integrated processes, merchandise assortments and store teams and we laid the foundation for future profitable growth in the Canadian market. Just one year ago in the third quarter of 2011, we completed the installation and training of store level POS and enterprise-level merchandising systems.

Today for the first time we have consistent year-on-year data on which debates our sales and assortment plans. We have visibility to our own hand, own order and sales along with the trailing history by store and by SKU. These are all key factors in the management of an efficient supply chain and improving customer satisfaction.

Merchandising teams are integrated to leverage Dollar Tree’s buying power. This has been a big transition but customers are beginning to find broader, more exciting assortments and better values in the stores. We expect this to gain momentum as we move through the holiday season and beyond.

Our focus is on more efficient store operations, continued building of store teams and improved product flow to the stores. We are working very hard to increase service level and in stock position of basic products while improving the shopping experience for a more powerful seasonal presence and a higher level of merchandise energy.

Meanwhile we are expanding our Canadian store base, we opened 12 new stores in the third quarter, 30 stores year-to-date and we ended the quarter with a 129 Canadian stores. We had begun the year with a plan to grow our Canadian store base approximately 25% under the Dollar Tree brand. We will likely exceed this plan and end the year with 135 stores in Canada.

In addition, we've rebranded all of the former Dollar Giant stores in Ontario to $3.10 of this year and we will do the same for stores in the western provinces in 2013. As we grow and improve, we believe the Canadian market can support up to a 1,000 Dollar Tree stores. This is an addition to the 7,000 store potential for Dollar Tree in the United States, plus additional growth in our Deal$ format.

I'm extremely excited about the opportunity for Dollar Tree in Canada and proud of what has been accomplished in a short period of time. Our current commitment to build infrastructure, develop store teams and improve the consistency of our offering across the chain will be worth the efforts.

Dollar Tree Direct our e-commerce business continues to grow. This additional channel of distribution provides an opportunity to broaden our customer base, drive incremental sales, expand the brand and attract more customers into the stores.

Traffic exceeded 4.5 million unique visitors in the third quarter, that's a 19% increase over the third quarter of last year. Additionally, over 28 million e-mails were sent to individual consumers, businesses and organizations. We're expanding the available market to more consumers in several ways. First, Dollar Tree Direct now has over 2,600 items available online including 825 items per sale via our website that can be purchased in less than case quantities, an increase of over 65% versus the same time last year.

Additionally, we continue to work to enhance the customer experience on their mobile device, improving the ease of navigation and speed on our mobile e-commerce site. Over 1.5 million people chose to interact with Dollar Tree via their mobile devices during the third quarter. Through these initiatives, Dollar Tree Direct is gaining customers every quarter and I am pleased with their progress. Investments in new stores, more productive stores, additional formats and expanded geography all increased our ability to grow our business, expand our client acceptance, serve more customers in more ways.

In order to achieve consistent and profitable growth, our practice has been to add infrastructure and distribution capacity to support our growth ahead of the needs. In that regard, construction is proceeding according to schedule on our new distribution center in Windsor, Connecticut. [DC 10] will be one million square feet. It will be automated and highly efficient providing capacity and cost effective service to our stores as we continue to expand in the northeast. We're on schedule for a third quarter 2013 completion.

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

Kevin Wampler

Thanks Bob. As Bob mentioned, excluding the non-operating income from the Ollie’s transaction, our diluted earnings per share increased 18.6% in the third quarter to $0.51. The increase resulted from our sales growth and expense control which resulted in a 40 basis point improvement in operating profit margin compared to the third quarter last year.

Our gross profit margin was 34.9% during the third quarter compared with the 35.1% reported in the third quarter last year. Several factors contributed to this performance, freight costs increased driven by higher trucking rate and diesel fuel prices that averaged $0.23 per gallon above the same period last year.

Our product mix continue to shipped in the third quarter as basic consumable products increased by 32 basis points as a percentage of sales. In addition, mark down expense increased slightly as a percentage of sales relative to the third quarter last year. These factors were partially offset by higher initial mark up across many categories.

Occupancy and distribution expenses were flat as a percentage of sales reflecting the 1.6% comp store sales growth and the addition of 295 new stores compared with the same period last year. SG&A expenses were 24.2% of sales for the quarter which is a 60 basis point improvement from the third quarter last year.

Operating expenses declined by about 45 basis points, this was driven by a realized gain of $3.8 million relating to the favorable resolution through a legal matter and reductions in legal fees, advertising expense, repairs and maintenance, utilities and debit and credit card fees as a percentage of sales.

Payroll related expenses declined by approximately 15 basis points due to lower incentive compensation expense compared with last year. We expect that credit card penetration will grow in the fourth quarter; we have just completed the rollout of MasterCard acceptance to an additional 3,500 stores. We now accept VISA and MasterCard in all of our stores chain wide and we also accept American Express and Discover in all of our stores in the United States.

Operating income increased $19.3 million compared with the third quarter of last year. Our operating margin for the quarter was 10.7% at 40 basis point improvement compared to the third quarter of last year. Year-to-date to the third quarter operating margin is 10.8% an increase of 50 basis points from the same period of last year.

The tax rate for the quarter was basically unchanged to 36.3% compared with the third quarter of last year at 36.4%. The tax rate was lowered than the tax rate anticipated in our guidance for the quarter due to favorable provision to return the reconciliation adjustments and the lowered tax rate on the Ollie's gain.

Cash and investments at the quarter end totaled $222.4 million versus $280.2 million at the end of third quarter 2011. During the third quarter, we invested $149.8 million for share repurchase and repurchased 3.3 million shares. During the first three quarters we invested $235.3 million for share repurchase and repurchased 5 million shares on the open market.

At quarter end, we had $965 million remaining in our share repurchase authorization. The diluted weighted average shares outstanding for the third quarter was $230.0 million. Over the past four quarters, we have invested $535.3 million for share repurchase; we will update you on additional share repurchases if any at the end of the quarter in which they may occur.

Our consolidated inventory at quarter end was 12.7% greater than it was at the same time last year. Selling square footage increased 7.1%, consolidated inventory per selling square foot increased by 5.2%, the increased reflect a higher amount of inventory in our distribution centers at the end of the third quarter and an increase in goods on the water. This is just for planned holiday and post Christmas sales and new store openings and it is consistent with our strategy to smooth the flow of inventory through our logistics network. Inventory turns increased in 2012 through three quarters and we expect this trend to continue for the full year, as it has for the past seven years. Capital expenditures were $96.6 million in the third quarter of 2012 versus $75.5 million in the third quarter of last year.

For the full year, we are planning 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 325 stores, IT system enhancements and approximately $70 million towards our new distribution center in Windsor, Connecticut. The total capital investment anticipated for this facility is approximately $100 million.

Depreciation and amortization was $43.6 million for the third quarter versus $41.1 million in the third quarter of last year. For the full year, we expect depreciation expense of $170 million to $173 million. Our guidance for the fourth quarter of 2012 includes several assumptions. First, Halloween shifted two days deeper in the fourth quarter this year from the first Monday of the quarter last year to the first Wednesday this year. We believe that this in fact shift approximately $5 million of sales from the third quarter into the fourth quarter compared to last year.

Second, we've been asked about the impact of Hurricane Sandy on our fourth quarter. We are grateful to report that it appears the storm will not have a material impact on our fourth quarter results. Also as previously disclosed, due to the retail calendar 2012 will include 53 weeks and the fourth quarter will consist of 14 weeks. This is expected to add $120 million to $130 million of incremental sales and $0.07 to $0.08 earnings per share for the fourth quarter and full year.

Our guidance also assumes a tax rate of 38.1% for the fourth quarter and 37.2% for the full year. Weighted average diluted share counts are assumed to be 228.6 million shares for the fourth quarter and 231 million shares for the full year. As always, our guidance assumes no additional share repurchase. With this in mind for the fourth quarter of 2012, we are forecasting sales in the range of $2.2 billion to $2.26 billion based on a flat to a low-single digit comparable store sales increase and 7.2% square footage growth.

Diluted earnings per share are expected to be in the range of $0.97 to $1.02, an increase of 21.3% to 27.5%. This fourth quarter guidance includes the impact of the extra week. For the full fiscal year of 2012, we are now forecasting sales in the range of $7.35 billion to $7.41 billion; based on a low to mid-single digit increase in comparable store sales and 7.2% square footage growth.

Diluted earnings per share are expected to be in the range of $2.65 to $2.70, representing an increase of 31.8% to 34.3% over our record earnings per share of $2.01 in fiscal 2011. This includes the impact of the 53rd week. The full year guidance also includes $0.16 earnings per shares from the Ollie’s sale in the third quarter. Excluding the impact of the Ollie’s transaction, we would expect full year earnings per share to be in the range of $2.49 to $2.54, representing an increase of 23.9% to 26.4% over last year.

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

Bob Sasser

Thank you, Kevin. In the face of a very challenging and uncertain environment Dollar Tree’s traffic grew, our reach is expanding and we continue to deliver record profitability. Operating margin increased by 40 basis points to 10.7%, and I would like to point out that that’s the highest this quarter operating margin in the history of our company. Earnings per share increased by 18.6% on top of a 19.2% increase last year. Our inventory is balanced and more productive than ever. Our turns increased again through the first three quarters of the year and we entered the fourth quarter well prepared for new store growth and customer demand.

Through the third quarter this year, we’ve opened 298 new stores across the US and Canada, and the productivity of the new store flats has been performing ahead of last year. In addition, the company invested $235 million for share repurchase, buying back 5 million shares over the first three quarters, including 3.3 million shares for $115 million at the third quarter alone.

I believe that Dollar Tree has singularly positioned to do even better in the future. The customers are focused on our stores and our product. They are strategically located to serve middle America. They are bright, they are convenient and they are fun to shop. Our balance mix of high value consumer basics and our unique assortment of fund, compelling seasonally correct discretionary product positions us to be relevant to customers in all economic circumstances.

Dollar Tree has a solid and scalable infrastructure that we're expanding and leveraging for better inventory management, increasingly efficient supply chain, more productive stores and crisper execution overall. The deals we are at is gaining traction, both traffic and average ticket are growing. Dollar Tree Direct continues to broaden its reach, and we're building and expanding our Canadian business.

We've plenty of opportunities to grow our business, a vision of where we want to go and the infrastructure and capital to make it happen, while generating substantial free cash which we use for the long-term benefit of shareholders. We are having a great year, we’ve transitioned quickly from Halloween and our stores are now set with our best merchandize value ever for Thanksgiving and the Christmas holiday season.

We are now ready for your questions so that we can accommodate as many callers as time permits. We ask that you limit your questions to two.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Scot Ciccarelli with RBC Capital Partners. We’ll take your question first.

Scot Ciccarelli - RBC Capital Partners

With a little bit more benefit of hindsight, can you help us better understand that the causes of what’s called that the slower comp growth that we saw towards the end of the second quarter and certainly in the third.

Bob Sasser

Sure, the Q3 had some sales pressures. It was a solid quarter, we are pleased that our sales were up 7.8%, our comp sales grew 1.6 and that was a result driven by traffic, our sales were within a range of guidance and it was an extremely profitable quarter. Our operating margin was the highest ever in Q3 at 10.7%. So it was really a strong quarter, net income up 12.2, EPS up 18.6 and again earnings at the high end of our guidance.

So, as I sit here talk about pressures on our business, I am struck a little bit by the exceptional profitability of our quarter. Depression on sales were basically, I think you put them in three buckets that was number one, consumer anxiety from just continuation of a difficult macro environment with stubbornly high employment and continuing high gas prices and they keep rising and continued concerns about the top economy and the fiscal cliff, and all of this was magnified everyday as we went through the elections and that created anxiety and then certainly in the consumer that was one.

Secondly, we had calendar shift of Halloween from Monday to Wednesday which moved two more Halloweens selling days into fourth quarter that was about a $5 million headwind and we saw that. And the third reason is the difficult comparisons. If you look at what we are up against, we are against the two years stack comp of 13.5%. As a comparison in Q2 this year, we were against the two years stand at 11.4%. And if you look back at the three years stack and the four years stack, you will find pretty much the same spread.

So it was a pretty difficult comparison this year and third quarter, and especially difficult comparison in our consumable business which really as a percentage of totaled by a 170 basis points last year, and we were up against that this year. This year consumables grew 32 basis points on top of that.

We had a good quarter as I said, we are pleased with the profitability. We are now focused on fourth quarter, our stores are well prepared for the holiday sales. We are in stock, we are in business with the best values ever and we are looking forward to good fourth quarter.

Scot Ciccarelli - RBC Capital Partners

And I guess, my confusion stems from effect that. gas prices seem to ease a little bit as the quarter went on and obviously the election wasn’t until the end of the quarter like really after the quarter. So I am a little confused why sales was improved during the quarter, if these were the main reasons for the softness?

Bob Sasser

Well, those were all subjective; we all saw the same thing, gasoline prices overall rose throughout the quarter and I believe continue to rise, they are higher than they were this time last year, they were at -- we do well within difficult times. My point is, all the anxiety played out on TV 24/7 with the election about the fiscal cliff, about the unemployment, about all the economic concerns, I believe put pressure on sales in the third quarter. Secondly, we had the calendar shift and lastly we were up against really tough comparisons in third quarter especially when you looked at our consumable business last year growing 170 basis points; its grown 200 basis points in two years, a 170 in last year, difficult comparison.

Operator

We will go next to Matt Boss with JPMorgan.

Matt Boss - JPMorgan

So parching through the flat to up low single digit 4Q guidance and hurricane not really having a material impact, what are you seeing in regions that were not impacted by the storm, any improvement post the election as you talked about fiscal cliff worries, just kind of trying to parch through ex the storm what you've seen so far?

Bob Sasser

Well, Matt, obviously we don't give, we give guidance, but we don't then comment on the forward quarter, basically but beyond that. Obviously, I don't know that any of the macro environment has changed significantly since that point in time. Some of those things as unemployment, high gas prices and uncertainty around the fiscal cliff are still there. So I think I don't know that the environment has changed a whole lot. Obviously, we feel like we are ready for a good fourth quarter. We are, our stores are, teams are well prepared. We have the inventory that we think is well suited and right on the spot for the consumer. So our expectations are to go through the quarter and we believe it could be relatively good, while we are going some very tough compared a year ago when we were up 7.3% on a comp basis with pretty much perfect weather, so we all know that going into though.

Matt Boss - JPMorgan

And then on the gross margin line, can you just walk further through some of the puts and takes, any changes on the discretionary front and how did discretionary fair in the quarter and anything you are seeing from a competitive standpoint of note?

Bob Sasser

Really if you look at the discretionary versus consumables, both pieces of business were positive for the quarter, so I think that's very, very positive. So they both continue to comp positive which has been the case for many quarters in a row now. I think that as we go forward, we would expect that to continue. We are well positioned. We think that as we go forward that maybe there will, we've seen a slowdown I guess in a sense as far as the delta between growth in consumables if you look at the quarters this year Q1 I think we are up about 110 bps in consumables, Q2 is 40 and then Q3 30. So we've seen that moderate a little bit. But overall we feel good about where we've positioned ourselves.

We are a variety store first and foremost and that's what our heritage is and that's what we want to be known as and that is very important to us, so as we continue to go forward we think that's good. Gross profit otherwise, as we look at talk maybe to some of the pressures from Q3, obviously there was some freight pressure there and we really, as we’ve talked in the prepared comments about trucking rates and the fact that if you look at the industry in general, since the economic downturn, there has been many trucking businesses go out, less competition obviously. If you keep up in that industry, there is a nation-wide shortage of truck drivers out there. So there is definitely some pressure there.

Fuel, 23 basis points, $0.23 up, I mean for the quarter. The metric there as we’ve always said, as fuel, diesel fuels are a $1 higher for the full-year, it would be about $0.05 hit to us. So you can kind of back in to what that means to us. So I don't know that, I expect there still to be some pressure as we go forward in the Q4 in that area. We’ve really seen it all year and I think we’ll continue to see a little bit of it as we go through the fourth quarter as well.

Operator

We’ll take our next question from Matt Nemer with Wells Fargo Securities.

Matt Nemer - Wells Fargo Securities

Good morning. Two quick questions; one, now that we're past the election and I know that there was some noise or some pressures in swing states. Have you seen comps improve faster in those states or do you have that noise? And then secondly, given the moderation in consumables growth, are you still seeing the same productivity lift when you add freezers and coolers to stores as you have historically seen? Thank you.

Bob Sasser

Matt, we don’t break it out by state or even by period our comp sales. We put that in our guidance; as Kevin described, he talked about the guidance going forward. Anecdotally, I will tell you that I think it's a good thing to get past the election and anything we can do to have more certainty in everybody’s lives is a good thing. There is a lot concern out there still and I think we're still in a period of a little bit of uncertainty in consumer.

Having said that, we are prepared; we have all the things that we need. Our people have done a terrific job transitioning from third quarter and into fourth quarter preparing for the holiday; we have got the best assortments ever out there and when things are tight we are still going to shop and at Dollar Tree everything is at $1; we have things you need, things you want and we think we are going to get our fair share of the customer. I am particularly pleased with our merchandize assortment this year, a lot of its new, a lot of it is change, it’s not the same old, same old and our customers I tell you they are going to be responding in great numbers to our stores and to our merchandize assortment for this fourth quarter. So we are excited about it yeah, so as we talk about all the headwind there, we always plan to get our piece of the business and I think we will do so again this year in the fourth quarter.

Kevin Wampler

And regards to your question as far as freezers and the lift as we add freezers and coolers to stores, we are continuing to see, as we have said historically a 5% to 10% lift across the store, so it’s not just consumables that see a lift, it is discretionary and consumables across the board. So we are continuing to see that; we are now over 2,400 stores with freezers and coolers and we continue to rollout as we said this year 325 stores and we continue to look to grow that program going forward. We do believe obviously that its fast returning, little bit lower margin, but it does drive footsteps into our stores and we like the traffic it generates.

Operator

We go next to Charles Grom with Deutsche Bank.

Charles Grom - Deutsche Bank

Thanks good morning. Just to kind of keep on this topic about the sales; if you look at the second quarter you guys were up 4.5% and it’s my understanding, from the analyst data your business in the beginning of August really slowed sequentially; last I checked economy or gas prices or the fiscal cliff really didn’t kind of play into kind of the equation then. So just wondering if you guys dug a little bit deeper as to just to try to understand why your business did slow in the quarter, just because you guys have been so consistent for multiple years here, it just seems very odd that your business was slow that much, that quickly?

Bob Sasser

Well Chuck, I think you just got to take a look at, the macro environment really hasn't improved. So it’s stubborn, it continues and there is on certainty out there; prove it, I can't prove it. For you, I can just tell you what I see and what we hear and what we listen to our customers and what they say. Now as you look at the third quarter, it was a terrific quarter last year, we were up against a big two year comparison third quarter, it was the largest two years stack that when you look at the difference in the two years stack between second and third quarter it’s about 200 basis point difference. So there is a big difference in the last year’s performance that we were up against in third quarter.

And a lot of that was consumer products; we again grew our consumer goods at 170 basis points in third quarter of last year. This year we grew it again, but its 32 basis points on top of the 170. So those were the fact that did start off, every month was positive, every month it grew August, September improved over August, October over September so it grew through the quarter, all-and-all it was 1.6 comp at the end of the day.

So the three pressures that I listed are the three that we can identify and those are the things that we see and again, I will just point, the 1.6 comp delivered a lot of leverage still on fixed costs and it was an extremely profitable quarter for us.

Charles Grom - Deutsche Bank

And then just for Kevin, just on the fourth quarter guidance (inaudible) to say dollar at the mid point, it looks like it implies about 70 basis points of operating margin expansion, I guess one is my math right and two can you kind of walk through the complexion of that, how much do you expect to get from gross margins versus SG&A?

Kevin Wampler

I mean I think your math is relatively correct. Obviously, you've got to remember we do have the extra week in the fourth quarter so we've got a $120 million to $130 million of sales where no additional fixed costs per se. Obviously, there are some variable costs that go with that. So that affects it and generally with the theme of the year I think what you would see is again the majority of the gains coming from SG&A, potentially gross profit being flat to maybe a little bit of upside. So I think that's, we continue to see the metrics kind of move in the same direction.

Operator

(Operator Instructions) We will go next to Meredith Adler with Barclays.

Meredith Adler - Barclays

Not to sort of beat the dead horse to talk about fourth quarter sales, when I look at it, I looked at a three year factor or three year average because last year was strong in part because of weather but also because the prior year had been certainly well below trend and so I'm kind of a little bit surprised if I added say 1% on a three year basis would be a really significant deceleration. I guess the question that hasn't been asked is about competition where it was asked, that didn't quite get an answer, do you believe that Wal-Mart which has certainly been growing sales better than previously, do you think that's having an impact on your business?

Bob Sasser

Well, Meredith, I didn't hopefully, I'm answering the question about competition as best I can you know, we stay focus on what we do, we look at the competition, I can't tell you that I can relate one or the other of the competitors to a reason that we factor anything into our guidance going forward, anything different into our guidance going forward because we are so different than the other guys you know comparing Dollar Tree to a Wal-Mart is really not a good comparison as we do what we do, everything at Dollar with comp stores, we create terrific value for customers on things that they need everyday and we've been growing that business for several years as well as the discretionary business, it’s a place to go to find fun and the exciting and new and seasonal and trend and everything is a (inaudible) as a fun shopping experience. So it’s just really a lot different model and Wal-Mart is a lot different than the other guys with Dollar in their name. I'm sure they are all doing really well but I can't tell you that I see anything that they are doing that is having an effect on us adversely. We actually like being near most of them because of the traffic they bring into the shopping centers but we are just different and we stay focused on what we are doing.

Meredith Adler - Barclays

Great and I have another question sort of unrelated, you did mention that I believe if I got it right that incentive comp was a bit of a help to expenses this quarter and I'm just wondering since your guidance has gone down for 4Q comp, does that mean that whatever they feel people need to produce has their expectation has gone down and so that if you hit a 1% then incentive comp would be there in the fourth quarter?

Kevin Wampler

Guidance obviously assumes the sales that we are expecting and within that is built the model of how we build up the incentive comp. So I don't think obviously if we significantly outperform the guidance with the sales bonus, potentially go up, yes but it goes up in concert. I mean that’s the way it's built such that its paper performance realistically, the way we’ve always looked at it. So I don’t think it's got a significantly shift in the fourth quarter one way or the other. It's really built in accordingly.

Bob Sasser

And Meredith, I think incentives are still the same. And if they exceed their goals then they get paid more but we like that. If our stores exceed then we all exceed our goals. So if that all goes up in concert.

Operator

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

Dan Wewer - Raymond James

So remember back in, way back in 1999 and 2000, Macon Brock used to say, don’t invest in Dollar Tree if you want strong same-store sales. You know, the small story, highly efficient that kind of capacity obviously there is no price inflation benefits with the $1 format. And then over the seven years following the company rebuilt itself in to a chain of larger stores, since 2007, the company has been achieving the strongest same-store sales growth in its history, so a lot different scenario than what Macon talked about. Even today and we're getting sales productivity not quite back to where it was in 2000, measure per square foot but quite a bit closer. Do you think they were the tipping point, where those days, the 5%, 6% same-store sales gains just mathematically aren’t possible given the big ramp that you achieved in the last four years and maybe business can be better than 2% that we should be thinking more, maybe that lower single-digit rate going forward?

Bob Sasser

Dan, going back to 1999, I remember I was there too and we did have small stores for the 4,000 to 6,000 square feet and they are pretty much opened up at what they were going to do and the comps were stubborn. As we expanded the size of our stores one of the things I used to like about perhaps still do is we expanded our open to sell which serve the customer better, it gave us the ability to serve, offer more products and more categories and serve more customers and brought more broad appeal and we have had that. I think your point about since 2007 through 2012 some of our highest comps is valid and I think what you are looking at is short-term versus long-term.

I still believe what I told you back in 1999 about the largest store and where we would go and the opportunity to serve more customers and better serve our customers and increase our same-store sales and our productivity. I still believe in that, but we are going to go through swings from time-to-time, from year-to-year, from quarter-to-quarter and likely short-term you are going to have a quarter that’s up against a really big quarter and really big, in this case five quarters and the comparisons are going to get a little difficult and what about it to deal with bad weather and by the way (inaudible) to get a little sentiment running the wrong way. I don’t see that as long-term though.

So yes we can still comp it at higher rates and we intend to comp at higher rates, I am clearly pleased with the 1.6 I know that sounds funny may be to when I say that, because always we are looking for more, but in this quarter a 1.6 comp and the way we convert it and leveraged that and converted that to operating margin. The highest operating margin ever in third quarter from a company that has high operating margins I think is and I am pretty proud of what I thought to have done with that. Can we do better? Absolutely. We can do a lot of things to continue to engage our customers we can sell more we can increase our productivity and all our stores it’s going in the right direction. You hear me praising that.

Directionally, we are going in the right way. We are not at the top, we are not where we are going to be, there are still things that we can do to drive productivity and our teams are working and focused and so look a little bit longer than one quarter and I still believe in the concept, I believe that we are more relevant today than we’ve ever been to our customer.

You know back in 1999, we clearly didn't have much that you needed; it was everything that you wanted for the most parts small stores. Now with our mix, when times are tough, we got things to sell in tough times and you can see that growth in our consumer products from that. One-time aren’t so tough, we have discretionary product. I talk about like customers are having jingle in their pockets because I really want to sell the full mix and that's what we strive to do it Dollar Tree, its not just one or the other selling the mix and selling the shopping experience and I still believe that when everything is in dollar in a store and that makes us different and our customers love it, and they react to it and they are going to go into for many years, go ahead.

Dan Wewer - Raymond James

I just want to add follow-up also on (inaudible) question about competition and expand the competitive side to include Family Dollar and Dollar General. It does appear that Dollar Tree’s momentum in consumables began to slow about the same time that Family Dollar began to make bigger investments in consumable products whether it’s a Pepsi product or [Mclean] products, and also it appears that maybe the business begin to decelerate after quotes, you started downsizing the Coke bottles at Dollar Tree from 20 ounces to 14 ounces. I know there is a lot of weak (inaudible) in that part of the business based on pricing and value. Maybe you can talk about on those two issues?

Bob Sasser

I know it may sound like that and it look like that but stacks are just they just don't support. As we look at our stores that are in the competitor’s areas and we see no difference, we see nothing from what they are doing that is affecting our stores on the store-by-store or market-by-market basis.

Like I said, they are good retailers, I have great respect for all of them but we are different, its just not, we are not the same, we are not a Coke Pepsi predominantly driven name brand predominantly driven assortment and when we do have name brands, we are usually a little different and I think our value on our front end, we only sell the Coke products at the front end for the most part, from time-to-time we will have to somewhere else but its always impulse, its always out of the cooler, mostly out of the cooler, you need one to drink, you pull it out, it’s a great value for a buck. By the way you can buy the Pepsi and it’s a bigger bottle than the Coke product for a buck. That's a position that Coke has chosen to take.

And so we are just like everybody else. We are out there whatever size they are willing to sell for that price. So I can't tell you that, I will tell you that there is no data that supports the fact that the competition is taking away our consumer products business. It is more us, it is more we started from zero to whatever we have now in the last several years and now we are starting to year-over-year run up against those big, big numbers and we can continue to grow but we intend to grow the whole mix, not just one side or the other and as you will go into our stores hopefully this Christmas you'll go into a stores, take a look and when you walk in what you are going to see is Christmas, and you are going to see fun and you are going to see toys and you are going to see all the things to decorate you house, and wrap your boxes and give you presents and stock and stuffers and all of those kinds of things because that is what we think adds excitement merchandize energy, ever changing mix of product to what makes us a difference than the rest of the folks in our sector.

So that's the facts we are in control of our destiny, we are going to have times where the comps are more and times when the comps are less and year-over-year-over-year you know there are going to be times when you have a little different set of circumstances after five years of progressively increasing comps. Look at the long term though, and I don't mean long term next century, I'm talking about just look at the long term future of our company, we are in the best position, we've got the most growth, we've got the most tools to grow, we have Dollar Tree, we have Deal$, we have Dollar Tree Canada, we have Dollar Tree Direct. We have the infrastructure to support that growth. We know how to run it, and I'm really pleased about where we are. It’s like playing golf I tell folks if I can take my drive, instead of driving if I can place my ball out in the fair way where I wanted, this is where I want to point it. We are exactly where we need to be in regard to relevance to our customer and that's the answer.

Operator

(Operator Instructions) We will go next to Stephen Grambling with Goldman Sachs.

Stephen Grambling - Goldman Sachs

Just a follow-up on some of these other questions surrounding the guidance. Just to be clear, you’ve had an acceleration in each month in the quarter. So are you running currently at the high end of the range, and if so, is it really just the conservatism associated with the tougher comparison that's driving the flat to low-single digit.

Bob Sasser

Yeah, Steven, again we don't give any information out about you know the forward quarter. Obviously everything we know today is baked into our guidance as we've given it to you and that's really where we are at. I don't know that we believe that there's conservatism in our guidance; we try to put it together with what the best facts that we have in front of us at that point in time and we try to be as realistic as possible and put the best numbers forward that we can. So that's kind of how we look at it and that's really all we can speak to you at this point.

Stephen Grambling - Goldman Sachs

Great and then as a follow-up to that would just be the leverage point seems to have come down with the comp and it definitely surprised the upside. If the comp was to reaccelerate, how does that change the dynamic of the leverage point and what would actually flow through and what would you think about maybe reinvesting the business?

Bob Sasser

Well, obviously, the better the comp, the more leverage we’ve traditionally seen; there is no doubt about that. We continue to work very hard in every aspect of our business to become more efficient to find ways to improve processes, buy things better from a non-merchandize point of view. All those things we work hard on every day, and obviously we believe there is always continue to room to improve there.

I think as we think about investing in our business, obviously the best thing investing is another Dollar Tree stores. We’ve said for a long time; that the return on another Dollar Tree store is the best thing we can do, and we look to continue to grow our business; we're investing in our infrastructure with a new distribution center, $100 million project. So not a small project and we will continue to look at those type of things. We continue to be a buyer of our stock in Q3 with a $149 million of stock repurchase in Q3. So those are ways we look at continuing to invest and our business, and as we continue to create strong quality earnings, that’s what we’ll look to do.

Operator

We will take our next question from Edward Kelly with Credit Suisse.

Edward Kelly - Credit Suisse

My question is on relocation. Can you talk about the performance of your relocations more recently versus last few years? Are you moving, starting to further down the opportunity curve there, and what does the quality of the pipeline look like over the next few years?

Bob Sasser

Yeah we are very strategic in our relocations now. We rarely close a store and we are always looking though we do usually five year leases with three five year terms something like that, sometimes longer if we know the market we are better. But the idea being that as the market changes we can move with the markets.

Back in the earlier days as we were transitioning from the small store to the large store, relocation was strategic for the market, but it was also an increase usually of the store size. Today our relocations are typically to stores strictly for strategic reasons may be the anchor and the center moved may be the population has changed, maybe we are just run out of term and we need to move may be the landlord is not going to scrape the center and something like that.

But the size of the store moving from is about the same as the size of the store that we are building. So there is not much of a difference and that is strictly a relocation based on strategy based on where we want to be in the market and how many stores and we talk about planning the market. It’s not just one store it’s the entire market that we are looking at.

So (inaudible) asked the question I would say that the pipeline we start looking at opportunities to relocate several years before the lease term expires, and we are always out there looking at the market and moving things around to be optimal. I would say that most of the time we relocate strategically, we are finding the space to move to, we are finding the right kinds of product and again we have the ability to take what’s there as is and turn it into a nice Dollar Tree store.

Sometimes we can work with those developer, sometimes not as much since 2008, but little more now then has been to build the right Dollar Tree store for us. So the relocations are generally there and the idea of planning out the market is moving them around is typically the reasons we do it now, not to get to a bigger store as much.

Edward Kelly - Credit Suisse

The question I am trying to ask has the sales lift from relocations changed it all over, let's call for last for two, three, four quarters and would you expect the sales lift over the next couple of years to be similar to what it’s been?

Bob Sasser

Sales was about the same as it was last year from a relo, and again we are relo in same size stores typically. A 10000 square foot stores, to the 10000 square foot store. So there is not a benefit for more square footage as it was in early days moving from 5 to 10. But we are still last year this year it was like pretty much the same sales lift.

Operator

And we will now take our last question from Dan Binder from Jefferies and Company.

Dan Binder - Jefferies

I had a couple of questions. First in your comments about the sequential improvements from August to October, I am just curious if you could drill down a little bit. What was the comp gap across it was like the worst and best performing month in the quarter. And then also as you have seen that the comp slow a little bit here. Do you think that you are inclined to do more types of promotion like two for one kind of things to try and get the business reaccelerate a little bit?

Bob Sasser

I can't tell you the comp gap for month and month, we just don't report that, but it’s really more. August last year was a bigger quarter than bigger period in September of course last year. So we were up against a bigger number in August. As we enter the quarter we are comp positive every period and it rose throughout the quarter. But it was more in relation to what we did last year by period than it was anything else to get to the 1.6.

And no we are not going to do two-for-ones. Everything’s at a dollar at Dollar Tree and we put the most value in it we can put for a dollar and it’s worth more than a dollar. So it’s not the value of our product as we see these things, and we are not planning any dramatic promotions and I would point to one more time that we had the highest operating margins in the third quarter we've ever had in the third quarter.

So our goal is to make money, our goal is to drive sales, drive productivity, leverage the fixed costs, leverage our infrastructure and make money for our shareholders and we are going to do that the best way. Sales is not something that we do. Clearance is the only thing we do, after Christmas we will sell some things too for a dollar but Christmas items. But no we don't plan any price promotions, we are already at price promotion; the whole store at 10,000 square feet [supplies].

Dan Binder - Jefferies

My other question was regarding store growth versus comp levels. When you are comping solid mid single 7% type square footage growth, it makes a lot of sense. One data point isn't a trend obviously, but if we look out over the next call it two to three quarters and you are more convalescent with your comps versus mid single, do you think you need to rethink square footage growth and how that plays into the model.

Bob Sasser

No, I don't think so. Our best use of a dollar invested is to build a new Dollar Tree store and the returns are terrific and our goal is to keep making them even better, more productive and we are having success in that. The new stores are opening up in a higher historically higher rate, productivity, sales per square foot are up and we think we can drive that higher.

So our returns should be going up and we are happy with continuing to grow and open more stores. The number of stores that we are opening are the number of stores that we think we can open profitability with the infrastructure that we felt, with the people and the store teams that we have and that we can develop profitably.

So we are subject, we have plenty of room for growth. You know we can run we think 7000 Dollar Tree stores, we've got a lot of room to go towards getting that number, and our goal is to continue growing pretty much at this rate. We haven't announced what next year’s rate is, but I'm still bullish on Dollar Tree. So we still have the same idea. We are going to grow what we think we can do based on our ability to do it profitably, not get ahead of ourselves.

Operator

That concludes today's question-and-answer session. Mr. Reid I'll turn the conference back to you for any additional or closing remarks.

Tim Reid

Thank you Roxanne, and thank you all for your participation on the call this morning and for your interest in the company and most of all thanks for your investment in Dollar Tree. Our next sales and earnings release and conference call are scheduled for Wednesday, February 27, 2013. In the meantime have a great and happy thanksgiving and a joyous holiday season. Thank you.

Operator

Thank you for your participation. That does conclude today's conference.

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