Dollar Tree, Inc. F3Q08 (Qtr End 11/01/08) Earnings Call Transcript

| About: Dollar Tree, (DLTR)

Dollar Tree, Inc. (NASDAQ:DLTR)

F3Q08 Earnings Call

November 25, 2008 9:00 am ET


Tim Reid - Vice President, Investor Relations

Bob Sasser - President and Chief Executive Officer

Kathleen E. Mallas - Vice President and Controller


Meredith Adler - Barclays Capital

Mitchell Kaiser - Piper Jaffray

Charles Grom - JP Morgan

Karen Short - Friedman, Billings, Ramsey & Co.

John Zolidis - Buckingham Research

David Mann - Johnson Rice & Co.

Steve Weiner - Deutsche Bank Securities

Joe Selzman – [Celce] Advisory Group

Patrick McKeever - MKM Partners


Good day and welcome to the Dollar Tree, Inc. third quarter 2008 earnings release. (Operator Instructions) At this time I would like to turn the call over to Tim Reid, Vice President of Investor Relations.

Tim Reid

Good morning and welcome to the Dollar Tree conference call for the third quarter of fiscal 2008. My name is Time Reid. I am Vice President of Investor Relations.

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. Katy Mallas, our Vice President and Controller, will provide a more detailed review of our third quarter financial performance and provide our guidance for the remainder of fiscal year 2008.

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 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.

Bob Sasser

Good morning everyone. Happy turkey week. I hope everybody can find things to be thankful for this week, and as for us, it’s a good time to be at Dollar Tree.

This morning we announced earnings for $0.47 per diluted share. This represents a 23.7% increase over last year’s $0.38 per diluted share. As previously announced, total sales for the quarter were $1.114 billion, an increase of 11.6% over the third quarter of fiscal 2007.

And comp store sales increased 6.2% for the quarter. Our comp store sales increase was the result of more than a 5% increase in traffic and about a 1% increase in transaction size. We are very proud of those metrics.

Year-to-date 2008 compared with last year, total sales are up 10.7%, comp store sales are up 4.9%, and our operating income as a percent of sales is 6.2%. This is an increase of $25.0 million, or 20 basis points over last year’s operating income of 6%.

For the year, net income has risen almost 17% and earnings per share have increased 25.7% to $1.37 per share.

You always ask me about the cadence of the sales in the quarter and I thought I would just share that with you, that sales were strong throughout the third quarter and consistent with the comp sales trend that began really earlier this year.

I view this as evidence that Dollar Tree is increasingly relevant to the consumer. With all of the economic uncertainty, high fuel and energy prices, and pressure in general on the household budget, consumers have to save somewhere. Customers know they can find great value at Dollar Tree for just $1.00 and a convenient, positive shopping experience. More and more our customers rely on us to deliver on this promise and new customers are finding us all the time.

One of the keys to our success is our expanded merchandise mix. Now we really have it all; both things that people need and things that people want. While still small and convenient, our store size has grown over the past several years in order to accommodate the more needs-based consumer product to our heretofore high-value discretionary product mix.

These needs-based products are lower margin but faster turning and drive footsteps into our stores on a more frequent basis. Part of this strategy is the continued expansion of frozen and refrigerated products in more of our stores and we remain on track with our goal this year to add freezers and coolers to 150 more Dollar Tree stores.

During the quarter we added freezers and coolers to 10 Dollar Tree stores, bringing our total to 127 additional stores so far this year. And at the end of the third quarter we had freezers and coolers in 1,101 Dollar Tree stores compared to 931 Dollar Tree stores the same time last year.

While adding new products and categories, we continue to use retail technology to improve the in-stock position on these basic consumer products. Gasoline is still expensive so when our customers come to shop, we want to make sure to have what they need.

Using point-of-sale data by item, by store, we are making smarter allocations and as we sell the product our auto-replenishment system is keeping the stores better in stock on more than 1,200 basic items.

While share of sales of these faster-turning, lower-margin products has increased, we are experiencing growth across our entire business, not just the consumer basics. The customer traffic created by increased depth in health and beauty care, household cleaning supplies, paper goods, food and beverage, including our frozen and refrigerated, is driving sales of our high-value, high-margin discretionary products. Party supplies, seasonal décor, gifts, stationery, and toys continue to benefit from the increased traffic.

I believe that our actions have been right on target. Our response has been appropriate for these times and is now being validated by our results. By offering more of what customers need, we are helping more people balance their budgets. We are gaining new customers and increasing market share. Our customer traffic and transaction size has increased. More people are shopping our stores and they are buying more when they visit.

By driving top line growth we are increasing inventory turns and leveraging costs throughout the P&L and that is resulting in increased operating margin and earnings per share.

Talking a bit about the merchandise, our seasonal product has always been a very important part of our business, has generally higher margin, and adds an ever-changing and fun element to our stores. Customers have always looked to Dollar Tree for their seasonal products and third quarter was no different.

For back-to-school, our unique teacher’s corner and teaching tree concepts continue to differentiate Dollar Tree as a high-value source for many of the things teachers and students need in their classrooms. In addition, families take advantage of our great values in back to school supplies and wide array of items from locker supplies to educational books and flash cards, to desk organizers and basic school supplies, even scientific calculators, and all for just $1.00.

Of course, the big holiday in the third quarter was Halloween. Through industry sources I have heard that this was not a good Halloween year at many retailers but Halloween for Dollar Tree was very strong.

Part of this is due to the value of our offering. Our assortment was compelling and our prices right, just $1.00. We also supported our Halloween sales with a newspaper insert on October 12, about two weeks closer to Halloween than last year and this seemed to have worked. The tab ran in 58 markets, covering about 1,350 stores, compared to 29 markets last year.

In addition to back-to-school and Halloween in the third quarter, we continued promoting our merchandise value, with our primary themes of See What $20 Buys, and that’s 20 items, by the way, and Stretch Your Dollar At Dollar Tree.

And by the way, the buzz in the news media continued in the third quarter. Dollar Tree has been featured in print and television news reports throughout the country as a place to stretch your dollars in tough times.

In addition to our merchandise initiatives, the expansion of our payment-type acceptance continues to contribute positively and it did so again in third quarter results. Debit card penetration increased in the third quarter. The average sale for a debit card purchase is higher and this helped to raise our overall average ticket.

Additionally, we saw a lift from Visa credit in the third quarter and we expect the penetration of Visa credit to continue increasing throughout 2008. We rolled Visa credit card acceptance to all of our stores nationwide on October 31 last year.

And last, we currently accept food stamps in more than 2,000 qualified stores. This number will continue to grow as we roll out more food-stamp-qualifying products to more stores.

Turning now to store growth, during the third quarter of this year we opened 68 new stores and relocated and expanded another 36 stores. This brings the total to 201 new stores opened in the first nine months of the year, 79 expansions and relocations, and approximately 7% growth in square footage.

Our targeted size range remains in the 10,000 s.f. to 12,000 s.f. range. The stores opened so far this year have averaged just under 11,000 s.f., so it’s clearly in the middle of our preferred range.

We expect to open 212 new Dollar Tree stores, 20 new deal stores, and expand and remodel 86 stores this year. This information is consistent with the forecast that we gave in our analyst day webcast in October.

We ended the quarter with 3,572 stores. Over the longer term we believe that we can operate 5,000 to 7,000 Dollar Tree stores across the country and our Deal$ multi-price point concept has the potential of expanding that number.

Speaking of Deal$, we continue to be excited about the development of our Deal$ concept as an additional growth format, lifting the restriction of the $1.00 price point in order to offer even more value and convenience, while leveraging the strength and infrastructure of Dollar Tree.

We believe that Deal$ will give us the ability to serve even more customers in more markets and that it fills a unique void in the value retail segment. We remain focused at the price point of $5.00 and less at Deal$ and we are especially excited over the availability of new merchandise opportunities at these higher prices and the lift that it can provide in our average ticket. We are making measureable progress with the Deal$ concept and we continue to grow into new markets.

So far this year we have opened 19 new Deal$ stores, and we expect to open one more before we stop for the year, for a total of 20 new stores this year. Last year we opened 23 new Deal$ stores and our current store count is 145 Deal$ stores.

The new stores, as I have said in the past, have been the best test of the concept as we have expanded the concept into new regions where customers had no preconceived expectations. We have seen enthusiastic response from these customers. From the very start, the new stores have outperformed the original Deal$ stores in nearly every sales metric, including higher average ticket and percent of market baskets that include items over $1.00, and those are two metrics that we track very closely.

Our Deal$ stores in total showed improved performance in the third quarter. Comp store sales, store productivity, and four-wall contribution all improved and we drove a significant increase in sales of multi-priced items, that is items that are sold for more than $1.00.

Sales increased across a broad range of merchandise categories in the third quarter, including double-digit sales increases in housewares, household cleaning supplies, toys, Halloween seasonal, and pet supplies, to name a few.

One way that our Deal$ stores are having success in driving sales is by improving our messaging, in the store especially. We are using more powerful signing, including outdoor banners, window posters, and increased point-of-sale signing.

And we are having success using in-store handouts for key seasonal promotions like back-to-school, Labor Day, and Halloween.

Looking forward, we still have opportunities. Our greatest opportunities lie in the continued rationalization of the merchandise mix, building assortments, and creating merchandise excitement. While we have made progress in these areas so far this year, we still have a lot more work ahead.

We are refining and improving our key operating metrics, we are refining the assortment and improving our replenishment disciplines, evaluating the pricing strategy and expanding the supply chain of Deal$. And we are rolling out new stores in a measured and thoughtful way.

We are very excited about Deal$ and about the growth platform it represents and we will continue to invest the time, effort, and commitment necessary to make this unique retail concept as successful as we know it can be.

Now I would like to turn the call over to Katy Mallas, Vice President and Controller, who will give you more detail on these and other financial metrics during the third quarter and provide guidance for the remainder of the year. I will then return with summary comments and we will address your questions.

Kathleen E. Mallas

As Bob mentioned, our earnings per share grew by 23.7% in the third quarter, driven by higher sales and a 20 basis point increase in operating margin. For the quarter, gross margin was 34.1%, which was 40 basis points below the 34.5% in last year’s third quarter.

This is a result of two main factors. First, as we have spoken to in the past, the largest negative factor on gross margin was diesel fuel cost. Based on current trends, the largest impact of this factor is behind us.

Second, gross margin was impacted by our planned shift in product mix toward more consumable products. In the third quarter sales of food, health and beauty care basics, and household consumables increased more than 3.5% as a share of sales, compared with the same period last year. This was about the same increase as we saw in the second quarter.

These two factors were partially offset by improvements in shrink, lower mark downs, and the benefits to buying cost, distribution cost, and occupancy cost associated with the increase in comparable store sales.

Also, the higher fuel price impact on our overall freight expense was lessened somewhat by improved operating efficiencies, including better trailer utilization, better routing, and an increase in back-haul.

Moving down the P&L, SG&A expenses were 27.8% for the quarter, a 60 basis point decrease from 28.4% in the third quarter last year.

Increased costs for debit and credit cards and professional fees were offset as we leveraged our expenses for payroll, benefits, and incentive compensation and advertising.

For the third quarter, depreciation and amortization was $38.3 million. The overall rate improved 50 basis points compared with the third quarter last year. We expect depreciation of $160.0 million to $165.0 million for the year, which will be a 30 basis point decrease from last year.

Our operating margin for the quarter was 6.2%, an increase of 20 basis points from 6% in the third quarter last year.

The tax rate for the quarter was 35.7% versus 36.5% for last year. The lower rate reflects the reconciliation of the 2007 tax provision with the 2007 tax return, which was filed during the third quarter. For the first three quarters the tax rate was 36.2% versus 36.9% during the first three quarters of 2007.

Looking at the balance sheet and statement of cash flow, cash and investments at the end of third quarter were approximately $79.0 million, an increase of $49.0 million over cash and investments at the end of the third quarter last year.

Long-term debt remained $250.0 million, a decrease of $85.0 million from our long-term debt of $335.0 million at the end of the third quarter last year.

During the third quarter, as always, we used cash for our normal inventory build in preparation for the holiday selling seasons. Our peak inventory position is now behind us and we expect to build cash for the remainder of the year.

Capital expenditures were $38.8 million in the third quarter of 2008 versus $63.9 million in the third quarter last year. The majority of capital expenditures in the third quarter this year were for new stores, remodeled and relocated stores, and the addition of frozen and refrigerated equipment to 10 additional stores. We now expect capital expenditures in the range of $145.0 million to $150.0 million for fiscal 2008.

Our inventory at the end of the third quarter grew by 4.4% compared with the prior-year period and was down slightly on a per-store basis. Inventory turns year-to-date through the third quarter are up slightly over last year and we expect them to be up for the full year as well.

Inventory investment is presently planned about $40.0 million higher as of the end of this year versus last year.

And now for sales and EPS guidance. As we look to the fourth quarter we face an extremely challenging economy with more pressure on the consumer than any time in years and we are considering this in our guidance.

In addition, as we have said, the retail calendar is unfavorable this year for the fourth quarter. Thanksgiving is a week later than last year resulting in one fewer weekend in the traditional holiday shopping season and five fewer selling days between Thanksgiving and Christmas.

We expect to see continued increases in demand for faster-turning, lower-margin consumable products in our mix. Additionally, we believe that the recent declines in diesel prices will ease some of the pressure on freight costs and the quarter progresses. The fuel costs remain a headwind.

These factors will likely be offset slightly by continued improvements in our shrink results compared with last year. We have included all of this in our guidance.

From an SG&A standpoint, energy prices and utility costs will most likely be higher for the remainder of the year, otherwise we expect to hold the line on expenses in the fourth quarter.

The tax rate is expected to be 37.2% in the fourth quarter and 36.7% for the full year.

With all of this in mind, for the fourth quarter of 2008 we are forecasting sales in the range of $1.38 billion to $1.42 billion and diluted EPS in the range of $1.07 to $1.15. This implies a low to low mid-single digit comparable store sales increase.

For the full fiscal year 2008, we are forecasting sales in the range of $4.64 billion to $4.68 billion based on approximately 7% square footage growth.

Diluted earnings per share are expected to be in the range of $2.45 to $2.53. This is an increase of $0.12 and $0.10 in diluted earnings per share above the low and high end of previous guidance for 2008.

Our guidance assumes that the share count remains approximately $90.5 million for the balance of the year.

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

Bob Sasser

Before turning the call over for questions, I want to leave you with a few summary observations.

So far this year we have been very successful navigating a tough economy and we are on track to accomplish our goals. Our investments in infrastructure continue to translate into better inventory management, more efficient stores, improved in-stock position, and a better execution of our model.

As an example, inventory turns have increased each quarter over the past three year, including another increase in the third quarter this year.

We have focused our merchandise mix to meet the needs of our customers and the results have been terrific, as sales for the third quarter grew 11.6% and earnings per share were up 23.7%.

Our stores quickly made a clean transition from fall and Halloween and we are well prepared for the Christmas season. We continue to grow at open new Dollar Tree stores and our new Deal$ concept is progressing and is exciting. We are opening new Deal$ stores in new markets and honing the merchandise mix. Customer acceptance is strong and growing.

We continue to demonstrate the ability to self-fund the growth of our business while generating substantial free cash. We are dedicated to building value for our long-term shareholders. This means running the business as effectively as possible and managing our capital in a way that enhances shareholder return. In these uncertain economic times, protecting our cash has been consistent with this goal.

As we enter the holiday season we know that our customers face unprecedented challenges. Consumer confidence is at an all-time low and this has adversely affected some retailers. We do not know exactly how the consumer will react to these pressures. We do know that they will find no better place to stretch their dollars than at Dollar Tree.

We believe that we are positioned squarely in the bull’s eye of what customers are looking for and we are focused on selling what they want to buy. Our merchandise value and our increased mix of consumer basics make Dollar Tree more relevant now than ever.

Finally, the development of our people has consistently been among our highest priorities at Dollar Tree. The importance and effectiveness of this ongoing commitment was never more apparent than during the past year in the way our finance department stepped up to the challenge while we searched for a new CFO.

Next week Kevin Wampler will join Dollar Tree as our new Chief Financial Officer. I am very excited about the talent, experience and insight that Kevin will add to our management team. Kevin has been with the Finish Line for 15 years, including serving as CFO for the past five years, and we look forward to the addition of his skill and leadership.

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 Instructions) Your first question comes from Meredith Adler - Barclays Capital.

Meredith Adler - Barclays Capital

I heard something about you having more flexibility in pricing below $1.00, that similar to what $0.99 did, that you might sell two for $0.79. Is that true that you are doing something different now?

Bob Sasser

We are really not doing anything different. We sell everything for $1.00 or less and we have had some items that sold for three for $1.00 or two for $1.00 that recently we took some mark-ups on, two for $1.00 to $0.59 on some items, or three for a dollar to $0.39 on some items. But that’s just more in tune to the competitive environment out there. We shopped our competitors, they were selling it for 4 and we saw an opportunity to pick up a few pennies on that type of product. But I wouldn’t call it an initiative like $0.99 is doing at all. This is just shopping the competition and making a competitive price change accordingly. But everything is still $1.00 or less.

Meredith Adler - Barclays Capital

I know that your guidance includes a share count that is unchanged. I think you had said earlier in the year that depending on how things go and that if cash flow is good that you might consider buying back stock in the fourth quarter. Any update on your thinking in that area?

Bob Sasser

We have never been shy about buying back our stock. Over the past three year we have bought back almost $1.0 billion. You can check the numbers but it’s in that range. And we still see that as a way of creating shareholder value and giving back to the shareholders.

In the current environment, though, we have chosen to preserve cash. We started out the year a little lower in our cash reserves than we had in previous and we started out with the thought in mind that this would be with the uncertainty that we were facing, it would be a good time to build some cash reserves, and that turned out to be the right decision.

That was before we knew, by the way, that the financial markets were going to melt down. As it turns out, our position to build cash has been the right result. As we go forward, for the rest of the year, we are going to continue building cash, because it is still pretty uncertain out there. But going past that I think that share repurchase can again be a viable way of using our cash.

So the answer is not now, but sometime in the future it could come back, depending on the environment.

Meredith Adler - Barclays Capital

Cannibalization, in places where Dollar Tree and Deal$ stores are near each other, what are you seeing in terms of cannibalization?

Bob Sasser

The usual. We see a little bit of cannibalization. First of all, there are really two segments to that. The stores that we bought, many of them were right next door to some Dollar Trees or across the street from some Dollar Trees, and over time some of those we have rationalized. We have converted a few to Dollar Trees, at the end of lease terms some have closed. And then we have opened new stores with the thought of not putting them right across the street or in the same centers, so these Deal$ stores can live in close proximity to Dollar Trees and they are doing so right now, but you have to be prudent, and again, we bought what we bought and we got what we got so we had to rationalize some of that real estate.

But as we go forward, we are locating Deal$ and Dollar Trees in the same markets with good success. We are being more prudent about how far away from a Deal$ or a Dollar Tree that we would open one or the other.


Your next question comes from Mitchell Kaiser - Piper Jaffray.

Mitchell Kaiser - Piper Jaffray

I was hoping you would talk a little bit about the real estate environment. It seems we have heard from a number of retailers that there are some good opportunities. I know you have set out what you’re going to do for the fourth quarter, but as you look to 2009 how should we be thinking about new store roll out?

Bob Sasser

I can’t tell you the 2009 plan yet because we haven’t finalized it, but I can tell you how we are thinking about the 2008 store openings and I plan right now to carry forward along the same lines with that. But we didn’t quite hit our original store opening plan this year, but it wasn’t because we pulled back, like some other retailers have done. We really didn’t open as many stores as we originally planned, because of the environment and what it did to some of the other retailers.

For example, when Walmart, or some of the other big-box retailers, pulled back, we had planned sometimes to be in those same developments or in shadow centers, and when those developments don’t happen, then sometimes our developments don’t happen, so we lost a few for that reason.

And then the credit crunch, the developers just couldn’t get financing, in the current year of 2008, so we lost some more of the planned openings that we had there.

So really in 2008 our reduced store openings were more a matter of a short-term situation where the credit markets forced some pull back in retail development over all.

Now, going forward, I believe that there is going to be a lot of opportunity going forward, with taking space where other retailers have pulled back, and/or some business failures that are happening now and probably could happen by the end of the fourth quarter.

So I am expecting the real estate market for our type of real estate to open up a little bit next year, and what that means to me is possibly getting better real estate or an economic model that I can afford, more availability of better real estate.

So as we plan our new store growth for next year we are going to continue to be aggressive but we are also going to be opportunistic. We have a strong balance sheet, we have the ability to go out and open up more stores if we see the opportunity to get great real estate in the areas that we want to be and at the economics that we can afford.

Mitchell Kaiser - Piper Jaffray

In terms of the Visa roll out, you now have anniversaried that, do you think that there is an opportunity that that continues to drive transaction or mix up as a percent of sales? How should we think about that?

Kathleen E. Mallas

We have anniversaried it, as you said, going into the fourth quarter. That change was around October 31 last year. We are continuing to see it climb. It’s not climbing as quickly as it was, obviously, as when we initially rolled it out, but we do continue to see it going up and do expect to see continued help from that in transaction size, as well.

Bob Sasser

Also, one indicator of the future and Visa can be seen with debit. Debit has been rolled out to 100% of our stores since the summer of 2006 and yet even this quarter it continued to increase as a percent of penetration of sales. So the potential is there for a while for continued growth through Visa.

Mitchell Kaiser - Piper Jaffray

What percent of transactions is Visa now?

Kathleen E. Mallas

If you look at it, it’s about 5%.

Mitchell Kaiser - Piper Jaffray

And debit is more than that?

Kathleen E. Mallas

Yes, debit is higher. Debit is about twice.


Your next question comes from Charles Grom - JP Morgan.

Charles Grom - JP Morgan

You highlighted diesel cost in the third quarter as the gross profit margin drag. Could you quantify that for us and can you remind us, also, how much in- and out-bound freight is as a percentage of your cost structure?

Kathleen E. Mallas

I’m not sure that we break it down specifically. We are not going to give the details, but directionally I can you that it was a pretty big hurt to the quarter. Coming out of the second quarter you will recall how high diesel rates were and so we had all of that capitalized with our inventory on the balance sheet. As that inventory turned in the third quarter, we saw all of that releasing through our freight costs. So that was by far the biggest driver of our gross profit results.

As we look forward, that has softened a little bit. Good news, diesel is going down. But it is still going to be something that we are carrying with us from the third quarter. We were still higher compared with last year if you look at the results of the third quarter. So, there will still be a little bit of a headwind on that into the fourth, but we certainly like the lower rates.

And we also continue, from an operational standpoint, to do a lot of things to try to mitigate that. Our logistics team tries to look for opportunities to increase that cause and [inaudible] out trailers. So we are trying to do some things to mitigate the pressures that we are facing on that.

Charles Grom - JP Morgan

So assume at this point in time you’re capitalizing a lower cost into your inventory, at what point would you expect to see that relief flow through your P&L? Would that be by the second quarter or could it be as early as the first quarter?

Kathleen E. Mallas

We turn about once a quarter and when we do that estimate we try to follow the turn as best we can. So, in the fourth quarter you will see what we have got capitalized at the end of the third quarter start to release, and then the same thing will happen into the first quarter of next year with the fourth quarter of this year.

Bob Sasser

If prices continue like they are, we do believe that the worst is behind us, as far as the diesel prices. Assuming they don’t jump right back up.

Charles Grom - JP Morgan

Could you update us with what your average ticket in within the Deal$, both with and without multi-price point items?

Bob Sasser

We’re not breaking that out.


Your next question comes from Karen Short - Friedman, Billings, Ramsey & Co.

Karen Short - Friedman, Billings, Ramsey & Co.

Regarding the fourth quarter in general, you talked about the tight calendar. Can you talk about any changes in advertising that you have planned for the fourth quarter, year-over-year, that we should be aware of?

Bob Sasser

There is nothing much different. The timing with the change of Thanksgiving is a week later this year so you have got a little bit of change there, but as far as our advertising plan for this year and last year, they are very similar.

Karen Short - Friedman, Billings, Ramsey & Co.

And in the third quarter what was the Visa contribution on the comps?

Kathleen E. Mallas

It’s somewhere around 1%.

Karen Short - Friedman, Billings, Ramsey & Co.

Can you give us an update on what your average ticket is with Visa versus debit versus cash?

Kathleen E. Mallas

The credit average ticket is somewhere in the $14.00 to $15.00 range and debit is about $1.00 less than that.

Karen Short - Friedman, Billings, Ramsey & Co.

Given the current environment, it’s obviously deteriorated pretty quickly from October into November, are you seeing any change in new store productivity, on the more recent openings?

Kathleen E. Mallas

It’s hard to look at the more recent openings. It takes a little while for them to get ramped up, but for the year we’re doing better from a productivity standpoint than we were in 2007’s openings.


Your next question comes from John Zolidis - Buckingham Research.

John Zolidis - Buckingham Research

Could you just let us know whether occupancy was levered or didn’t lever and maybe quantify that in the quarter?

And is it safe to assume that your quarter-to-date comps are in line with that low to low mid-single digit plan?

Kathleen E. Mallas

On the occupancy side, we don’t really break out specifically what those rates are or what that leverage looks like. Occupancy is a different question to answer because you have to look at both the comp base and the new stores that we roll in each year, so depending on the timing of when those new stores come in, you’re going to see rent costs without the sales, so it’s not as easy as just saying as the volume goes up, so too shall the leverage.

Obviously, as the comp runs up we like that answer a lot better and we do get a lot of leverage on that, but the most important to us is as we look ahead, we need to be mindful of what sorts of deals we are entering into and so we do those calculations as we are trying to determine what our hurdles are and what the returns are going to be and that’s how we determine which lease deals we are going to actually do.

From a leverage standpoint, overall we did leverage expenses because of the comp for the quarter, so we feel good about that and we will continue to try to do the right things to keep our occupancy costs in line.

Bob Sasser

It was 6.2% comps but we got leverage throughout the P&L in the third quarter.

As far as your question about the sales trend, we don’t report that. We have given our guidance, which includes very consistent with our current sales trend. You are looking at this calendar change, and we will tell you, anybody you talk to in retail, Thanksgiving was last Thursday last year and this Thursday this year and that puts a really big kink in the rope as you’re trying to determine whether or not, what you’re real true comps are until you get past that.

But we have seen nothing that leads us to move off of our guidance that we just gave you.

John Zolidis - Buckingham Research

Just to make sure I understand, on the occupancy, basically the answer is it was really a material contributor to gross margin expansion or there wasn’t material deleverage. And then on the comp guidance, there is some comparability issues, but you feel comfortable with the guidance.

Bob Sasser

That’s pretty much it, but we have leverage throughout the P&L, I guess that would be the answer on the occupancy, that 6%+ comps. That’s the way to run a business right now. You get these comp stores moving up, we’re getting leverage throughout the P&L, and that top line is driving growth. You saw the SG&A improvements that we had for the quarter and that’s how we got to the bottom line. So I don’t know if I have answered your question but I have tried to share with that we did get leverage on our expenses in the third quarter.


Your next question comes from David Mann - Johnson Rice & Co.

David Mann - Johnson Rice & Co.

Two or three quarters ago everyone was concerned about China costs and inflation. Can you give us a sense of how you expect where you are in terms of sourcing and what kind of benefits we might see into next year in terms of product costs and IMU, given it seems like inflation has abated?

Bob Sasser

It does seem like the pressure if off a little bit, along with the business in China. The global business environment is a little depressed right now so that has helped in our zeal to offer higher value at better cost. So we have seen, in our January trip, the prices out of China, there’s not many people asking for a price increase now and actually there have been some price declines.

Let me tell you how we think about this, though. It’s not always, and it’s the same thing that I said early in the year when we were being asked the question about price inflation out of China, I will tell you the same answer as the prices go down. We are in control of our margin, we are in control of the value and the value that we offer for the dollar. As prices tend to go down, we are just as likely to turn that into even more value that we can offer the customer as we are to take it into our gross margin.

As prices were tending and pressured to go up, as I told you, we always made our products fit value for the dollar as well as our margin expectations out of China. So it’s really up to us, and since the beginning of Dollar Tree time, we have always taken the strategy of as we can buy better, with our size, or for whatever reason, we take a lot of that and we put it into more value because we believe that by driving the sales and the value equation to our customer, that’s what makes us who we are.

David Mann - Johnson Rice & Co.

Can you give an explanation for the change in the accounts payable leverage?

Kathleen E. Mallas

There is a lot of timing noise that goes on with that. One of the things that we stay very focused on is the terms that we have with our vendors and we do everything we can to try to stretch them out. And we also have discounts that we try to take, which would shorten them. So we do watch it very closely to try to make sure that we are paying at a time that we are happy with in terms of days from when we received the goods. So it’s something we stay focused on, but there is nothing unusual going on there.

David Mann - Johnson Rice & Co.

Is this more accurate of what we should expect or were the previous couple of quarters more the norm?

Kathleen E. Mallas

I’ve seen that thing move up and down a little bit and I would say that we continue to try to increase the time spread but there’s only so far you can go with it.


Your next question comes from Steve Weiner - Deutsche Bank Securities.

Steve Weiner - Deutsche Bank Securities

Just a quick question on your comp guidance. It seems to me in looking at how strong your comps have been and in looking at your compares from last year, it seems that you have put out some pretty conservative guidance. Other than the Thanksgiving shift that you’ve already talked about, is there any other kind of reason why the two-year trend would come in a little more conservative than in the third quarter?

Bob Sasser

It’s just so uncertain out there. We have given you guidance based on what we know about the business but we have also factored in the uncertainty. What is unemployment going to be, are people going to come out and buy or not? We have thought through all of that. Those are things we just really can’t with any exactness, we all feel what we feel but that’s all that is. We have factored some of that in there though. And I think rightfully so.

At the first of the year we were trying to give guidance and at time we didn’t know that Fannie and all that was going to go, with the housing debacle, and the credit markets were going to melt down, and unemployment was going to go up. So you have to factor a little bit of what you’re feeling in the macroeconomic environment into that.

The other thing is the calendar is a real thing. That’s a $25.0 million headwind to our fourth quarter and we have factored that in there. So if you take the trend that we’re on and you factor in a $25.0 million headwind because of calendar, that puts you closer, I think, to what you think. And if you take that and say it’s pretty uncertain out there and how is the customer and the consumer going to react to all the news and everything that you see and feel, and so we factored in some of that, too.

But having said that, all and all I would say, low to low mid-single digit comps is nothing to sneeze about in the fourth quarter for a retailer in these times. We are not telling you were are not bullish at all, but we think we are very well positioned with our inventory, with our stores, with our labor components, with our promotion, with our mix, and as far as being against, squarely in the bull’s eye of consumer sentiment, we’re there.

There is a flight to value and everything we sell is a dollar. So I pick my spot over most others.


Your next question comes from Joe Selzman – [Celce] Advisory Group.

Joe Selzman – [Celce] Advisory Group

Earlier in the call you had mentioned that you are seeing more new customers. I just kind of wanted to drill down on that a little more. Are you continuing to see more customers trade down to Dollar Tree? And as you come out of this, when the economy does start to stabilize a bit, what percentage do you think tend to stick around, after trading down?

Bob Sasser

I think they are trading down. It just makes sense that with the pressure that is on the consumer these days that they have got to be looking for ways to balance their budget, so everything is a dollar at Dollar Tree and we have great value.

We are seeing our traffic increase. This whole year we have seen more footsteps in our doors and that tells me there are new customers. Anecdotally, when you are in our stores talking to our managers, they tell you that they are seeing new customers. You find people coming in and asking the price and obviously they haven’t been there for a while. Anecdotally we think we are getting new customers and it makes sense from an economic standpoint that we are.

As far as going forward, what we are trying to do is run the best stores we can, stay focused on what their needs are, stay relevant to them, and if we do that, they will keep coming back to us because it is about value but it is also about the shopping experience and being treated nice and polite and some fun and some excitement. People shop our stores because, Holy Cow, everything is $1.00. 12,000 square feet and everything in the store is $1.00 or less is special.

Our customers love that concept. So I believe our new customers will be drinking the Kool-aid, too. And that’s what we’re trying to do. And again, [inaudible] the basics and making sure that if they come in for something that we’ve got it. We don’t to disappoint in any way. And I think that’s the way we will keep them coming back.

Joe Selzman – [Celce] Advisory Group

I know it’s early to give guidance on 2009, but just as we are thinking about store growth and capex for next year, would the same rate of growth that you have been going at for the past couple of years be fair or should we expect to see you moderate that tone like a lot of other retailers?

Bob Sasser

Right now I would expect to see what we have been doing for the last few years. But I will be able to tell you a lot more after the fourth quarter and at that time we will give you some growth numbers with more specificity in the growth. But right now there is nothing that tells us that we should not continue our growth. Again, strong balance sheet, access to the capital, internally generated capital, we don’t to borrow money to open these new stores. The only thing that is a question mark in my mind is the availability of real estate, the right kind of real estate, and the economics of that real estate.

We can afford to be patient. We don’t want to open stores that we wish that we hadn’t opened so we would like to make sure we do it right, when we get these leases. So those are really the only things, I would say barriers, in our way and it seems like those are diminishing, frankly, because as I see other failures out there, that is probably going to open some new real estate, too.


Your final question comes from Patrick McKeever - MKM Partners .

Patrick McKeever - MKM Partners

You mentioned doing more without a replenishment and I was wondering if you could give us an update on how many SKUs are being replenished automatically and if that dynamic is changing, do you continue to add SKUs to the auto replenishment?

Bob Sasser

Right now it’s more than 1,200. And it is a little dynamic in as much as some things come on and some things go off. And also we have the element of Dollar Tree plus Deal$. So it’s more than 1,200. I guess probably the last time I said anything about it, it was around 1,000. So it has tended to move up. Again, we are using it for that basic replenishment business, things that have a pretty predictable sales cadence.

Now that we have sales history by store, by SKU, we have increased the amount of that. And it is serving us well. Especially in these household supplies, cleaning supplies, chemicals, paper goods, HVC, all those things that there is some expectation you will have in stock.

Our auto replenishment is working like a charm. It takes away the guess work from stores, which is allowing them to spend more time on merchandising the stores, on working with the customers, on making their stores exciting, so it is something that we have really brought on line in the last couple of years that has helped us tremendously.

How many SKUs will it be? I don’t know. We’re going to follow our nose with it. It will depend on the mix of basic products, it will depend on our history. But right now it is more than 1,200.

Patrick McKeever - MKM Partners

You gave some color on debit and credit card transactions. How about food stamps? Is that a material same store sales driver?

Bob Sasser

It is. It is sort of wrapped up in the assortment numbers, though, because you have to have the qualifying product in order to take the food stamps. That usually means that it kind of goes hand-in-hand for sure with the roll out of frozen and refrigerated. So with those stores, as we are rolling that out, we are seeing a lift in sales because of the new product, but we’re also seeing a lift because of the ability to take food stamps in those stores.

So, yes, in the stores that take it, it’s important. Some stores it is material. It just depends on the location of the store. We will do it in more stores as we go along.


This concludes our question and answer session.

Tim Reid

Thank you all for participating in our conference call today and thank you for your continued interest in Dollar Tree. Our next conference call is scheduled for Wednesday, February 25, 2009, when we will give our full year fiscal 2008 results.


This concludes today’s conference call.

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