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Dollar Tree (NASDAQ:DLTR)

Q4 2012 Earnings Call

February 27, 2013 9:00 am ET

Executives

Timothy Reid

Bob Sasser - Chief Executive Officer, President and Director

Kevin S. Wampler - Chief Financial Officer and Principal Accounting Officer

Analysts

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

Aram Rubinson - Nomura Securities Co. Ltd., Research Division

Matthew R. Boss - JP Morgan Chase & Co, Research Division

Stephen W. Grambling - Goldman Sachs Group Inc., Research Division

John Zolidis - The Buckingham Research Group Incorporated

Scot Ciccarelli - RBC Capital Markets, LLC, Research Division

Peter J. Keith - Piper Jaffray Companies, Research Division

Operator

Thank you for standing by. Good day, and welcome to the Dollar Tree, Inc.'s Fourth Quarter Earnings Conference Call. As a reminder, today's call is being recorded. And at this time, I'd like to turn the call over to Mr. Tim Reid, Vice President of Investor Relations. Please go ahead, sir.

Timothy Reid

Thank you, Mike. Good morning, and welcome to the Dollar Tree Conference Call for the Fourth Quarter 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 the business. Kevin Wampler, our Chief Financial Officer, will provide a more detailed review of our fourth quarter financial performance and provide our guidance for 2013.

Before we begin, I would like to remind everyone that various remarks that we will make about future expectations, plans and prospects for the company constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors included in our most recent press release, most recent current report on Form 8-K, quarterly report on Form 10-Q and annual report on Form 10-K, all of which are on file with the SEC. We have no obligation to update our forward-looking statements, and you should not expect us to do so.

[Operator Instructions]

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

Bob Sasser

Thanks, Tim. Good morning, everyone. Welcome to the call, and thank you for your continued interest in Dollar Tree. This morning, we announced our sales and earnings for the fourth quarter of 2012. I'm pleased to report that fourth quarter comparable store sales increased 2.4%. This was on top of a 7.3% increase in the fourth quarter last year. This increase was split somewhat evenly between traffic and average ticket with a 1% gain in traffic and a 1.4% increase in average basket size.

Total sales increased 15.4% to $2.25 billion. Anecdotally, this was the first $2 billion quarter in the history of the company, and it was, as always, achieved largely $1 at a time.

In terms of geography, performance in the fourth quarter was relatively consistent across the country as all zones achieved positive comp store sales. The highest comps came from New England and the Midwest. This was followed closely by the Southwest, the Southeast, Far West and the mid-Atlantic.

Sales growth in the fourth quarter came from a mix of both basic and discretionary products. Our top performing categories include housewares and home products, stationery, health care products, party supplies, food and beverages. Comps were positive every month, with our strongest performance in December.

Earnings for the fourth quarter were $1.01 per share. This represents a 26.3% increase over last year's $0.80 per share. Operating margin for the fourth quarter 2012 was 16.2%, an increase of 70 basis points over the fourth quarter last year. And net income rose by $40.7 million or 21.7% to $228.6 million. These results include the impact of the 53rd week, which contributed approximately $125 million of sales and $0.08 earnings per share.

For the full year fiscal 2012, comp store sales increased 3.4%. That's on top of a 6% comp store sales increase last year and a 6.3% comp in 2010 for a 3-year stack of 15.7%.

Net sales were $7.39 billion, an increase of 11.5% over fiscal 2011. Operating income increased by $138 million and operating margin was 12.4%, an increase of 60 basis points compared with 2011. Net income rose 26.8% to $619.3 million. This was on top of a 22.9% increase in net income last year. Earnings for the full year were $2.68 per share, an increase of 33.3% compared with $2.01 per share last year. In addition to the impact of the 53rd week, the full year results include the previously disclosed gain on the sale of our investment in Ollie's, which contributed $0.16 earnings per share in the third quarter. Excluding the impact of these 2 items, earnings per share for the year rose 21.4% to $2.44 per share.

I'm very pleased with these results. They were achieved in a tough environment. They speak to the value and continued relevance of our merchandise, the power and flexibility of our model and the day-by-day execution of our strategy across the organization. I'm extremely proud of our Dollar Tree associates, who work every day to deliver on our promise of great value merchandise and a clean, bright and fun place for our customers to shop.

Looking forward, we're excited about our growth potential and continued relevance to the customer. Over the next several years, we expect the consumers' demand for value will continue to grow and intensify. Dollar Tree is uniquely positioned to take advantage of the continuing trend. Our plan is to grow our business by providing more value to a broader range of customers, and we're doing this in many ways.

The first way is through organic new store growth, and we have a lot of room to grow. For the full year 2012, we opened 345 new stores and relocated or expanded 87 stores for a total of 432 projects. Selling square footage increased 7.7%. We exceeded our original plan, which included 315 new stores and a total of 390 projects and we ended the year with 4,671 stores. In the fourth quarter this year, boosted by January openings, we opened 47 stores and relocated and expanded 6 stores.

And the past we've chosen not to open stores in January, but that's changing. In fiscal 2012, due to the efficiency of our store development teams, we accelerated the opening of 25 new stores and 5 relocations from early fiscal 2013 into January, and we like the results. In addition to generating incremental sales in fiscal 2012, these stores will now give us a full year of sales in 2013 and improved productivity.

Excluding the 30 projects opened ahead of schedule in January, square footage growth in fiscal 2012 would have been 7.1%.

This year our plan includes approximately 340 new stores and 75 relocations for a total of 415 projects across the U.S. and Canada. This is in addition to the 25 new store openings and 5 relocations that we completed early and opened in January 2013. Square footage growth is planned to be 7.3% over fiscal 2012, which included the 30-store projects in January.

In addition to opening more stores, our plan is to open better stores. I am particularly pleased that average new store sales per square foot increased once again in 2012 to the highest level since 2001. New store productivity has now increased each year for 7 consecutive years.

This improvement has been a team effort. Our real estate department is focused on improved site selection and on rightsizing our stores to the market. Our merchants are working to develop more productive floor plans and expanding assortments with a focus on the most productive categories of merchandise. And our field organization is opening stores faster and more efficiently through improved staffing and building the bench of qualified store management. These have been the key elements to increasing our new store productivity, and we expect this to continue.

Efforts to increase sales per square foot are not limited to new stores. Elements of the strategy to increase store productivity can be seen throughout the chain. In all stores, we're developing more powerful seasonal presentations to create interest and a fun shopping experience. Across the chain, we're expanding our basic assortments in candy, stationery, health and beauty care and home and household products to maintain relevance to our customers. These were among our fastest growing categories in the fourth quarter.

We have re-fixtured, re-merchandised and expanded assortments at the front end of our stores to create more merchandise energy and to drive impulse sales. Store associates are emphasizing the friendly factor with more effective customer engagement and working to drive sales of related items through cross-merchandising and through suggestive selling.

And our expansion of frozen and refrigerated product continues. We installed freezers and coolers in 329 stores in 2012, including 190 new stores, exceeding our goal of 325 installations. We now offer frozen and refrigerated product in 2,549 stores. This important category is extremely productive. It serves the current needs of our customers, drives traffic into our stores and provides incremental sales across all categories, including our higher-margin discretionary product. We plan to expand frozen and refrigerated product to an additional 475 stores this year.

Another key component of our growth strategy is the development of new retail formats, expansion of our geographic reach and the development of additional channels of distribution, 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 unit growth potential. Deal$ stores deliver low prices on everyday essentials, party goods, seasonal and home product. By lifting the restriction of the $1 price point at Deal$, we're able to serve more customers with more products at value prices every day.

Awareness of the Deal$ brand is growing and the concept is building momentum. In the fourth quarter, Deal$ had particular success in toys, softlines, stationery and HBC. I'm excited about the growth potential of Deal$, and particularly the opportunity that it provides to grow profitably in the higher cost of operation urban markets. We had a 25 new Deal$ stores in 2012 and ended the year with a net total of 194 Deal$ stores. We plan to continue this growth rate in 2013.

Our Canadian integration and expansion continues. Through the investments made during 2011 in systems, training and infrastructure, we now have consistent year-on-year data on which to base our sales and assortment planning. Specifically, we have visibility to our own hand [ph], own order and sales along with a trailing history by store and SKU. These are all key factors in the management of an efficient supply chain and improving customer satisfaction.

With our merchant teams leveraging the buying power of the Dollar Tree, Canadian customers are beginning to find broader, more exciting assortments and better values in our stores. Our recent Valentine's Day assortment reflected the best items from Dollar Tree, and our customers responded enthusiastically.

Our focus continues on building and solidifying store teams and improving product flow to the stores. We're working very hard to increase the service level and in-stock position of basic products, while improving the shopping experience through a more powerful, seasonal presence and a higher level of merchandise energy. And we're aggressively expanding our Canadian store base. We began 2012 with a plan to grow store count approximately 25% under the Dollar Tree brand. We exceeded this plan, opening 41 new stores and we ended the year with 140 stores in Canada.

Additionally, in 2012, we completed the re-branding of all the former Dollar Giant stores in Ontario to Dollar Tree Canada. And we'll complete the transition with the re-branding of the stores in the Western provinces by the end of the third quarter this year.

Merchandise in Dollar Tree Canada will reflect the combination of the Dollar Tree U.S. assortment, expanded with unique, high-value offerings sourced by our Canadian merchandising team. We see enormous potential in Canada, and we expect to grow our store count by 25% or greater in 2013.

As previously reported, we believe the Canadian market can support up to 1,000 Dollar Tree stores. This is in addition to the 7,000 store potential for Dollar Tree in the United States, plus additional growth in our Deal$ format. Our goal is to be the leading retailer in Canada at a single price point of $1.25, just as we are in the U.S. at the $1 price.

Adding to our growth strategy, Dollar Tree Direct, our e-commerce business, is expanding as planned. This additional channel of distribution provides an opportunity to broaden our customer base, drive incremental sales, expand the brand and attract more customers into our stores. Some key milestones achieved by -- in 2012 by Dollar Tree Direct include growth in site traffic, which exceeded 5 million unique customers in the fourth quarter, a 20% increase over the fourth quarter last year. Dollar Tree Direct now has over 2,600 items available online, including 850 unique items that can be purchased in less than case quantities, an increase of over 65% versus the same time last year.

We're using social media to drive brand awareness. Our 2012 holiday YouTube video was popular once again. The video had a 15% increase in views over last year's holiday video. Additionally, over 2 million people chose to interact with Dollar Tree via their mobile devices during the fourth quarter. Through these initiatives and more, Dollar Tree Direct is gaining customers every quarter. We expect to see continued growth in our Dollar Tree direct sales.

One of the keys to achieving consistent, profitable results has been our practice of adding infrastructure and distribution capacity to support growth ahead of the need. In that regard, construction is proceeding according to schedule on our new 1 million square foot distribution center in Windsor, Connecticut. DC10 will be automated and it's designed to increase capacity and provide cost-effective service to our stores as we continue to expand in the Northeast.

In addition to our new Northeast DC, in January we announced plans to expand our DC in Marietta, Oklahoma by 400,000 square feet, bringing its total size to 1 million square feet. Both the Marietta expansion and the new Windsor DC are being financed through available cash, and both will be operational in the third quarter this year.

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

Kevin S. Wampler

Thanks, Bob. As Bob mentioned, our diluted earnings per share increased 26.3% in the fourth quarter to $1.01. The increase resulted from our sales growth, a 15 basis point improvement in gross profit margin and a 55 basis point reduction in total SG&A expense compared to the fourth quarter last year. Sales and earnings for the quarter were also favorably impacted by the addition of the extra 14th week, consistent with the 53-week retail calendar, which contributed $125 million of sales and $0.08 to earnings per share.

Our gross profit margin grew to 37.9% during the fourth quarter compared to 37.8% in the fourth quarter last year. We achieved strong leverage in occupancy and distribution expenses, reflecting the impact of the 53rd week and the increase in comparable store sales. We also achieved reductions in both shrink and markdown expense as a percent of sales. The shrink improvement came primarily from our Canadian operation, reflecting the full implementation of our SKU-based inventory system for both periods.

The improvements were partially offset by increased freight cost, due to our higher trucking rates and the impacts of the continuing shifts in product mix, as basic consumable products increased by about 60 basis point as a percentage of sales in the fourth quarter.

SG&A expenses were 21.7% of sales for the quarter, compared with 22.2% reported in the fourth quarter last year. Payroll-related expenses declined by approximately 25 basis points, due to lower incentive compensation expense compared with last year, partially offset by an increase in store payroll as a percent to sales.

Depreciation declined by 15 basis points, helped in large part by the extra week. And operating expenses declined by approximately 10 basis points, due to reduction in insurance and utility expense as a percent of sales.

Operating income increased $61.5 million compared with the fourth quarter last year and operating margin was 16.2%, an increase of 70 basis points for the fourth quarter last year. It was the highest quarterly operating margin since 2002. For the full year, operating income increased $138 million and our operating margin grew to 12.4%, up 60 basis points from last year's 11.8% operating margin.

The tax rate for the quarter was 37% versus 37.7% in the fourth quarter last year. The lower rate reflects primarily the favorable impact of the American Taxpayer Relief Act of 2012 and a slightly lower state tax rate. For the full fiscal year, the tax rate was 36.7% compared with 37.4% in 2011.

Looking at the balance sheet and statement of cash flow. Cash and cash equivalents at year end totaled $399.9 million versus $288.3 million at the end of fiscal 2011. During the fourth quarter, we invested $104.9 million for the repurchase of 2.7 million shares. For the full year, we invested $340.2 million for the share repurchase -- for share repurchase and repurchased 7.7 million shares. At year end, we had $860 million remaining in our share repurchase authorization. The diluted weighted average shares outstanding for the fourth quarter was $227.1 million. We will update you on additional share repurchases, if any, at the end of the quarter in which they may occur.

We continue to focus on increasing our inventory turns. Our inventory turns increased in 2012 for the eighth consecutive year to 4.25. Consolidated inventory at year end was 12% greater than at the same time last year and selling square footage grew by 7.7%. Consolidated inventory per selling square foot increased by 4.1%, which is down from the 5.2% increase at the end of the third quarter. This overall increase reflects inventory in our distribution centers relating to the earlier Easter, our Spring Fling promotion and the first quarter store openings. In addition, store level inventory was slightly higher, reflecting the timing of year end relative to Valentine's Day due to the 53rd week.

Capital expenditures were $75.5 million in the fourth quarter of 2012. This compares with $53.3 million in the fourth quarter last year. For the full year of 2012, capital expenditures were $312.2 million compared with $250.1 million in 2011.

For 2013, we are planning consolidated capital expenditures to be in the range of $320 million to $330 million. Capital expenditures are focused on new stores or remodels, the addition of frozen and refrigerated capability to approximately 475 stores, IT system enhancements and approximately $37 million towards the new distribution center in Windsor, Connecticut and $25 million for the expansion of our DC in Marietta, Oklahoma.

Depreciation and amortization totaled $46.9 million for the fourth quarter versus $44 million for the fourth quarter last year. For the full year, depreciation was $175.3 million, a 10 basis point decrease from last year. For 2013, depreciation and amortization is estimated to be in the range of $190 million to $200 million.

Our guidance for 2013 includes the following assumptions: First, in regard to freight expense, we will soon be negotiating new ocean rates that become effective in May 1. As always, we cannot predict the outcome of these negotiations nor can anyone accurately predict the direction of diesel prices for the next year. For this reason, our guidance assumes that ocean freight rates and diesel prices will be similar to their current levels on average throughout fiscal 2013.

Second, Easter is 1 week earlier this year and it moves into March. This represents about a $4 million sales challenge in the first quarter. Also as we look ahead to the fourth quarter, this year, there are 6 fewer selling days between Thanksgiving and Christmas, which represents a $25 million sales challenge for the fourth quarter.

Our guidance also assumes a tax rate of 38.1% for the first quarter and 37.8% for the full year. Weighted average diluted share counts are assumed to be 226.2 million shares for the first quarter and 226.7 million shares for the full year. While we still see share repurchase as a good use of cash, our guidance assumes no additional share repurchase.

With that in mind, for the first quarter of 2013, we are forecasting sales in the range of $1.84 billion to $1.89 billion and diluted earnings per share in the range of $0.53 to $0.58, which would represent a 6% to 16% increase compared to the first quarter 2012 earnings of $0.50 per diluted share.

Sales range implies a low single digit comparable store sale increase and 6.8% square footage growth.

For the full fiscal year of 2013, we are forecasting sales in the range of $7.79 billion to $7.97 billion based on a low single-digit increase in comparable store sales and 7.3% square footage growth.

Diluted earnings per share is expected to be in the range of $2.54 to $2.74. This represents an increase of 4% to 12% over 2012 earnings per share of $2.44, which excludes the impact of the 53rd week and the gain from the sale of Ollie's in the third quarter.

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

Bob Sasser

Thanks, Kevin. Once again, I'm very pleased with our company's performance in the fourth quarter and for the year of 2012. In summary, our comp store sales increased 3.4% and total sales grew 11.5% to a record $7.4 billion. Operating margin increased by 60 basis points to 12.4%. That's the best in the past 12 years, and earnings per share increased by 21.4%, excluding the positive impact of the 53rd week and the gain from the sale of Ollie's.

We opened 345 new stores in 2012. We expanded and relocated 87 stores and we ended the year with 4,671 stores and square footage growth of 7.7%.

Last year, our new stores achieved the highest sales per square foot in 12 years since 2001 when our average store size was much smaller. We expanded frozen and refrigerated product to 329 stores for a total of 2,549 stores across the U.S.

At Deal$, new customers are pleased to find surprising values on consumer basics, and you can see it in the results. Comp sales at Deal$ benefited from both increased traffic and increased average ticket. Customers are shopping more frequently and buying more on each trip.

We opened 41 new stores in Canada, representing a 40% increase in our Canadian store base, and we're beginning to translate our investments in systems and to better merchandise assortments for our Canadian customers.

Significant enhancements to Dollar Tree Direct, such as expanding bright pack, enhancing our mobile capability and increasing our social media presence are attracting more customers. In order to efficiently support our continued growth, we broke ground on a new 1 million square foot DC in Windsor, Connecticut, and we've announced plans for the expansion of our Marietta, Oklahoma DC.

As always, we continue to manage capital for the benefit of long-term shareholders. Last year, we repurchased $340.2 million of our stock. We sold our interest in Ollie's in the third quarter with a gain of $60 million and a contribution of $38 million to net income, and we executed a 2-for-1 stock split in June.

2012 was another great year of great accomplishment, and I will tell you that we're singularly positioned to do even better in the future. We have a vision of where we want to go and the infrastructure and capital to make it happen. We're opening new Dollar Tree stores, and there's plenty of room to grow. We're growing the productivity of our stores in both new stores and in comp stores. We're growing through new formats, like Deal$ and Dollar Tree Direct, and we're growing through expanded geography. Canada provides a great opportunity for substantial growth.

We will now address your questions. [Operator Instructions]

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Dan Wewer with Raymond James.

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

Can you talk about what changed from the third quarter when same-store sales were struggling to be slightly positive to a 2.4% gain in the fourth quarter? In particular the comparison actually became more difficult during the fourth quarter. And also curious as to why you're not expecting same-store sales to accelerate in the second half of 2013 given the comparisons become quite a bit easier.

Bob Sasser

Well, Dan, in reflecting back over the last year, the third quarter, we were up against a big comp in third quarter, too, as I remember. We were especially up against that big comp in our consumer products. It was probably the highest, you didn't know that, but the highest consumer products comps that we were up against for the year. So there's a little difference and when you're looking at third quarter versus fourth quarter about what we're selling and the mix of what we're selling. Of course, in fourth quarter, we had a couple -- we had the holidays. And at Dollar Tree, we're always -- we come in to our own at the holidays. And I think that's what you saw. We were up against in fourth quarter the largest comp of the year and the largest quarter of the year, and it came out with a 2.4% comp. And I think it was just really great execution. We invested into stores, standards and quality, and we've got great execution. We had great merchandise in the fourth quarter, great values. And by that, we overcame the 7-plus percent comp from the year before. As to your second question, I believe about this year in the second half, we're really excited about the second half of this year. We're giving guidance to you based on what we know and from internal and what we see from external. We can -- we've given first quarter guidance and then guidance for the year. In uncertain times, our guidance -- our visibility of first quarter is a lot better than it is of fourth quarter. So we're factoring in some of the uncertainty in the business that we're looking forward. I do expect the second half of the year to be particularly strong. So that's how we got to the guidance, though. We know what we know, less visibility the further you get out.

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

Let's just -- if you're right, let's say that the same-store sales are in fact low single digit for all of fiscal year '13, historically, if you look at the inflation pressure at the store level, it runs about 2% to 3% a year. Do you see any opportunities to ratchet down the rate of expense growth so that you have a chance to get expense leverage with only 1.5% or a 2% comp?

Bob Sasser

Dan, we've proven we can get leverage on 1.5% or 2% comp. Third quarter, we've got leverage on our expenses. This year, 1.6% comp. Fourth quarter, 2.4% comp. We've got leverage on expenses. So yes, there's continued opportunity to leverage our expenses on those low single-digit comps as we go forward. And we intend to, by the way.

Operator

We will go next to Matt Nemer with Wells Fargo Securities.

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

Could you talk to any impact that you've seen from the payroll tax or the delayed tax refunds and if trends in January and February are any different than what you saw during the full quarter?

Bob Sasser

Look, the consumer is under pressure. Burdened and concerned is the way we sort of characterize the consumer right now. They're facing not only higher payroll taxes but rising gas prices. And with the tax refunds being delayed, they really are under pressure. Overall, less money to spend and you add to that job concerns and uncertainty that everybody sees out there right now. But at Dollar Tree, we think of ourselves as part of the solution. We're seeing the effect on the consumer. But we think we're part of the solution and a destination for a cash-strapped customer that's trying to balance their budget. We have all the things that you need. Over half of what we sell now, 50.1%, are products that are needed most often and must-haves in everyday life, high value and they're only $1. And we're -- when our customers are in the store, they can still splurge at Dollar Tree. On the discretionary products, yes, you can afford it at Dollar Tree. It maybe discretionary, but it's only $1 also. So we believe as we've said for years, we are right for all time. We believe we're more relevant today with the consumer under pressure than we've ever been. And we think that's going to continue for a few years, several years.

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

Okay, great. And then secondly, can you talk to the cadence of the cooler, freezer expansion this year? And then are there any other significant SKU additions or deletions planned for this year?

Bob Sasser

No. The cadence is going to be throughout the first half, especially and then -- and maybe into third quarter. The -- we take a little break around Easter. We don't want to do anything to disrupt our customer shopping experience around that important time of the year. But we're rolling out the 475 pretty regularly throughout the year, especially in the first half. What was the second question?

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

Any SKU significant category expansions or SKU additions this year?

Bob Sasser

Yes. We're looking at across the business. We're looking at where we think we have opportunities to increase our market share, to drive sales, to drive margins. You're going to see expansions in our stores through the course of the year in our household products area, in our Candy, snacks and beverage area. In our stationery business. We're very excited about our stationery business. And also in our party business. So as we look at our -- in addition to 475 more stores with frozen and refrigerated product, we're expanding a lot of variety categories in the business. We're also -- we have and continue to reengineer the front ends, 40% more SKUs on the front ends, permanent homes for our drive items, more and better customer engagement at the front of the store. We really want our customers to be challenged by great value and to purchase great product from the time they enter the store until the time they leave the store. So you check out, assortments are there, more SKUs, better variety, a lot the value, ever-changing mix on the front end of the stores, the front tables, the items of the week and especially in the seasonal department.

Operator

[Operator Instructions] We'll go next to Aram Rubinson with Nomura.

Aram Rubinson - Nomura Securities Co. Ltd., Research Division

Can you tell us about your customer a little bit? Specifically I'm curious how they index to tobacco and to alcohol. I guess, what I'm trying to drive at is whether or not that push by Family Dollar and Dollar General to those categories even though they're different formats may have any impact on your own business or customer.

Bob Sasser

Well, I guess, our customer probably indexes the same as their customer does to tobacco. We have no plans to add tobacco in Dollar Tree stores. It's bad for you, but it's also bad for our margins at Dollar Tree. So there are no plans for tobacco. We are going to continue driving sales through, again as I said, to the earlier question, we're really excited about the frozen, refrigerated business rolling out another 475 stores and expanding a lot of our variety categories, as well as expanding our wow items through the year. In times where consumers are in need of value, we've always been able to step it up and offer even more value for the dollar. We're looking to do that throughout the year this year with what we call our wow items, bigger sizes, bigger savings, still just $1. And by the way, operational excellence, we put great value on running great stores and a shopping experience that our customers find pleasurable.

Aram Rubinson - Nomura Securities Co. Ltd., Research Division

And if you don't mind a follow-up about inventory management. Your inventory management has been fantastic for many years. So my question is a little counterintuitive. But I'm wondering whether or not you might be able to sell more if you stock more inventory, again I know it's counterintuitive. But can you and have you tested whether plugging inventory can drive enough incremental sales from here to justify the investment?

Bob Sasser

Yes. Just speaking anecdotally to that and not to figures, but the -- more inventory doesn't always equate into more sales. And what we want to have is a right amount of inventory in our stores for our customers when they want to buy it. So our opportunity continues to be the supply chain and delivering the right amount of inventory at the right times. We can still increase our turnover. We can still lower our average inventory levels and still satisfy our customers even better, with less inventory in some cases. So I do appreciate the counterintuitive question. It's the one that our merchants ask me all the time. But at the end of the day, the proof is in the pudding, and high inventories do not equal high sales. It's all about the right merchandise in the stores and then the productivity of that.

Operator

We'll go next to Matt Boss of JPMorgan.

Matthew R. Boss - JP Morgan Chase & Co, Research Division

From a competition standpoint, have you seen any impact on your traffic from a competitive standpoint, any recent actions worth noting from your peers? And are you feeling any incremental pressure on any categories from a pricing perspective as a result of anything you've seen out there recently?

Bob Sasser

We're looking at competition all the time. We watch them closely. I have great admiration for what they do. But you've heard me say this before, we're just different. And we're small and we're convenient and we're well located, where middle America either lives or shops or both. At Dollar Tree, everything is $1. So the idea of staying focused on what we do the best is what we're about. The -- in a Dollar Tree store, 10,000 square feet, everything is $1. It's an honest proposition. It is disarming to the customer, and that's our goal is to continue to exceed their expectations for what they can buy at a Dollar Tree. We do watch the competition. I do watch what they do. We respond really more to the customer than we do what the competition is doing, and that has worked well for us.

Matthew R. Boss - JP Morgan Chase & Co, Research Division

Okay. And then on more home discretionary. Have you seen -- can you talk about any trends in the quarter on the non-consumable side? Any bright spots in home or seasonal? And any in-store initiatives to drive the basket going forward? And then finally, tax refunds are beginning to trickle back in. Have you seen any improvement over the last couple weeks?

Bob Sasser

I would tell you, in the last couple of weeks, the first -- and we're in the year, what, 3 weeks now. And it's a story -- 2 stories on this year. 3 weeks at end of the year, I'll share with you what I think the story so far is and what the changes could be. But first of all, we had a terrific Valentine's Day. We don't break all that stuff out. It's too early to report. But I do want to tell you that Valentine's Day occurred and it's probably the best sell-through we've had in years and years. I was extremely pleased with our Valentine's business. On the flip side of that coin, we've had the worst weather. We've had through the center of the country and then up the East Coast, seems like there's a storm a week. And so that had been sort of a drag on our business. Overall, it's 3 weeks in, and we're -- everything -- we're still -- we just gave you our guidance. So all of that is baked into that. But that has been more of what we've seen. It's really hard to see when those storms are sweeping through and dumping all that snow and closing stores, and people are losing electricity and can't drive. It's really difficult to see what the core power of the business is in these past 3 weeks with all the disruptions from storms and then of course the Valentine's holiday that we had. My feel is, though, that as the refund checks get out that people will be out shopping. Those people that get them will be spending them as they have in the past. That's a good thing. My feeling is that as the economic environment, throughout the year, becomes more transparent, and it will, and there'll be more visibility. And I feel that things are going to improve over what they are now for the consumer that we'll see the impact of that. We prefer more people working. We prefer more certainty, less uncertainty. And I'm hopeful that we can see that. And in the meantime, we are absolutely zeroed in on the customer that is under pressure from high gas prices, from the tax refunds being later and from the higher taxes. So if you're under pressure, by gosh, we want to have it. When you come to our store, we want to have the things you need. We want to have them in stock. We want to exceed your expectations with more value on the things that you need. And we want you to have a fun shopping experience, so that's where we are.

Operator

[Operator Instructions] We'll go to Stephen Grambling with Goldman Sachs.

Stephen W. Grambling - Goldman Sachs Group Inc., Research Division

Just to change gears a little bit, maybe if you can talk to just your thoughts on the buyback and maybe the willingness or ability to take on leverage at all to even increase the buyback going forward.

Kevin S. Wampler

Sure. I mean, obviously, as we look at our capital allocation every year and we put a lot of thought into it. And obviously, our first priority is to fund the business and its growth. And as we've always said, the best use of any dollar is to build another Dollar Tree store, which we're doing plenty of that. And as Bob said, we have a lot of room for growth out there, so that's going to continue. And as -- we spent more the last year or 2 on infrastructure from the standpoint of expanding our distribution network as well. So new [ph] 10 up in Windsor, Connecticut, the total price on that is about $97 million on an overall basis and another $25 million for Marietta. So obviously, we are continuing to fund the business through that manner. From a share repurchase standpoint, obviously, it has been an important part of what we've done and we do believe it's very important as a way to return to our shareholders. And $340 million this past year, $645 million in 2011 and $414 million in 2010. So it obviously has been a big piece of it, and we still have $860 million outstanding in our authorization. That's one piece. Obviously, as we always look at acquisition. If there's something out there that makes sense, we're open to that. We haven't done anything since Canada, which we purchased in the fall of 2010. But obviously, we always keep that consideration out there. And the board and the company looks -- talks about dividends from time to time. We do believe we're in a point where we want to do that. So as we look at share repurchase, we're looking at it as a great way of returning value to our shareholders. I would tell you on an overall basis that one of the other things I look at is our overall return on invested capital. And if you look since 2008, our return on invested capital is 16% and we've since grown it so that the last 2 years, it's approximated 30%. And we feel very, very good about that. And I think if you would benchmark that against others within our sector that you see it benchmarks very favorably, at the end of the day. So we kind of look at it from an overall perspective on a return on invested capital as well. The question is would we leverage up to buy additional shares. Historically, within the last few years, we've not done that. We've intended to spend our free cash flow. Doesn't mean that if the opportunity presented itself that we wouldn't. We obviously have a line of credit in place. We have a lot of availability on it. So it wouldn't be hard to do. It's just not been in our nature at this point in time. As we've said, we've bought back over $1 billion in the last 3 years, and that's without basically borrowing $0.10 to do it. So we feel good about it from that perspective.

Stephen W. Grambling - Goldman Sachs Group Inc., Research Division

Great. Then one quick follow-up, if I may. This one maybe for Bob. You had referenced that you're still below your prior peak sales per square foot. I'm wondering is that a target that you think that you can reach longer term even with a bigger store. Is that kind of the appropriate way to think about it?

Bob Sasser

Yes. We think about it as year-over-year growth, incrementally improving our productivity of our stores, our new stores, our existing stores. Those small stores years ago were 5,000 square feet and they pretty much peaked out in year 1 and the comps then became stubborn, if you remember that. The new larger stores, when we started opening them, sales per square foot went down, but it gave us a longer runway by which we could serve more customers for a longer period of time without reinvesting in the store and expanding the store. So we've been building it back over the years. We continue to build it. And yes, there's still plenty of opportunity to drive sales per square foot in all of our stores.

Operator

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

John Zolidis - The Buckingham Research Group Incorporated

A question, if we look back over the course of the year and Bob, I noticed your tone today is considerably more upbeat than at the Analyst Day when there were some difficult months in there. What gives you the confidence given the volatility we saw last year that in 2013 we won't see similar volatility in comp trend? How do you feel about the business, the consumer? Maybe with more distance looking back, what happened in the October quarter? And how do we, as investors, feel good that the trends can be more consistent as we go forward?

Bob Sasser

Yes. John, just backing up and looking at the past year, it was a terrific year. Even at our Investor Conference, I was upbeat about the business, the longer-term view of the business. And if you look back at third quarter, I think we had record operating margin and higher inventory turns. And we didn't like the comp, 1.6% comp. We always want more. But the P&L was just really spectacular, frankly. So we have every reason to be proud of third quarter. We came at -- it was a big quarter to be up against. We came in the fourth quarter, another big quarter. At the Investors Conference, if you remember last year, I was saying, "We're giving you the information on how we looked at third quarter. And oh, by the way, fourth quarter was going to be a big hurdle for us." And I didn't look at that as not being upbeat, I looked at it as just being transparent and reminding you of what we were facing and how we were going to go about it. So that's what we did. And at the end of the day, I'm really proud of third quarter. I'm really proud of fourth quarter and the year. I always want more comps. I always want higher operating margin. I especially want high returns. So those are the things that we're focused on. I think maybe what gives me confidence going forward -- it is tough calendar. We know that and we planned for it. Easter is early. Easter is not good for the top line growth typically, but we planned for that. It's a tough fourth quarter. It's 6 less days -- selling days between Thanksgiving and Christmas. We planned for that. We have exciting plans for third quarter of next year. Third quarter next year -- this year is 1.6% comp we're up against. So it's sort of the reverse of last year. So I see that as great opportunity as we go, and we're making plans to make third quarter very good. But I have just great confidence in the model, our flexibility. We've been doing this at a $1 for 27 years. We feel pretty confident that we're good in all times. We've seen up times then down times, and we've performed well. We've been able to offer more value to our customer over the 27 years, haven't raised our price. Our product is better than ever. Our value is better than ever. Our operating margin continues to rise, may be counterintuitive. So 2013, we have great merchandise. We have great product. We have great plans in this tough year. And by the way, the consumer in their search for balancing their budgets, they're making less and spending more on everything else. At Dollar Tree, you can buy everything for $1, you can help balance your budget. By the way, have a good time. Buy a toy for your child, have a party at the school and everything is still $1. We're excited about our business.

Operator

[Operator Instructions] We'll go next to Scot Ciccarelli with RBC Capital Markets.

Scot Ciccarelli - RBC Capital Markets, LLC, Research Division

Bob, can you talk about what you guys are seeing on merchandise margins? And then the second question is going to be what are your expectations for the Canadian operation from a profitability standpoint for '13?

Bob Sasser

Well, let me start with the second one first. The -- Canada, we're really excited about. We're still in investment mode. The -- it was about a $0.02 to $0.03 pressure on this year's earnings. For next year, we have plans. We think that we're going to improve over that. But we still have some investments to be made. And I think for Canada, the opportunity we're seeing growth in the top line next year. We're excited about that. We're getting our stores re-branded. And with the re-branding, remix, re-merchandise and bringing to bear all of the information [ph] that we put in. Only a year ago now, we're just starting to see the numbers from that. So I think there's going to be a payback from that. So there could be still some pressure in 2013 on the bottom line for Canada. But less than this year. And this year was only $0.02 to $0.03. We're investing in our future in Canada. As I said, we think we can open around 1,000 stores there. And in order to do that, we want to get it right in the beginning, and that's what we're doing. The margin, overall, there's -- I've said this before and I'll say it again, we're in control of our margin. We don't planogram items. There's nothing that we have to have. Our buyers, our merchants are encouraged to offer the highest value for $1 price point at a margin that we are willing to accept. And the one we're willing to accept is the one we planned. So we're just about always going to hit our margin on items and on departments and on categories and subcategories. If you look at any of the -- most of the margin, gross margin changes which we've been -- we've managed it through a pretty tight band over the years. But it's usually all about mix. And when the mix is more consumer products, a little pressure on the margin. And when the mix is more variety of product, and I guess better times and you're selling more -- a little more variety merchandise. Throughout the years though, it's been managed within a very tight band, and I know that we can continue to do that. We don't see, I don't see, there's always something that's going up. There's always something that's going down. But with our philosophy of not having to have anything, we're going to be able to manage through this year once more. You heard Kevin say our guidance includes pretty much the same kind of ocean freight rates, as we experienced. So we're not expecting pressure there. It'd be nice to get a little improvement, but we're not expecting it. The merchandise margins are good, improving, flat to last year, maybe even up in some cases. We just had the trip -- the January trip, which is one of the big trips of the year to Asia. I can tell you, it was well planned. Our merchants were knowledgeable and enthusiastic. It was the best trip that I've been on with our group of merchants, using historical data that -- armed with a financial plan for every category and a strategy to back that up. They'd already shopped the market here. They knew what the winners were out across the country and what the losers were. And we went off and went to Asia with a real plan, worked with the vendors, got the best prices. And I got to tell you, with the merchandise that's coming from that trip, first of all, for our fourth quarter next year, our mark on is going to be on plan from the import side. We've already done that. The merchandise is going to be really exciting. We have new home and textile products, their own trend, our housewares categories are exceptional, especially our dinnerware is just striking, really. We're able to do what our merchants are able to do for the $1 price point. They've updated our stationery assortment. They've updated our party assortment. Our toy department was completely overhauled. It's just really was an exciting trip. And frankly, it is the best trip I've been on since I've been with Dollar Tree. So I'm encouraged on the margin side. I'm encouraged on the value side for fourth quarter.

Operator

And our final question will come from Peter Keith with Piper Jaffray.

Peter J. Keith - Piper Jaffray Companies, Research Division

I was hoping you could just give us the stats around your credit and debit card penetration and perhaps provide some commentary just on how the MasterCard acceptance to 75% of the stores has been received initially in the fourth quarter.

Kevin S. Wampler

Sure, Peter, I'd be glad to do that. So in general, between debit and credit, it's basically -- for the year, it was roughly about 38%, 39% of sales. So it continues to increase a little bit. We've seen basically -- in the fourth quarter, we did see strong growth in the credit card business. It was up about 180 basis points. So -- and again, that we rolled -- as you said, we rolled MasterCard out to additional 3,500 stores, roughly, leading into the fourth quarter. So it was obviously well received. Anecdotally, we heard from a lot of stores where customers were very happy to see that we're now accepting it chain-wide. So we do feel that it has been successful. And so overall, the expectation is as the industry continues to grow, we expect our shift to debit and credit to continue, although it's obviously not near what it was a few years ago when we had initially put it in place.

Peter J. Keith - Piper Jaffray Companies, Research Division

Okay. That's all very good to hear. And I guess just to follow up on that, the 180 basis points shift in credit would be pretty sizable from what you guys have had during recent years, and MasterCard is a pretty widely held card. So is that -- as sort of awareness is building, are you seeing that credit shift actually accelerate as the months go by? And then kind of coupled with that, your ticket growth was one of the best you've had in, I guess, about a year. Is the ticket growth being impacted by that MasterCard acceptance as well?

Kevin S. Wampler

I would say in general, the 180 basis point increase, as we look at it, I really believe is, as we've analyzed it, it's where it came from. Part of that conversion is people -- half of that conversion is people are paying cash previously that are now paying with a credit card and the other half is somebody who changed from a card they were using maybe to MasterCard. So you might have seen some people leave debit and go to credit, in some instances even. So I think in general from a ticket perspective, it's obviously beneficial to have our average ticket for a credit/debit transaction is significantly higher than a cash transaction. So it's not a bad thing to get that conversion. I think it's a small piece of the pie as far as the growth in ticket. I actually believe that a bigger piece of it always relates back to the merchandise in the stores and the store operators setting up great displays. And we've done work around our front ends, impulse items and things like that, which I think are important as we continue to go forward and is a big initiative for us on an overall basis. So I think that's probably more important to the overall ticket.

Operator

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

Timothy Reid

Thank you, Mike, and thanks to all of you for your participation in the call today, particularly for your interest and most importantly for your investment in Dollar Tree. Our next scheduled conference call will be on May 23, 2013, when we announce the results from our first quarter. Thank you again.

Operator

And again that does conclude the Dollar Tree Inc.'s Fourth Quarter Earnings Conference Call. We do appreciate your participation. Have a good day.

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