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Dollar Tree (NASDAQ:DLTR)

Q3 2013 Earnings Call

November 21, 2013 9:00 am ET

Executives

Timothy Reid

Bob Sasser - Chief Executive Officer and Director

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

Analysts

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

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

Meredith Adler - Barclays Capital, Research Division

Denise Chai - BofA Merrill Lynch, Research Division

Scot Ciccarelli - RBC Capital Markets, LLC, Research Division

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

Joan L. Bogucki-Storms - Wedbush Securities Inc., Research Division

Daniel T. Binder - Jefferies LLC, Research Division

Operator

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

Timothy Reid

Thank you, Devonah. Good morning, and welcome to the Dollar Tree Conference Call for the Third Quarter of Fiscal 2013. Our call today will be led by Bob Sasser, our Chief Executive Officer, who will provide insights on our performance in the quarter and recent developments in our business. Kevin Wampler, our Chief Financial Officer, will provide a more detailed review of our third quarter financial performance and provide our guidance for the remainder of 2013.

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

As a reminder, in September 2012, Dollar Tree, Inc. sold its ownership interest in Ollie's Holdings, Inc. that we will refer to as Ollie's. The sale had a favorable impact on the third quarter 2012 earnings, with an increase to net income of $0.17 per diluted share. Unless otherwise noted, all net income and earnings comparisons presented today will exclude the impact of Ollie's -- the Ollie's transaction on last year's results for the third quarter and year-to-date.

At the end of our planned remarks, we will open the call to questions. [Operator Instructions]

Now I'd like to turn the call over to Bob Sasser, CEO of Dollar Tree. Bob?

Bob Sasser

Thanks, Tim, and good morning, everyone. This morning, we announced our sales and earnings for the third quarter of 2013.

Total sales increased 9.5% to $1,885,000,000, and comp store sales increased 3.1%, driven by increased customer traffic. Earnings for the third quarter were $0.58 per diluted share. This represents a 13.7% increase over last year's $0.51 per share, which, as Tim said, excludes the gain from the sale of our interest in Ollie's last year.

Operating margin for the third quarter 2013 was 10.8%. This was the highest third quarter operating margin in the history of the company. The previous record was 10.7%, which was set in the third quarter last year. And net income was $125.4 million versus $117.3 million in 2012.

Year-to-date through 3 quarters of 2013, total sales were $5.61 billion. This is an increase of 8.9%. Comp store sales increased 2.9%. Operating income increased by $65.5 million. Operating margin was 11.1%, an increase of 30 basis points compared with the same period last year. Net income was $383.6 million compared with $352.6 million last year. And earnings per share were $1.73, an increase of 13.1% compared with $1.53 per share last year.

I'm pleased with another solid quarterly performance, with top line and comp store sales continuing to grow. Most importantly, the Dollar Tree model is more relevant than ever, providing extreme value to customers while recording a record level of third quarter earnings. Customers know that even in a difficult economy, at Dollar Tree, you can still splurge. Everything is only $1.

I'm also pleased with the mix of products sold and the consistency of our sales growth. Comp sales growth of the third quarter was the result of increased sales in both needs-based consumables and increased sales of our seasonal and variety categories, with our seasonal and variety categories growing at a faster pace overall.

Our comps were positive every month, with our strongest performance in October. And performance in the third quarter was relatively consistent across the country. All zones achieved positive comp store sales, with the strongest performance in the Midwest, followed by the Southeast and the Southwest.

We have room to continue growing our business and the ability to grow in many different ways by opening more stores, by opening better, more productive stores, by increasing the productivity of all our stores and by developing new formats, new markets and new channels. During the third quarter this year, we opened 117 new stores and relocated and expanded another 19 stores. Through 3 quarters of 2013, we have added 292 new stores and expanded or relocated 67 stores. Selling square footage has increased 7%, and we ended the quarter with 4,953 stores. We are on track with our new store opening plan for the full year 2013, which includes 340 new stores and 73 relocations and expansions for a total of 413 projects in 2013.

In addition to opening more stores, we have a strategy to continue to open better and more productive stores. Last year, new store productivity reached its highest level since 2001, and so far this year, our U.S. class of 2013 is tracking at a similar pace, trailed somewhat by Canada. This has been the result of a coordinated process concentrated on improved site selection, rightsizing our stores, expanding our assortments, improved staffing and building the bench of qualified store management.

Efforts to increase sales per square foot are not limited to new stores. Elements of the strategy to increase store productivity can be seen throughout the chain. In recent quarters, we've described some of our category-specific initiatives to drive sales. For example, in all stores, customers are seeing more powerful, seasonal and party presentations. We re-merchandised our checkout lanes and expanded assortments across the front end of our stores to create more merchandise energy and to drive impulse sales. Results of these efforts have been validated by company-leading comp sales increases in our checkout department. Additionally, we continue to rationalize and expand assortments across the chain of stationery, candy, health and beauty care, and home and household products.

In addition to assortment initiatives, store associates are emphasizing more effective customer engagement and working to drive sales of related items through cross merchandising and suggestive selling. And we're rolling out freezers and coolers at a faster pace. In the third quarter, we installed freezers and coolers in 122 additional stores, for a total of 566 store installations year-to-date, exceeding our plan of 550 store installations for this year. We now offer frozen and refrigerated product in 3,115 stores, and we expect to add another 25 installations by fiscal year-end. This category serves the current needs of our customers and drives traffic into our stores and provides incremental sales across all categories, including our higher-margin discretionary product. Reflecting all of these initiatives, our top-performing categories in the third quarter were checkouts, frozen and refrigerated products, stationery, party supplies and candy.

Another key component of our growth strategy is the development of new retail formats, the expansion of our geographic reach and the development of additional channels of distribution. Specifically, that means 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. In the third quarter, Deal$ comp sales increases were led by floral and accessories, stationery, party and seasonal, with a strong Halloween performance. We opened 10 new Deal$ stores in the third quarter, ending the quarter with a net total of 214 Deal$ stores, and we're on track with our growth plan for 2013.

Our Canadian integration and expansion continues. We're aggressively expanding our Canadian store base. In the third quarter, we opened 16 new stores and ended the quarter with 176 Canadian stores, achieving our plan to grow our store count by 25% for the year. In addition to opening new stores, we've now completed our planned re-branding of former Dollar Giant stores to Dollar Tree Canada. Leveraging the buying power of Dollar Tree, our merchants are sourcing higher-value product, and our Canadian customers are finding broader, more exciting assortments and better values in the stores. The service level and in-stock position of basic products is increasing. The shopping experience continues to improve as our stores develop a more powerful seasonal presence and a higher level of merchandise energy. And through our investments in infrastructure, systems and training, we now have consistent year-on-year data on which to base our sales and assortment planning decisions. We see enormous potential in Canada. As we grow and improve, we believe the Canadian market can support up to 1,000 Dollar Tree stores. This is in addition to the 7,000 Dollar 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 the single price point of $1.25, just as we are in the U.S. at the $1 price point.

Dollar Tree Direct, our online business, continues to expand. DTD provides an opportunity to broaden our customer base, drive incremental sales, expand the brand and attract more customers into our stores. We've expanded our online offering by 40% this year. Dollar Tree and Deal$ Direct now offer more than 3,800 items online, including more than 1,700 items in less than a case pack quantities. Traffic on the site exceeded 5.6 million unique visitors in the third quarter, a 25% increase over the third quarter last year. In addition, we now have more than 1 million Facebook fans and more than 1 million opt-in e-mail subscribers following our brand. We recently launched Christmas at the Tree on our site, showcasing our unique values for the holidays. I urge you to check it out at dollartree.com.

One of the keys to achieving consistent, profitable results has been our practice of building infrastructure and distribution capacity to support growth ahead of the need. You may remember in June of this year, we opened our new 1 million-square-foot distribution center in Windsor, Connecticut ahead of schedule. This new facility will provide capacity for growth in the Northeast and increase network efficiencies long-term. In addition to the new DC in Windsor, in the third quarter, as planned, we completed the expansion of our Marietta, Oklahoma DC to 1 million square feet. Both of these projects were under budget, and both were financed through available cash.

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

Kevin S. Wampler

Thanks, Bob. As Bob mentioned, our diluted earnings per share in the third quarter were $0.58. The increase resulted from our sales growth and a 10-basis-point improvement in operating profit margin compared to the second quarter last year.

Starting with gross profit, our gross profit margin was 35% during the third quarter compared with 34.9% reported in the third quarter last year. Several factors contributed to this performance. The improvement was driven by higher initial markup across many categories and leverage on occupancy costs. The higher IMU reflects continued improvement in sourcing and the flexibility of our merchandise model. The improvements were partially offset by increased distribution expenses as a percent of sales, reflecting the incremental expense associated with the ramp-up of our new DC in Windsor, Connecticut and maintaining a high level of service to stores as we realign DCs consistent with our added capacity.

SG&A expenses were 24.2% of sales for the quarter, unchanged from the third quarter last year. Payroll-related expenses declined by 30 basis points, as improved labor productivity and reduced expenses for stock compensation and retirement plan contributions offset a 17-basis-point increase in health insurance benefit expenses relative to the third quarter last year.

Operating expenses increased by 30 basis points. This was due principally to a 20-basis-point reduction in other income, reflecting the onetime realized gain of $3.8 million in the third quarter last year relating to the favorable resolution to a legal matter. In addition, store supplies and debit and credit card fees increased in the third quarter of the current year. Absent the onetime benefit from last year, SG&A would have improved 20 basis points for the quarter.

Operating income increased $20.2 million compared to the third quarter last year, and operating margin was 10.8%, an improvement of 10 basis points on top of the very strong 10.7% operating margin in the third quarter last year. Year-to-date through the third quarter, operating margin is 11.1%, an increase of 30 basis points from the same period last year.

The tax rate for the quarter was 36.9% compared with the third quarter last year at 36.3%.

Looking at the balance sheet and statement of cash flow. Cash and investments at quarter-end totaled $147.1 million versus $222.4 million at the end of the third quarter 2012. In September, the Board of Directors authorized a $2 billion share repurchase program. Under this new authorization, the company invested $1 billion for share repurchases through an accelerated share repurchase program that was launched on September 17. We received 15 million shares as part of the ASR during the third quarter. All additional shares repurchased under the ASR will be delivered to the company on or before June 2014. The ASR was funded by $250 million of cash and $750 million from the private placement of senior notes completed in September. Year-to-date through the third quarter, the company has invested $1.1 billion for share repurchase. The diluted weighted average shares outstanding for the third quarter was 217.6 million.

Our consolidated inventory at quarter-end was 9.2% greater than at the same time last year, while selling square footage increased 7%. Consolidated inventory per selling square foot increased 2.1%. We believe that current inventory levels are appropriate to support scheduled new store openings and our fourth quarter sales initiatives.

Capital expenditures were $84.5 million in the third quarter of 2013 versus $96.6 million in the third quarter last year. For the full year, we are now planning consolidated capital expenditures to be approximately $340 million. Capital expenditures this year are focused on new stores and remodels, the addition of frozen and refrigerated capability to over 590 stores, IT system enhancements, approximately $37 million towards the new distribution center in Windsor, Connecticut and $25 million for the expansion of our DC in Marietta, Oklahoma and additional fee development store projects to be opened in 2014.

Depreciation and amortization was $48.6 million compared to $43.6 million in the third quarter last year. We expect depreciation expense of $190 million to $192 million for the year.

Our guidance for the remainder of 2013 include several assumptions. First, Halloween shifted back into the third quarter this year, reflecting the retail calendar. We believe that this moved approximately $5 million of revenue out of the fourth quarter and into the third quarter compared to last year. Comparable store sales are not impacted by this shift, as we aligned the comparable weeks in our comp store calculation.

Second, there are 6 fewer selling days between Thanksgiving and Christmas this year, which presents a $25 million sales challenge in the fourth quarter; also, as you will remember, due to the retail calendar 2012 included 53 weeks and the fourth quarter consisted of 14 weeks. This extra week added $125 million of incremental sales and $0.08 of earnings per diluted share to the fourth quarter and the full year last year.

Finally, our guidance assumes a tax rate of 37.7% for the fourth quarter and the full year. Weighted average diluted share counts are assumed to be 209.1 million shares for the fourth quarter and 219.1 million shares for the full year. As always, our guidance assumes no additional share repurchase.

With this in mind, for the fourth quarter of 2013, we are forecasting sales in the range of $2.25 billion to $2.31 billion based on a low single-digit comparable store sales increase and 7% square footage growth. Diluted earnings per share is expected to be in the range of $1.01 to $1.07, an increase of 8.6% to 17.2% compared with the fourth quarter last year, excluding the $0.08-per-share benefit from the extra week.

For the full fiscal year of 2013, we are now forecasting sales in the range of $7.86 billion to $7.92 billion based on a low single-digit increase in comparable store sales and 7% square footage growth. Diluted earnings per share is expected to be in the range of $2.72 to $2.78. This would represent an increase of 11.5% to 13.9% over 2012 earnings per share of $2.44, which excludes the $0.08 benefit from the 53rd week and the $0.16 gain on an annualized basis from the sale of Ollie's in the third quarter of last year.

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

Bob Sasser

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

Sales year-to-date through the third quarter grew 8.9% to a record $5.6 billion, and comp store sales increased 2.9%, driven by a combination of increased consumer traffic and higher average ticket. Our operating margin increased by 30 basis points to 11.1%, the best performance in our history. And earnings per share increased by 13.1% to $1.73.

In addition, we continue to invest capital to support growth. This year, the company opened a new distribution center in Windsor, Connecticut and expanded our distribution center in Marietta, Oklahoma on time and under budget. We opened 292 new stores across the U.S. and Canada, and we expanded frozen and refrigerated product to 566 additional stores, more than any previous year.

During the third quarter, Dollar Tree celebrated its 27th anniversary. Through those years, we've grown steadily, built solid infrastructure, evolved from small stores to larger stores with broad assortments and reinvented ourselves continuously, yet we have remained true to our original concept. Everything is still $1 at Dollar Tree stores in the U.S. The Dollar Tree business model is powerful and flexible. It's been tested by time and validated by history. And I believe that Dollar Tree can do even better in the future. There's much more opportunity ahead of us than behind us. Our strategic plan involves multiple platforms for growth. There's a great opportunity to grow and expand the Dollar Tree brand in the U.S. through more stores and better stores. The Deal$ brand is positioned for growth, serving more customers with more categories. Dollar Tree Canada is positioned for profitable expansion in the years ahead, and Dollar Tree Direct continues to broaden its reach to new customers throughout North America.

We have plenty of opportunities to grow our business, a vision of where we want to go and the infrastructure and capital to make it happen while generating substantial free cash. And we continue to manage our capital for the benefit of long-term shareholders.

During the third quarter, the Board of Directors authorized a $2 billion share repurchase program, under which $1 billion has already been invested through an accelerated share purchase plan -- share repurchase plan.

I'm proud of our consistent strong performance. I'm even more proud of our Dollar Tree associates from every department in the company, who work hard to deliver on our promise of great-value merchandise and stores that are full, fun and friendly for every customer every day.

It's an exciting time at Dollar Tree. As we enter the fourth quarter, our shelves are full of the right product for Thanksgiving and the holiday season. Our stock rooms are in great shape, and our merchandise values have never been higher.

We will now address your questions. So that we can accommodate as many callers as time permits [Operator Instructions]

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Stephen Grambling with Goldman Sachs.

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

Just a little bit more detail on the comp trajectory. I think that last year, you had noted better trends throughout the quarter, and you just mentioned October was the strongest. So maybe if you can provide a little more detail on what you saw as the quarter progressed, perhaps highlighting any changes in the traffic and ticket or categories.

Bob Sasser

Well, Stephen, I'll try to give you a little color on the quarter. As I already said, all 3 months were comp positive. All zones in the company were comp positive. It was led by the Midwest and the Southeast and Southwest, but it's pretty close. Both consumable and our variety merchandise was comp positive, with the variety merchandise growing a bit faster than consumables, and that's similar to the trend that we saw in the second quarter. We had a great back-to-school. It was one of the best on record. Our top categories during the back-to-school period were our office supplies and writing and our teaching tree, which is our classroom supplies, our binders and our paper products. We came directly out of back-to-school and into Halloween and harvest and fall, and we were set with all of that by September 6. Our stores just did a terrific job of turning it around from back-to-school fronts of the stores to those seasonal categories that were Halloween, harvest and fall. They did again with an exceptional job of converting on October 31, the night of -- the evening of October 31, our stores converted to Thanksgiving and Christmas, so that when we opened up on November 1, we were ready for those new holidays. Other notables, our checkout and front-end impulse lane led the company in comp increases. That initiative has begun last fall. It's been very successful. Our checkouts were followed by frozen and refrigerated. As I said, we rolled out more stores with frozen and refrigerated in the third quarter, followed by stationery and party and cards. So that gives you a little color on the quarter, where the seasons were dynamic, very good, I would say. The customer traffic was attributed to all of the comp store sales increases, so customer traffic was very good. We're getting new customers all the time. They seem to be shopping a little later for their needs and maybe a little more often and getting a few new customers in that regard. So very consistent across the quarter, I think, is the way I would characterize the business.

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

Okay, that's helpful. It sounds like there's not a lot of deviation. And then changing gears a little bit, as you think about the ASR and what's left there and then the future buybacks, any additional clarity you can give in terms of the timing of deploying that?

Kevin S. Wampler

Yes, Stephen, I think as -- obviously, the ASR that we've put in place in September is really just kind of in its infancy. I mean, the transaction can last as long as mid-June of next year. So that's in place. In September, we received about 15 million shares. There will be a settlement at some point between the minimum timeframe of the contract and the maximum timeframe of the contract. And again, that can go, as we said, until mid-June of next year. So basically, that's in place. We look at our -- as we look at our capital structure and our capital allocation each and every year, we have looked at share repurchase as being a good return of value to our shareholders, our long-term shareholders. But really, between now and the end of the ASR, there will not be anything additional per se. But obviously, that still leaves time later in the year that we'll be able to give consideration as to what direction we want to move.

Operator

And we'll go next to Matthew Boss with JPMorgan.

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

Can you speak to trends in the quarter on the non-food, more discretionary side? And did you see momentum that you see in October, did you see that continue into November?

Bob Sasser

It's too early to say about the November. We're only a couple weeks into it. And with that shift in the Thanksgiving holiday, as Thanksgiving's a week later this year, it's hard to say what the trends are right now. We're -- it's all in our guidance, and we're running a little bit ahead of our forecast, but it's all cloudy by Thanksgiving. But the trends, both of our -- both the consumable categories and non-consumable categories grew in the third quarter, and it was very similar to what we experienced in the second quarter. Actually, it was our plan. We have driven our variety business with our front end and our impulse and our stationery initiatives and our party initiatives. Our goal is to always have a balanced assortment of things you need and things you want. Over the last several years, the consumable categories have grown a little faster, really attributable to 2 things. One, the nature of the economy, more people needing more the consumable product and seeing Dollar Tree as the place to shop. They continue to do that. But also the -- we rolled out more consumable product over the last several years. So what you saw beginning in Q2 this year was a little bit of a shift, with the non-consumables growing a bit faster than the consumables. But both categories of goods grew, and I'm very pleased with that. I'm especially pleased with the shopping experience that, that offers the customer. It's about the balanced mix to manage our margins. We've been very successful for 27 years managing our margins within a tight range because we are always looking for that balanced mix of needs-based, as well as variety merchandise. And so our initiatives that we rolled out last year, we're seeing the results of that. We're seeing the front end and the impulse and the checkout categories grow, again, a great back-to-school with stationery growing, our party business is very healthy and growing. And all the while, we still continue to roll out frozen and refrigerated. We still continue to focus on the needs-based businesses, and our traffic is up.

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

Great. And then on the margin front, what are you seeing on the sourcing front today and any early thoughts on IMU into the spring?

Bob Sasser

Well, as far as margin, we're -- I've always said, we're in control of that. As far as sourcing, we go to market with 2 things in mind, and one is to offer the greatest value for the dollar at a margin that we're willing to accept. There is always pressure on commodities up and down. They move around a little bit. The most recent trip to Asia I did not go on, I've already been to 3 this year, so I decided not to make the October trip. But reports from Asia were that everything is just fine. Again, we buy in U.S. dollars, we don't buy in the foreign currency, and we negotiate a price based on our buying power, based on our needs and based on our relationships that is within our margin range. So I'm always pretty comfortable in that margin. I've always said, it's all about the mix of product at Dollar Tree that we sell as much as cost changes because we manage the cost changes very well. We follow the mix. Sometimes, customers are demanding more of the consumer products which are a little lower margin, sometimes a little more discretionary products, which is higher margin. And again, we're sort of balancing that every quarter.

Operator

And we'll go next to Meredith Adler with Barclays.

Meredith Adler - Barclays Capital, Research Division

At the Analyst Meeting, you talked quite a bit, I think, about the 6 days less between Thanksgiving and Christmas, and you talked about how successful Easter was in making up timing shortfalls there. And you seemed very optimistic about not being able to make up that $25 million during the holidays. Any change in that view now?

Bob Sasser

Meredith, we're always -- we knew there was going to be 6 less days. We planned accordingly, and we're never victims. We always plan to make up. We have terrific plans, and you saw some of them at the Analyst Day. We have terrific plans for the fourth quarter. We have the best seasonal assortment that we've ever had. We're going to deliver that, as we've already begun that with setting it up in our stores. It's absolutely the best merchandise assortment. The execution has been terrific so far. I don't expect that to change, so there's nothing inherent in the business different as far as how we execute, how we run, how we buy, how we deliver, how we run our stores. There's nothing new out there. I have great confidence in that. We are still subject to -- it is still 6 less days, we're subject to all the things that we didn't know at the time, with the pressure on the consumer, which consumers are under pressure right now. And I predict that we will have customers in our stores, we'll get our share, and I predict we're going to have a very good holiday season. That's all included in our guidance.

Meredith Adler - Barclays Capital, Research Division

And the Street, I think, had a higher expectation for comps this quarter in part because comparison was very easy. Can you tell us whether comps met your expectations for the quarter?

Bob Sasser

Well, we're always looking for, Meredith, as much as we can get. And I will tell you, comps are never easy, it's always about execution, it's always about looking at what you've done and then putting your hands on the -- finger on the pulse of the consumer and managing the business accordingly. I am pleased with our third quarter results. Our revenue grew 9.5%. We had a 3.1% comp. That's -- on that, we'd leveraged -- we had the highest third quarter operating margin in our history at 10.8%, a 13.7% increase in earnings per share, so the results were very good. And I will tell you, it was done during a very difficult environment. And again, some of this, we've known and we've been experiencing, like high unemployment, and it's still high, and the customers are still burdened and concerned and -- about that, higher taxes on the middle class this whole year. Recently, the reduction in food stamp benefits puts more pressure on the low income consumers. There's also the fear of the -- what's going on with health care, and it's -- you turn on the TV or pick up a newspaper, and that's all you see. And the end result of that is a weak consumer confidence. And the third quarter, I think, was the lowest in 2 years or about 2 years, as I read the news. So consumers are cautious, and we have a cautious consumer and a somewhat shortened shopping season. I think that's magnified when you have those short seasons. So our job, Meredith, is to be part of the solution by offering the high-value merchandise and a great shopping experience. We did that extremely well in the third quarter, in a tough time, traffic was up. And as a result, our revenues, our profits hit a record high. We feel very confident about what we can control in the fourth quarter. I'm very excited about the fourth quarter.

Operator

And we'll go next to Denise Chai with Bank of America Merrill Lynch.

Denise Chai - BofA Merrill Lynch, Research Division

Could you elaborate a little bit more on the fee development program and the kind of capital commitment we'll see there?

Kevin S. Wampler

Sure, Denise. We've started doing some fee development deals a couple years ago, and I think it's something that some of the other people in the discount value space have been doing for a while. But traditionally, we've had plenty of space available through traditional leasing available to us. As we went through the economic downturn, some of the developers became more capital challenged, and there were not as many new spaces coming out of the ground. So we looked at it as an opportunity. We obviously have the capital to deploy accordingly. So we've kind of stuck our toe in the water, and we're starting to build that program. And I think what we like about it is the fact that what we've seen so far is that the performance of the ones we have opened has actually exceeded our expectations. They've done very well. And so I think part of that is about getting not only a good location front and center, but it's also about building a store that's exactly what we want it to look like. When we can build a store that's 100 by 100 or 80 by 120, and it lays out well from us from a linear space perspective and lays out well from a merchandising perspective, it makes us that much more efficient, and it just plays well to the consumer. So we got a lot of success from that perspective. We're going to continue to build it. From an overall capital allocation perspective, we're going to continue to grow, I mean, I think this year, as we talked about our capital, our CapEx was a little bit higher. We raised it. We've given a range of $320 million to $330 million. We've bumped that to $340 million, so we got about additional $10 million that we've put towards it this year, above and beyond what we had originally allocated, which is closer to $30 million. And then so for 2014, we haven't given numbers. We'll probably look to bump that potentially a little bit more since we have the opportunity. But it's a program we're building. But the majority of our stores are still going to be through the traditional leasing method, but it does give us another avenue for growth.

Denise Chai - BofA Merrill Lynch, Research Division

Great. And just a follow-up here, could you please quantify the distribution deleverage from the new DC? Was it similar to the last quarter? Because what I'm trying to get at really with your very strong gross margin is, what was the basis point shift between consumables and discretionary?

Bob Sasser

The -- we shifted 70 to 80 basis points more discretionary versus consumables during the quarter and...

Kevin S. Wampler

And in regards to the distribution cost, it was similar to Q2 basically from how it delevered, but -- so again, that's part of getting that store up online -- or that DC up online, full operation, and it does not have a full load of stores today that it will at some point in the future. But it's gone very, very well. It's obviously very important to us up in the Northeast. We've had a lot of growth up there, so it's very important to us. And so it gives us a lot of opportunities as we go forward.

Bob Sasser

Denise, it's Bob. On that 80 -- 70 to 80 basis points, that's as a percentage of mix shift, that's not margin. That's about 70 to 80 basis points more percentage of total in the discretionary versus the nondiscretionary.

Operator

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

Scot Ciccarelli - RBC Capital Markets, LLC, Research Division

Given the acceleration we've seen in terms of the cooler rollouts going in the stores in the comp base, I guess I'm a little surprised consumables didn't grow faster. Anything you can point to that maybe adversely impacted the consumables growth in that quarter -- in the quarter? And related to that, do you think you're still gaining the same kind of sales lift as what you once saw earlier in the rollout process?

Bob Sasser

Well, we had a good rollout. We rolled out -- we've rolled out a lot of new stores -- cooler stores this year and again in the third quarter. And the stores that we rolled out in the third quarter, we had higher comps in those stores than in the non-freezer stores, which is as we would expect. We had higher traffic. The average ticket on the rollout is a little slightly down but just a little bit. And I think that's to be expected with -- as you roll these out, consumers typically give you a try first, and then they respond if they like it. So I think that's what we're seeing with as many cooler rollouts as we've had. By the way, we had in those stores that we rolled out the new cooler program, we saw a lift across all category, both discretionary and nondiscretionary. So it's doing what we expect it to do. We've always said that the frozen and refrigerated, the mission of that is to satisfy the customer and drive more traffic and more frequent purchases, and that's exactly what we're seeing as we roll out these new cooler stores. And just to the point there, so I'm not disappointed in our growth in our consumable business. It's growing, too. Both categories are growing. We always said that we're looking for that balanced mix of sales in things you need and things you want. And as one grows a little faster, we're always pushing on the other side to grow that a little faster. And I think that's what we're seeing the result of, those initiatives that we kicked off last year in stationery, in our front end, in our party business and our seasonal business, they're working, and they're growing faster because we've put a lot more emphasis, we've expanded the assortment, we've expanded the inventory, we've reviewed our signing, we've really increased the focus on our stores on execution in those categories. So our consumer business is still comping year over year over year. It's just that the discretionary business -- it all has to add up to 100, by the way, and the discretionary business is growing a little faster now, and that's healthy. That turns into better operating margin.

Scot Ciccarelli - RBC Capital Markets, LLC, Research Division

Got it, and that's very helpful, Bob. And then, Kevin, can I just clarify something you said regarding SG&A. You gave us a bunch of give-and-takes. Did you say SG&A would have leveraged 20 basis points on kind of an apples-to-apples basis?

Kevin S. Wampler

That's correct. So remember, last year, we had a benefit from a legal settlement of -- and it was equated to about 20 basis points. So that was a headwind, basically, for this quarter. So without it, we would have leveraged 20 basis points.

Operator

And we'll go next to Dan Wewer with Raymond James.

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

The increased promotional activity at other multiple price point discounters how is that -- how do you think that's impacting Dollar Tree? And how do you respond given your commitment to that $1 price point?

Bob Sasser

Dan, it's -- I feel exactly the way I've always felt that our success is really driven on focusing on the customer and doing what we do best. Other retailers, I respect them all highly. They have a model that run -- that they run their business by, that may include price promotions, that might include more advertising and the like. We really don't, and, actually, I like to see more customers out shopping as early as possible. And if I can relocate our stores where middle America lives and shops and if we can get some of the traffic into our stores when customers are out shopping, we think we can get our share of that. We're focused on everything's $1, we're focused on value for our customers and running great stores. And we watch what competitors do. We're knowledgeable about what's going on in the industry. But at the end of the day, our success is going to be driven on how well we execute on our plan, and that's what we continue to stay focused on. I think we're still dead center in the crosshairs of what consumers are needing. We have that balanced mix of things you need, things you want, and everything is still $1, and the excitement around going into one of our stores and everything being $1 and finding something that you didn't expect is still evident in our customers.

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

It's also a question about Canada. You reminded us you still see 1,000 store opportunities. I believe you also indicated new store productivity in Canada is probably not where you wanted to be. Can you talk about what's working in Canada and what's not working compared to where you thought a couple years ago?

Bob Sasser

Yes, and some of the enthusiasm I have over Canada is exactly that, the opportunity to improve the productivity of the stores. We opened 36 stores this year through Q3 in Canada, and we ended with 176 stores. That's about 26% so far. We've more than doubled the size since we bought the Canadian stores in, what, late 2010. All of our stores have now been re-bannered. We've finished that this year. So they're all Dollar Tree Canada, all except for maybe -- you may find a handful of small stores that we didn't re-banner because we're probably looking to expand those stores anyway. Service level and our in-stock position on merchandise is improving. The shopping experience continues to improve as the stores develop more seasonal presence. By the way, we're now ready for the holidays in Canada. The stores, if you walked into a Dollar Tree Canada store, you'll see a lot of the same excitement and enthusiasm in the merchandise mix. We've made a lot of investments so far, investments in infrastructure and systems and training. And we now have consistent year-over-year data, which we can use to base our sales and assortment planning decisions on. So that's working. I'm very proud of the Canadian team, I'm proud of, really, members on both sides of the border and all that they've done. The opportunity in Canada is still as great as we saw in the beginning. And I'm really pleased with where we're coming, but we do have opportunity to increase our -- not only our store count but the productivity of new stores and the productivity of existing stores through merchandise and merchandising.

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

Well, just a follow-up real quickly then, if I could, just is it -- Dollarama is proving to be a more formidable competitor? Or is it on the items above $1 that you're carrying in Canada, perhaps, are not as relevant, not as value-added?

Bob Sasser

It's more us again -- and Dollarama, by the way, is a nice company. We've always admired what they've done there. Their financials are terrific, and, frankly, I view that as it's there to be done. But the -- just think about all we've changed since we bought the company, we've changed every part of the mix, we've changed new people, we've got new systems, we've got new processes, we've gotten rid of old merchandise that was part of the old assortment, we've pushed in new merchandise as part of a new assortment, we've put in POS and -- systems and new logistics and all the things that we've done, it's really been a period of investment and invention and building of the history in order to take advantage of it. So it's still us. I mean, no matter what you say, there's good competitors everywhere, and Dollarama is indeed one, but the Canadian customers love what we do. And there's something special about everything in the store is $1.25. We're the largest at the single price point. We want to -- that's the niche that we want to own, as everything is one price, everything is a great value. You find the things that you need. And by the way, when you shop in the stores, you find things you didn't expect, it was only CAD 1.25.

Operator

[Operator Instructions] We'll go next to Joan Storms with Wedbush Securities.

Joan L. Bogucki-Storms - Wedbush Securities Inc., Research Division

I have -- just want to dive a little bit deeper into the SG&A line. Were there unusual expenses in the third quarter? For example, on the -- Kevin, I think you had cited the increase in health care or health insurance, and then operating expenses were also up and anything -- and then also the store supplies and professional fees. Was there anything unusual there that you might have been able to lever on that comp?

Kevin S. Wampler

Well, I would tell you, so we've talked to each of those, Joan. If we look at, for example, debit and credit fees, a year ago in Q4, we rolled out MasterCard to the rest of our stores. It had been in about 1,000 stores when we rolled it to the rest of the chain. What we've seen since then is our credit card business has grown by about 2.5%. It actually grew by 2.7% in Q3. So we'll actually anniversary that coming into Q4 here. So obviously, a bigger percentage of our business is being done in card business. We're up to, combined between debit and credit, a little over 40% of our business is now there. It wasn't all that long ago when it was about 1/3, so it's grown and continues to grow. So -- and again, so that's something we could -- we have to pay our processors at the end of the day, so that's up. As we look at things like health insurance, our health insurance was a pretty big headwind in the quarter, in the sense we're up 17 basis points. And our health insurance, we're self-insured. And basically, we've just had a lot of large claims this year. I've been doing this long enough to know that every once in a while, you have a year like that, where things just seem to come in one after another. And -- but that's just the way it is, it's self-insured, we pay it, and we'll go down the road and understand that it just seems to be an unusual year for us from a natural claims point of view. It's not like there's anything related to the Affordable Care Act per se or anything like that, that's part of that. It's really just the normal course of business. In store supplies, I think a little bit of it is just a little bit of new fixturing and a little bit of getting ready for the holiday season with bags. Probably our biggest expense overall in store supplies in any given year is the bags we use in our stores for customers to carry product out in, and then costs have been just slightly higher this year, and those get allocated as we get them shipped to the stores. So I think that's a little bit of that at the end of the day. So those are just some of the things that we saw during the quarter. And then as we -- as per Scot's question, I think it was the idea, the fact that we had the benefit last year, 20-basis-point benefit last year, so that was an automatic headwind heading into the quarter.

Joan L. Bogucki-Storms - Wedbush Securities Inc., Research Division

Okay. And then any guidance? Obviously, we had the 53rd week last year, you had a higher sales, plus you had higher SG&A. Anything abnormal in that SG&A from last year that you could point out?

Kevin S. Wampler

Nothing that comes to mind at the end of the day. Obviously, you're right, from a comparability, it's not comparable going into the -- our guidance compared to that. I mean, the big thing is, obviously, the extra week of sales. And the biggest effect there is in the occupancy line because, basically, you have 12 months of expense in each year, but the one year, you get that extra $125 million. So we'll see significant deleveraging year-over-year in the fourth quarter because of the occupancy costs up in gross profit. So that will be there, and we know that's there, but that's obviously all built into our guidance at the end of the day.

Operator

We'll go next to Dan Binder with Jefferies.

Daniel T. Binder - Jefferies LLC, Research Division

A question on your category management. You've done a lot this year to try and expand the categories that have been growing nicely. I'm just curious, as you look ahead, do you see any emerging categories that you think are worth adding to the store? Or is there any further tweaking of categories in the store not necessarily for holiday but as we go into next year?

Bob Sasser

Yes, Dan, it's -- there's really nothing -- no new categories. We're going to continue as we go forward to roll out our frozen and refrigerated as we open new stores and as we find existing stores that meet the criteria. So that's an initiative that's ongoing. There's still room to continue to roll those out. We are looking at our variety experience as we go forward, not just more categories or even necessarily more space, but just that excitement around seasonal, that excitement around tween business, that excitement around our party and all of the events. We really want to own these holidays. So as we'd look at the layouts of our stores, as we'd look at the merchandise flows, we're doing a lot of work around continuing to maximize sales and earnings through that variety experience because those categories aren't -- they're margin, but they're also the excitement, they're part of the reason that you shop at Dollar Tree. You're buying things you didn't expect. They -- we speak of the seasons as changing like the leaves on the trees. And so we really have focused on execution, changing out from one season to the next quickly, really starting with that new seasonal impact early on in the season and how we display that and how we're going to sign that, how we're going to merchandise that. So it's really more of those kinds of things than it is 1 more skew or 4 more pieces of these or a new category.

Daniel T. Binder - Jefferies LLC, Research Division

My follow-up question is not related to merchandising but a separate question on cannibalization. I know you guys have focused on that in the past at the different analyst meetings you've hosted. Just curious, so are you seeing anything in terms of changes in self cannibalization? In other words, with new store productivity good but comp is a little softer, do you think that some of your comp stores are being affected by the new store openings?

Kevin S. Wampler

Dan, as we have a financial planning and analysis group that works hand in hand with our real estate group, as we've built our models over the year not only in the way we build our pro forma sales models but also cannibalization model, and they've worked. And our models have proven to be very accurate at the end of the day. And -- but we really haven't seen any significant difference in the cannibalization levels. And I think what we've found is that, actually, we can put stores a little bit closer together than maybe we thought in the past based upon the various inputs into the model. So I think realistically, if anything, we've proven that we can dense up markets, we can shift into build out marketplaces with more stores and really do just fine. And part of our analysis when we're looking at opening new stores is really not only an individual store return, which is with our hurdle rates for individual stores on return on invested capital, but then there's also hurdle rates as it relates to the market ROIC. So if we're going into a marketplace, we know we're going to have some cannibalization, we'll actually look at the market ROIC as well and verify that it meets a level that we're very satisfied with as we look at how we deploy our capital. So that's kind of the way we're looking at it right now.

Operator

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

Timothy Reid

Thank you very much. And I want to thank all of you on the call for your participation today and for your interest in the company and, most importantly, as always, for your investment in Dollar Tree. Our next sales and earnings release and conference call are scheduled for Wednesday, February 26, 2014. In the meantime, have a Happy Thanksgiving and a great holiday. Thank you.

Operator

Thank you. This does conclude today's conference. We appreciate your participation.

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