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Dollar Tree, Inc. (NASDAQ:DLTR)

Q1 2014 Results Earnings Conference Call

May 22, 2014, 09:00 AM ET

Executives

Timothy J. Reid - Vice President, Investor Relations

Kevin S. Wampler - Chief Financial Officer

Bob Sasser - Chief Executive Officer

Analysts

Scot Ciccarelli - RBC Capital Markets

Matthew Boss - JPMorgan

Joan Storm - Wedbush Securities

Paul Trussell - Deutsche Bank

Charles Grom - Sterne, Agee & Leach

Anthony Chukumba - BB&T Capital Markets

Dan Wewer - Raymond James & Associates

Dan Binder - Jefferies & Company

Patrick McKeever - MKM Partners

Operator

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

Timothy J. Reid

Good morning. Thank you [Levi] and welcome to the Dollar Tree conference call for the first quarter of fiscal 2014. My name is Tim Reid, I’m Vice President of Investor Relations for Dollar Tree.

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 first quarter financial performance and provide our guidance for the remainder of 2014.

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

And 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 results for the first quarter 2014. Comp store sales on a constant currency basis increased 2% in the quarter, driven primarily by increased traffic with a small increase in average ticket. Adjusted for the impact of Canadian currency fluctuations, the comp store sales increase was 1.9%. This was on top of a 2.1% comp in the first quarter of last year and a 5.6% comp the year before.

Total sales grew 7.2% to $2 billion. Operating income increased by $15.4 million or 7.1%. Operating margin was 11.6% matching last year’s all time high first quarter operating margin. Net income increased 3.6% to $138.3 million and earnings per share increased 13.6% to $0.67 compared with first quarter 2013 earnings of $0.59 per share.

We believe that our model is right for all times. We offer the customer a balanced mix of consumable merchandise they need every day alongside assortments of high value seasonal and basic discretionary product and all at $1.

Our sales growth in the first quarter was the result of increased sales in both consumable and discretionary products with our seasonal and discretionary product growing at a slightly faster rate as planned. Top performing categories included candy, check-out and trend products, stationery, Valentines and Easter seasonal merchandise and frozen and refrigerated products.

As was the case in the fourth quarter, we were not immune to the impacts of the unusually long and harsh winter; weather impeded customer traffic well into March, created snarls in our merchandise flow and resulted in higher than planned freight, logistics and utility costs. It’s not surprising then that in terms of geography performance in the first quarter was strongest in the southern zones led by the Southwest and the Southeast followed closely by the Midwest. Our performance was weaker in the Northeast.

Sales strengthened throughout the quarter with our strongest comps in April reflecting the Easter calendar shift and our strong Easter seasonal performance. We ended the quarter with increasing sales momentum that has continued into May.

Looking forward, we're positioned for continued relevance to the customer, sustained growth and increased profitability. We have room to grow and the ability to grow in many different ways. We are growing by opening more stores, by increasing the productivity of all stores and by developing new formats, new markets and new channels of growth vehicles.

During the first quarter this year, we opened 94 new stores and we relocated and expanded 28 existing stores for a total of 122 projects. Total square footage increased 6.8%. We ended the quarter with 5080 stores and we are on track with our plan for the full year, which includes 375 new stores and 75 relocations and expansions for a total of 450 projects across the U.S. and Canada. As a reminder, square footage for the full year is planned to increase 7% over fiscal 2013.

In addition to opening more stores, we continued to develop our strategy to increase productivity in all stores. Some of our sales initiatives include category expansions; our customers are finding more value as we continue to rationalize and expand assortments in candy, stationery, health, beauty and eyewear as well as home and household products. Across the chain, customers are seeing more powerful seasonal and party presentations that create excitement and a fun shopping experience.

We plan for our storefronts to change like the leaves on the trees, creating seasonal energy in our stores. In the minds of our customers we want to own the seasons at the $1 price point.

Store associates are emphasizing more effective customer engagement throughout the store and at the front end to drive sales of related items through cross merchandising and suggested selling.

Our goal is to provide value and a shopping experience that exceeds the expectations of every customer and every store, every day. We are doubling down on being first of the month ready with an increased emphasis on chunky displays of basic consumable core items. We are reintroducing our See What $20 Buys, along with our Stretch Your Dollar campaign through in store promotions and digital media. And to satisfy basis needs and to drive increased shopping frequency, we continue to expand our frozen and refrigerated category.

In the first quarter, we installed freezers and coolers in 112 additional stores. We now offer frozen and refrigerated products in 3,269 stores and we’re on track with our plan to have freezers and coolers to 320 additional stores and to expand the frozen and refrigerated sections in 50 stores this year. This category continues to serve the needs of our customers and it’s a reason to come into the store more often. This increase in shopping frequency provides the opportunity to increase sales across all categories including our higher margin discretionary products.

Another key component of our growth strategy is the expansion of 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.

We ended the quarter with a total of 217 Deal$ stores and growing. Our Canadian integration and expansion continues. We opened 11 new stores in the first quarter under Dollar Tree Canada brand and ended the quarter with 189 Canadian stores well on our way to achieving our growth plan for the year.

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. 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 store potential for Dollar Tree in the United States, plus additional growth in our Deal$ format. Our goal is to be recognized by customers as the leading retailer in Canada at the single price point of $1.25 just as we are in the U.S. at $1 price point.

Adding to our gross strategy, Dollar Tree Direct, our e-commerce business is -- rapidly expanding. Dollar Tree Direct provides an opportunity to broaden our customer base, drive incremental sales, expand the brand and attract more customers into our stores.

Our customer traffic continues to grow as we expand the breadth of assortment and points of contact with customers online. Dollar Tree Direct and Deal$ Direct, now have over 4000 items available online an increase of 50% versus the same time last year.

This increase in assortment is showing up in our customer visits. In the first quarter, our online traffic increased 19% over the first quarter last year. We’ve expanded the functionality of our mobile platforms adding the ability for shoppers to post reviews of products and to share their Dollar Tree stories via their mobile devices. Over 2.2 million people visited the mobile version of our site in the first quarter, an increase of more than 34%. Dollar Tree Direct is gaining customers every quarter, and we expect to see sustainable growth in our Dollar Tree Direct sales. Check this out online, there is always something exciting going on at Dollar Tree.

As you know, we’ve always planned to support our growth with investments in infrastructure and distribution capacity ahead of the need. We recently broke ground on a 250,000 square foot expansion of our distribution center in Joliet, Illinois. This project will bring the total size of the facility to 1,450,000 square feet, an increase of 21%. The project is scheduled for completion by year-end. We are also in early stages of work on our 11th distribution center; we will provide more details on this project as the plans are finalized.

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

Kevin S. Wampler

Thank you, Bob. As Bob mentioned, our diluted earnings per share increased 13.6% in the first quarter to $0.67 per share. This reflects our sales growth, expense control and the impact of share deliveries in the first quarter as part of our $1 billion accelerated share repurchase program.

Starting with gross profit, our gross profit margin was 34.8% during the first quarter compared with 35.2% in the first last year, a change of about 35 basis points. The decrease resulted from higher freight and distribution expenses. Freight expense increased by 30 basis points, reflecting higher trucking rates, driver shortages and weather related disruptions on inbound trucking, impacting deliveries to our DCs and reducing opportunities for backhauls. Excluding the freight impact, merchandised margin was slightly higher than the first quarter of last year.

Distribution expenses increased 25 basis points, primarily driven by the expense associated with our new DC in Windsor, Connecticut. This facility opened in June of last year. We should annualize the year-on-year expense impact of this additional facility in the second half. These two items were partially offset by reduced shrink expense, leverage on occupancy cost and continued improvements in initial mark-up.

SG&A expenses were 23.2% of sales for the quarter, compared with 23.6% in the first quarter of last year. Payroll related expenses declined by approximately 50 basis points reflecting lower expenses for incentive compensation, medical benefits, retirement plan contributions, and workers’ compensation.

We also had lower expenses for legal fees as well as leverage associated with the comparable store sales increase. These reductions were partially offset by increased utilities cost related to the colder weather which affected both usage and rate.

Operating income increased $15.4 million compared to the first quarter last year and operating margin remained at 11.6% compared with the 11.6% operating margin in the first quarter last year.

The tax rate for the quarter was 38.2%, this compares with a 38.1% tax rate in the first quarter last year. Cash and investments at quarter-end totaled $387.1 million compared with $383.3 million at the end of the fiscal first quarter 2013.

As you may recall, in September of 2013, 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.

ASR was funded by $250 million of available cash and $750 million from the private placement of senior notes completed in September. We received 1.9 million shares as part of the ASR in the first quarter.

Subsequent till the end of the first quarter on May 15th of 2014, the company received an additional 1.2 million shares completing the ASR. All together the company received a total 18.1 million share out of the $1 billion accelerated share repurchase program. The company has $1 billion remaining on it share repurchase authorization.

The diluted weighted average shares outstanding for the first quarter was 207.7 million. Our consolidated inventory at quarter end was 3.3% greater than at the same time last year, while selling square footage increased 6.8%.

Consolidated inventory per selling square foot at cost decreased 3.3%. Our inventory turns increased in the first quarter and we expect continued improvement in the inventory turns for the full year.

We entered 2014 with leaner store level inventory than last year, reflecting our inventory management plan. We believe that current inventory levels are appropriate to support scheduled new store openings and our sales initiatives for the second quarter.

Capital expenditures were $71.9 million in the first quarter of 2014 versus $103.2 million in the first quarter last year, reflecting our investments to expand distribution capacity. For the full year of 2014, we are planning consolidated capital expenditures to be in the range of $350 to $360 million.

Capital expenditures are focused on new stores and remodels, including additional fee development stores, the addition of frozen and refrigerated capability to approximately 320 stores, IT system enhancements, expansion of our Joliet, Illinois distribution center and the beginning phases of work on our 11th distribution center.

Depreciation and amortization in the first quarter totaled $50.8 million versus $45.1 million in the first quarter last year, an increase of approximately 10 basis points. We expect depreciation expense to be in the range of $200 to $210 million for the year.

Our guidance for 2014 takes into accounts the actual performance in the first quarter and except for small refinement to the share count and tax rate is unchanged from that which we issued on February 26.

It includes the following assumptions. First, we were pleased with the results of our May 1st ocean freight negotiations, which were consistent with the assumptions in our previous guidance.

As always, we cannot predict the direction of diesel prices for the next year. For this reason, our guidance assumes that diesel prices will be similar to their current levels on average throughout fiscal 2014.

We also cannot predict future currency fluctuations. We have not adjusted our guidance for changes in currency rates. And as we look ahead to the fourth quarter, this year there is one additional selling day between Thanksgiving and Christmas, which returns us to a more normal pattern than last year.

Our guidance also assumes a tax rate of 38.4% for the second quarter and 38.3% for the full year. Weighted average diluted share counts are assumed to be 206.7 million shares for the second quarter and 206.9 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 this in mind, for the second quarter of 2014, we are forecasting sales in the range of $1.97 billion to $2.02 billion, based on a low single-digit comparable store sale increase and 7.2% square footage growth.

Diluted earnings per share expected to be in the range of $0.58 to $0.64, which represents a 3.6% to 14.3% increase compared to the second quarter 2013 earnings of $0.56 per diluted share.

For the full fiscal year of 2014, we are forecasting sales in the range of $8.37 billion to $8.54 billion, based on a low single-digit increase in comparable store sales and 7% square footage growth.

Diluted earnings per share expected to be in the range of $2.94 to $3.12. This represents an increase of 8.1% to 14.7% over 2013 earnings per share of $2.72.

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

Bob Sasser

Thanks, Kevin. In summary, during the first quarter 2014, comp store sales grew 2%. Customers are visiting our stores more often and we’re attracting new customer’s everyday, both traffic and average sale were positive with results being driven primarily by increased customer traffic.

Our sales strength throughout the quarter with the highest comp sales in April, sales momentum has continued into May. Total sales grew 7.2% into a first quarter record $2 billion. We achieved 11.6% operating margin tying our first quarter records at last year and earnings per share increased 13.6% to $0.67.

We opened 94 new stores in 2013, expanded and relocated 28 stores and ended the quarter with 5,080 stores and square footage growth of 6.8%. We expanded frozen and refrigerated product to 112 additional stores for a total of 3,269 stores across the U.S.

Our inventory is balanced and increasingly productive. Our turns increased in the first quarter and we entered the second quarter well prepared for new store growth and customer demand. And we continue to manage our capital for the benefit of long-term shareholders.

We invested more than $1 billion for share repurchase over the past four quarters and have another 1 billion authorization remaining. Now in our 28th year, Dollar Tree has built an exemplary record of consistent profitable growth.

This performance has been the result of the collaborative efforts of tens of thousands of Dollar Tree associates working together to deliver value to every customer at every store, every day. As I look into the future, I see even more exciting opportunity.

Our balance sheet is strong. The Dollar Tree business model is powerful, flexible and more relevant than ever providing extreme value to customers while recording record levels of earnings. It has been tested by time and validated by history.

We have multiple platforms for growth. The Dollar Tree brand is a benchmark of value for our customers and there is great opportunity to grow and expand the Dollar Tree brand in the U.S. through more stores and more productive stores.

The Deal$ brand is serving customers with increased value on even more categories. Dollar Tree direct continues to broaden its reach to customer throughout North America and we’re working to build, expand and improve the Dollar Tree Canada brand.

We remained committed to a concept that customers love, and we’re positioned to continue grow in profitably for many years ahead. We have a vision of where we want to go and the ability to execute with the infrastructure, capital and most importantly, our talented management team who has a long history on retail success.

It’s a great time to be Dollar Tree, as we enter the second quarter, our inventories are clean and fresh, the shelves are full of terrific merchandise, our stock rooms are in great shape and our values have never been higher.

We will now address your questions, so that we can accommodate as many call as time permits. We ask that you limit your questions to two.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we'll go to our first question from Scot Ciccarelli with RBC Capital Markets. Please go ahead.

Scot Ciccarelli - RBC Capital Markets

Good morning, guys. How are you?

Kevin Wampler

Great, Scot. Good morning.

Scot Ciccarelli - RBC Capital Markets

Excellent, little bit more -- I was just wondering if you can give us little bit more Bob on the cadence of the quarter. First of all, how large was the volatility, kind of when you looked through the quarter? And then, number two, any idea kind of how to size the, any kind of weather impact and your general thoughts on how much weather may have impacted the sales trends? Thanks.

Bob Sasser

Yes, Scot. Well, basically as I said earlier, the sales strengthened throughout the quarter. April was the strongest. There was a shift of Easter as you know which helped April, as well as the weather continued to improve a little bit as we got into April. The quarter was terrifically impacted by named storms. Just as a little reminder, you know we had 26 named storms across the season last year, 11 of those were in first quarter and as we moved into February there were 6 in February, there were 4 in March, almost one a week and then one in April the very first week of April. So as we moved through the quarter, as weather improved and as we got closer to the Easter holiday, our sales strengthened and that momentum has continued into May.

Both consumables and our discretionary categories grew, both were comp positive with the discretionary business only slightly growing at a faster rate. In terms of geography as you might guess, the southern zones did better; our sales were led in the Southwest followed by the Southeast and then the Midwest and of course the Northeast which was the most impacted by the negative weather was lagged alone. Top performing categories, we already talked about. We had candy and check-out and our trend. Our stationery business was very strong. Valentine and Easter seasonal, Valentine even with the horrible weather, the week of Valentine’s Day we had an acceptable Valentine’s Day season. So we are pleased to have come out of that as we did. And of course we continue to grow our frozen and refrigerated as well as our snacks and beverages.

Scot Ciccarelli - RBC Capital Markets

Bob, was the Northeast negative in the quarter?

Bob Sasser

You know I think we don’t, I’m not going to break it out but I would characterize it as – it was the lagging, I guess.

Scot Ciccarelli - RBC Capital Markets

Bur that - specifically the Northeast recovered as we got through kind of April and into May?

Bob Sasser

Absolutely. It was weather; the Northeast as you know was the most impacted by weather. Valentine’s day I – we had storms, we had all the bad stuff that went on there. So I’m not trying to give you a weather report, just trying to share with you the cadence of the sales. Our sales strengthened because of weather improving and because of getting closer to Easter as you went through the quarter our sales strengthened. February into March and then into April with April being the strongest.

Scot Ciccarelli - RBC Capital Markets

Understood, thank you.

Bob Sasser

You’re welcome.

Operator

And we’ll go to our next question from Matthew Boss with JPMorgan. Please go ahead.

Matthew Boss - JPMorgan

Hey, guys on the gross margin front, can you speak to underlying drivers of the core merchandise margin being positive here, opportunities going forward and what you are seeing on the sourcing front today?

Bob Sasser

You know as I’ve always said, we are in control of our merchandise margin and we are merchants and have managed that just terrifically over the years. Our basic purchase mark up I guess on our margin was solid and slightly better. The shrink also improved as a component of our gross margins. The sort of the drag was the transportation cost component of our gross margin. Kevin.

Kevin S. Wampler

Yeah, well I think just to give maybe a little color on the transportation cost. If you look at you know the weather definitely impacted us, definitely you know where we saw the biggest impact was in the Port of New York, which got backed up significantly, big disruption there you know first weather did backed it up and then there was a lack of equipment because truck chassis were not being returned and put back into use within the business. So that was a big problem and as well as a fact that in Vancouver we had some disruption from the truckers strike for a period of about a week to two weeks roughly.

So those are definitely things that were not expected. To move freight we had to pay some higher rates, and make sure we could keep things moving so there are some one time costs there. I would tell you in general though as we go forward you know we are seeing and it’s still within our guidance is the idea of the fact that there are some pressures on freight cost within our business. There is a somewhat shortage of truckers out there in some regards you know they changed the rules of operations for truckers last summer, so the amount of hours they can spend on the road and so forth and it does have a direct impact on the industry at the end of the day. So but that is built into our model and into our guidance, but we could see some continued pressure there as we go forward.

Matthew Boss - JPMorgan

Great. And then one quick follow up. On capital allocation you guys have talked to comfort operating with more leverage on the books, the ASR is now complete; can you just talk about priorities on the capital front?

Kevin S. Wampler

Sure, I mean, I think as you’ve heard me say before as we look at it obviously you know the best use of a dollar is build another Dollar Tree store. We have plans to open 375 new stores this year and 75 relocations, so 450 projects there, so that’s always our first and foremost. Again we continue to work on our infrastructure from the stand point of you know we are expanding DC3 for us which is in Joliet. We are looking at DC 11 you know trying to put that on a board and plan out accordingly. So those are going to be uses of capital as we continue to go forward.

After that, you know as we’ve always talked about this acquisitions which historically you know the last one we did was Canada - nothing going on there and then you get into dividends and the Board of Directors basically has looked at that in the past and we’ve talked about that and we really feel like we are going to put our money towards growing the company, and then returning to shareholders through our share repurchase program which is where we’ve been a -- good way for us to return value to our shareholders at the end of the day. So, I don’t think our overall thought processes have changed in any regards in that way. And again, the ASR has been complete and we’ll go from there.

Matthew Boss - JPMorgan

Great. Best of luck.

Operator

And we’ll go to our next question from Joan Storm with Wedbush Securities. Please go ahead.

Joan Storm - Wedbush Securities

Good morning. Congratulations on a great quarter.

Bob Sasser

Thanks, Joan.

Joan Storm - Wedbush Securities

So I had a question on your merchandising and your - the non - the discretionary categories jumped up pretty well. And I know for competitive reasons you don’t want to disclose a lot about that, but can you hint anything about whether [inaudible] there going forward and also on the club scene, tell us what you think about the consumer [inaudible] and you know the multiples been [inaudible] little bit for a low single digit comp versus a mid single digit comp and what does it take to get sort of back to that?

Bob Sasser

Okay, Joan I’ll give it a shot here. You know we always talk about our merchandise assortment. It’s a balanced mix of things people need and things people want. So basically the things you need everyday is faster turning merchandise, creates traffic in our stores, it’s a reason to shop Dollar Tree; you go there for all the great values on paper goods and HBC and household supplies and all the things that you need to consume on a frequent basis and that adds shopping trips to our stores, it also serves our customer needs very well.

Alongside that, we’ve always strived to sell a balanced mix which is also the discretionary merchandise. We are very proud of our party business, with our seasonal businesses. We had talked about it as changing like the leaves on the trees and what that means is, the fronts of our stores are always changing. We place great, we place a lot of importance to our shopping experience at Dollar Tree. People - customers shop Dollar Tree because we have great values on things they need, and it’s a fun experience they always find something that they didn’t expect, they find things for the party, they find things for the season, they find toys for the kids and as we say everybody leaves happy because at Dollar Tree you can still afford to splurge even in tough times and buy those things for your kids.

So we always plan to sell and we manage our business appropriately mixing out that balance between products needed and products that are discretionary. It’s about a 49 to 51 discretionary to needs and sometimes it goes 50:50 and it’s plus or minus in that range and that’s the way we plan our business; it’s not by accident, it’s by plan and it’s one of the reasons that our operating margin is the highest in our sector and always has been. We strive to exceed the expectations of our customer not only with the values that they need but also the shopping experience we come to Dollar Tree because I enjoy shopping Dollar Tree. I really like to go to Dollar Tree. I take my kids and I can buy them things that I couldn’t buy in other places. And you hear those kinds of experiences from our customers.

As to the customer, I think the customer is still burdened and worried and it’s just been, you know it seems like there are some signs of improvement out there but the pressure remains and it’s just been a long stubborn period of high unemployment and high cost and anxiety over uncertainty, so it’s been a real strain on family budgets. Our job at Dollar Tree as always is to be part of the solution. So once again we try to offer the things our customers need as they need more of the consumable products, we’ve increased that in our mix in our stores, again striving for that balance. And then to exceed their expectation for what they can buy on each visit, every customer every store every day.

Joan Storm - Wedbush Securities

Right. Thanks, a lot Bob.

Bob Sasser

You’re welcome Joan.

Operator

And we’ll go to our next question from Paul Trussell with Deutsche Bank. Please go ahead.

Paul Trussell - Deutsche Bank

Good morning, Great quarter guys.

Bob Sasser

Thank you.

Paul Trussell - Deutsche Bank

Wanted to just ask about our new store productivity, it was little bit lighter than we had modeled and kind of your historical average but you also opened up few more stores than we modeled for 1Q. So just wanted to ask about maybe the timing of the openings, if that had any impact, and just what you think about new store productivity moving forward?

Bob Sasser

Well you know I’m not concerned about it. It’s a little lower than you might expect it. We have changed our cadence a little bit. The weather had an impact on that. We opened up in the first quarter, fewer of our urban stores which are typically the higher margin higher margin per square foot stores. We’ve still got those coming, but we didn’t open any in the first quarter. The weather had an impact delayed some of our openings in the first quarter and as well as impacting customer traffic. So having said that, I mean, it’s all annualized number. So we’ve got very few weeks and days in some cases to use in our annualization but it’s not concerning, we still believe in the concept that in our customers when they can get out they are shopping in our stores and I believe we are going to see the productivity rise as we go through the year.

Paul Trussell - Deutsche Bank

That’s helpful. And just Bob, you know we’ve had pretty mixed results across a lot of retailers year-to-date. I just wanted to get your thoughts on the health of the consumer today, obviously Dollar Tree is positioned well regardless of you know where we are heading from an economic standpoint, but what are you sensing as you hear from customers and walk stores, you know do you believe that the environment is improving a bit or is this still a very challenging market place for your color consumer?

Bob Sasser

You know I believe it’s still challenging Paul. The lowest demographic in term of demographic consumers have to specially the low, middle and the lowest have specially been pressured with less in their food stance and less in their entire movements. And then the talks about you know the still the unemployment issues, it remains high, there is always concern about you know how long the benefits are going to last until I get a job, so it’s a worried and concerned consumer. I believe that we are well positioned as you can be.

Again, we strive to offer that balanced mix, everything is a Dollar, a Dollar Tree, so in terms of Dollar Tree you can buy the things you need everyday and from a little bit of money. So that’s I think that has change. It feels to me like things are improving, but it doesn’t feel like consumer has actually brought in. And then, I mean every buy into that and I think we have gone through a time where people have been forever touched by some way. It is through higher unemployment or just the ability to run their families or run their businesses and all that goes with the down economy I think have been forever changed in their habits. We continue to see new customers, our traffic continues to grow, some of it is more frequent shopping by existing customers, some of it are still those people that come in and say how much is that switch, you know it’s a clue that they haven’t’ been there before, because obviously the answer is a Dollar.

Paul Trussell - Deutsche Bank

Thank you.

Bob Sasser

You’re welcome.

Operator

And we’ll go to our next question from Charles Grom with Stern Agee. Please go ahead.

Charles Grom - Sterne, Agee & Leach

Hey good morning, Bob, good morning Kevin. Great quarter here. So Bob when you take a look back at the improvement in your sales this quarter over the past six, seven years it’s pretty impressive. I think we’d all agree on that. But since the third quarter of 2012, comps have been in the 2% range, traffic is positive, but certainly not what you were doing five, six years ago. And I guess, my question is, when you at over the next five to ten years and you look at the opportunities within the four walls of the store to improve productivity, where do you think it can go? And I guess, what’s the pace of that and I guess how do you get there?

Bob Sasser

Those are five and ten-year questions, but they are really tough to answer. I can tell you what we’re doing. I can tell you how we think about growing our business and I can tell you how we’re going to continue to improve our sales square foot. We’re always about running better stores.

We always focused in our stores with initiatives that speak to increasing average ticket, increasing customer engagement, being the friendly, fun place to shop, we’re always -- again we continue to expand assortment in our store based on customer needs. And you can see it on our sales that we’ve gone through with the areas that we’ve expanded the assortments, expanded SKUs, you can see, are coming up at the top end of our sale.

So, you can’t have -- there are ebbs and flows to any business. Stacking comps on top of comps, on top of comps, but I think we -- if you look at three-year stacks, you’ll feel lot better about it. And I believe that comps can continue to improve. But they are all obviously going to have to be review of the overview of the last three years, the last five years and what the next year’s comp to that.

So, we’re going to keep drive our business, our customers love what we are doing. We’re in a market that value is of the utmost importance and we’re clearly, people that have the value that we’ve built the business based on value. Everything the dollar you just can’t beat that for value. As we’ve gone through time we continue to expand what you can buy per dollar and we’ll continue to that adding even more value as we go forward.

So over the next five years, we’re going to continue to grow. We’ve got a lot of more new Dollar Trees that we can open in the U.S. We have our Deal$ stores that we’re using largely in our urban high density markets, because we think that by lifting the restriction of the price point, we can have even higher sales productivity and serve those customers and those urban markets better. We have Dollar Tree Canada which is coming along. We are expanding that business. We have [opened] I think 189 stores somewhere around there from the 86 that we bought.

So, we continue to grow Canada. There was just a terrific amount of space that we can build new stores whether it would be geography or Deal$ new type store or our Dollar Tree Direct business alongside of our Dollar Tree business. So, more stores continue to focus on sales per square foot, better stores and over the next five years, in our growth trajectory is still going to be amongst the highest in retail I believe.

Charles Grom - Sterne, Agee & Leach

Okay. And just one follow-up on your comments there and also the kind of follow-up on Matt’s question earlier about capital allocation. I just want to attack it from a little bit different angle. In that -- of these three major Dollar stores, you guys historically been the most acquisitive. You did Deal$ several years ago. You went into Canada a couple years ago. Is there anything on the horizon that you guys are looking at to plug into to enhance that growth in addition to other success you guys have had with the Deal$ stores? You have lot of cash in the balance sheet. You’re arguably a little bit underlevered. Is there anything you would look to do accelerate that growth?

Bob Sasser

We’re always looking for good companies and we’re looking for opportunities to enter new businesses. I don’t see anything right now, but we are very focused on. Our last acquisition was in Canada and we really expect standing that up and getting that going in the right direction. And we’ve got a lot of energy focus towards that as well as our Deal$ business. So -- but we’re always looking. We’re always open to good opportunities.

Charles Grom - Sterne, Agee & Leach

Okay, great. Best of luck and thanks.

Operator

And we’ll go to our next question from Anthony Chukumba with BB&T Capital Markets. Please go ahead.

Anthony Chukumba - BB&T Capital Market

Good morning, and congrats on the strong quarter.

Bob Sasser

Thank you.

Anthony Chukumba - BB&T Capital Markets

So I just had a question about sourcing. Just wondering if there’s anything that you’re seeing different from a positive perspective, negative perspective particularly given the slowdown in the Chinese economy? Thanks.

Bob Sasser

We’ll just keep driving our business and about 40% of our product comes from somewhere rather than the U.S. mostly from China. I did not make the last trip, but the results of it, the April trip would continue to be strong. We hit our margin targets again. The market really is open to our kind of business and as much as we go and we actually place orders and lay down orders, and we stand by our commitments, we’ve spent years building relationship with our Chinese as well as all of our vendors that continue to grow.

As we’ve gotten larger and placing margin orders, we’ve involved more factories and developed more relationship. So, that is, I would characterize our foreign sourcing as being really unchanged and really strategic advantage that we have over many, especially since we aspire to continue to thrill our customers with types of product that are -- if can find offshore, the things like our toy business and our party business and our seasonal business and all of our stationary business. There’s a lot of that product that comes from somewhere else.

Domestically, we continue to drive those businesses too. We are very proud of our relationships at home. Obviously more of our business comes from the U.S. than come from anywhere else, 60%. So continue to drive those businesses. We enjoy a terrific relationship with many of those large consumer product companies across the country. And I believe that we’ll continue to grow and the consumer continues to seek value that part of our business will continue to improve and excel.

Anthony Chukumba - BB&T Capital Markets

That’s helpful. Thank you.

Operator

And we’ll go to our next question from Dan Wewer with Raymond James & Associates. Please go ahead.

Dan Wewer - Raymond James & Associates

Thanks. Good morning, Bob.

Bob Sasser

Good morning, Dan.

Dan Wewer - Raymond James & Associates

I wanted to ask you, when you benchmark your performance in Canada against Dollarama, what would be the puts and takes -- I know you won’t give any specifics comps or margins, but how much of a differential in kind of qualitative terms you’d willing to go?

Bob Sasser

Right As we benchmark against Dollarama -- that is a terrific company by the way. And we’re the new guy on the block, so to speak. We are the largest in the U.S. than what we do. But as we go into Canada, we are very humble and we realized that we aren’t the largest there.

So the first thing is, they have the size. They are the large company that’s been there a long time. So, the growth, I think is important for us in Canada -- more stores, the brand, building the brand in Canada, many Canadians know Dollar Tree of the U.S. But that’s just not good enough. I mean, you have to be in Canada, you have to be their store of choice. So we’re building the brand in Canada. We’re growing. We’re building size in Canada. And all the while we are building store teams there and people and the ability to run the Canadian business. There are desires in Canada. There are consumer needs. We’re paying very close attention to that. And there are things that we don’t know still that we’re very -- again, we’re very humble and we’re willing and eager to continue to evolve to sort of that Canadian customer. It’s not a Dollar Tree from the U.S. and Canada, it’s a Dollar Tree Canada, and so building that assortment.

But, as we benchmark there, we are the smallest guy. We are growing. We have a big idea. And again we’re the only single -- the largest single price point operator in Canada, and that’s the message that we’re trying to get to our consumers.

Dan Wewer - Raymond James & Associates

And Kevin, when you look at your expenses per square foot, that actually decline now -- decline two consecutive years and it’s typically, I think you talk about needing one or two comp to maintain a flat expense rate. But you’re also doing lot better than that, but it’s not -- it doesn’t appear to be sustainable in the long run, but I want to get your thought on the sustainability of the 1%, 2% drop in expenses per foot?

Kevin Wampler

Sure. I mean, as I’ve said before, I know that it’s a metric that many of you folks use out there. We tend not to use that so much. We always look at, as I’ve said, line item by line item. And I think, part of it, as we’ve continue to grow over the last four, five years part of it is scale. Part of it is technology. Part of it is initiatives surrounding certain expenses and how can we do it better.

And again, when everything is a dollar, the penny is count and everybody realizes that’s part of our culture, it’s built in from day one. Everybody realizing that the expense side of the ledger has to be a strict focus as well, so, again I think as we have said it, one, two comp typically would help us -- get us flat on our SG&A.

But we’re always working to try to leverage things. We got some benefit in Q1 from our medical benefits. Last year, we had huge claims. We had more large claims than ever. It was a really unusual year. Those things tend to be cyclical, tough for some reason and maybe this year is going to be a better year. You can’t always say, but that’s something I can’t rely on at the end of the day.

But as we look at things, we always believe there’s room for improvement. We always talk about continues improvement, continues ways to improve our business as well as the processes around, I mean, that’s really the way we go about a day in and day out. And as I’ve said, more on a line item basis or a detailed line item basis as opposed to looking at it a per square foot basis.

Dan Wewer - Raymond James & Associates

But you had called out incentive comp, given that the second quarter same-store sales are starting stronger than that low single-digit guidance. If that were to continue, would it be probable that your incentive comp would increase year-over-year in the second quarter?

Bob Sasser

Well, first I would say, your first statement relating to business going forward being stronger than our low single-digit comp. I don’t know that I would agree with that. So let’s start there at the end of the day, let make sure we have that right. We were just saying that...

Dan Wewer - Raymond James & Associates

Bob, what you said it was -- April was better than 2%. And then May momentum was good?

Bob Sasser

We said basically that strongest period was April, but obviously part of that, the fact that Easter shifted later in the April. But I think, we’re talking about in general is as it relates to our guidance that we’ve given. So let’s start there. And then I think as we think things like incentive comp, it depends upon -- we have higher expectations that we will improve our business. And part of that is at store level and another big part of is in the store support center.

So, as we’re look at those things, this business improves, yes, those expenses may go up, but the hope would be, because we’re beating sales guidance, and you actually leverage them in the long run. So I think it’s kind of two components there that go into it over time, which is kind of way I would look at it.

Dan Wewer - Raymond James & Associates

Okay. Great. Thank you.

Operator

And we have time for a couple of more questions. We’ll go to our next question from Dan Binder with Jefferies. Please go ahead.

Dan Binder - Jefferies & Company

Hi. It’s Dan Binder.

Bob Sasser

Good morning, Dan.

Dan Binder - Jefferies & Company

Hi, it's Dan Binder. Usually it's Dan Binder; today it's Dan Sinder - So I had a couple of questions. First, on a point of clarification around the whole Easter shift in April business. When we adjusted the Easter shift, did you still see sequential improvement April versus March? And then my second question was around the pricing environment. You heard from target that they’re getting more promotional. They already have, Walmart has been pretty competitive since last fall, just curious your thoughts on the pricing environment if you need to react at all?

Kevin Wampler

Dan, since I’m the one that said, what I said about the sales building throughout the quarter. Let me say again, sales strengthen throughout the quarter -- first quarter and momentum continued in to May. All that’s in our guidance. We’re not given you new guidance with that comment. We did consider all that in the guidance that we gave for the second quarter.

As far as the competition you know, we see all that. I think our values are up too. Our prices still a dollar, but the way we, as you know Dan, in our business is, we offer the most value that we can at the dollar at the margins we’re willing to accept overall. And I think you can shop at our stores right now, you’d find some terrific values for a dollar, it’s still a dollar, but we add more to the product from time to time. We have our wow items out there, more wow items than ever.

I believe that we’re very, very competitive and having said that, we’re just different than the other guys anyway. Our price is a dollar yesterday will be a dollar tomorrow, the dollar today, it’s all about offering the most value for that dollar. And as long as we can do that, than we’ll be successful. We feel pretty good about our position.

Dan Binder - Jefferies & Company

One of the things that I’ve noticed in retail over the last several months and just generally speaking, is as retailers have experienced software sales you can see it in sort of the way they are staffing the stores as labors come out, and then you get these inflection points, where weather improves and they think they get unprepared for the volume and you know it’s in terms of the longer line or out of stocks or whatever, I mean just curious if you could give us a little color on how you’ve been managing labor in your stores?

Bob Sasser

Well it’s pretty much the way we’ve managed it for years. We looked at it on a productivity basis, and of course we are always looking to deploy techniques and labor plans and support our stores in a way that allows us to leverage and improve the productivity of our labor and our stores. We measure it, report on it our stores and if our goal that – trying to meet as we do more sales you know you get more labor but we are trying to leverage that and that’s pretty much the way we’ve done it for the past 10 to 15 years.

And I don’t think you will see any longer lines and that’s of course that you have seen or will see. And frankly right now, I believe our stores and it gives position both from a merchandised standpoint, from stock rooms in the best shape, it’s been on a long time. Our store teams have really done a terrific job of running and they are improving the standards in our stores, while at the same time being more productive at driving sales in the store that can support the labor.

So, we are going to continue to do that. Our stores know how to do that, I’m real proud of whenever they come up with a better labor number, because I know it just didn’t happen because of plan, it’s because initiative, it’s because of focus and actually they are doing the right thing.

Dan Binder - Jefferies & Company

Great. Thanks.

Operator

And we’ll take our final question today from Patrick McKeever - MKM Partners. Please go ahead.

Patrick McKeever - MKM Partners

Okay. Great. Thanks, good morning everyone. I had a question on the impulse initiative. And just -- you called it out as -- check-out as the stronger area of the store during the quarter. So I'm just wondering how much of that ties into what you're doing with impulse merchandise, and how that initiative is evolving? I know you had talked about doing more suggestive selling at the register, if you're still doing that. And if you look at that initiative, how would you rank it in order of the various comp drivers for the year, including, let's say, the cooler program?

Bob Sasser

You know it’s one of the more powerful initiatives that we have I think for a couple of reasons. It’s the first thing – when you walk in the store, the front of the store the first thing you see and it’s the last thing you see. So if you remember a year so ago, we were talking about playing up our front end, and lowering the profile so you could see the cashiers, cashiers could see the customers, lowering the profile remerchandising that whole front end.

And we re-merchandised our check land first of all with things that you need on the way out, you might not have thought about it, but why not buy a pack of gum or something that you need a pocket comb -- hundreds of items up there, but that’s the idea is to offer more and last chance to buy something on that check-out trip. And in that front aisle there, you’ll find new products, you’ll seasonal products and you’ll find we got trend merchandise and we’re always looking for something that’s new, unique, it might be seasonally relevant, it might be trend relevant, you’ll find fun, exciting things on the front-end designed to come in be brought and go away. It adds to our sales and it also adds to the customer experience in the store.

So those are two big initiatives that we have been working with and we’ll continue to drive our comp sales forward as we go forward. And the last thing you ask about is what we call our drive items. And that is our cash here is we have an item with -- drive item each week and our cash here across the country as you check out or engaging you, hopefully smiling at you as have you seen our new whatever pen or whatever hand sanitizer or this just came in and or would you like to buy another candy bar? Or things like that.

So our cashiers are doing a couple of things; one, when you know that our customers like being engaged personally at the front end. So it accomplishes that and it’s just that one last chance to get another item than to shopping bag -- as they go through it. So through [cost] -- by the way they offer till you buy it, it helps us and of course the fact that’s really important, would appreciate some help with that.

Patrick McKeever - MKM Partners

And for the impact on -- you know it’s obviously more of an impact on average tickets than traffic, right. Did you talk about the average ticket during the quarter; you said it was up a little bit, right?

Bob Sasser

It was up slightly. Most of our increase was due to traffic. So you got some puts and takes there, so improving your front end, you are improving the impulse sales. At the same time, there are pressures on consumers from time to time or that it may be flying less more frequently I think that’s happening. We saw some things with bracelets and food stamps, not a big number for us but our traffic on food stamps was about unchanged but the average selling food stamps is a little less.

I think that’s tied directly to the fact that they are getting less food stamps, now that program has been cut back. So we always have some puts and takes, Patrick, you know some things were always driving our sales and for instance in this case, right up there towards comparable comp with our front end, our check outs and our trend merchandise reflect they are all of – there are all of ways puts and takes in this business that’s in task. Every plus is not a 100% plus, sometimes it’s one plus one equals 1.5, so that’s my answer for that.

Patrick McKeever - MKM Partners

Okay. Thank you, Bob.

Bob Sasser

Thank you.

Operator

And that concludes today’s question-and-answer session.

Timothy J. Reid

Thank you [Levi] and thanks to all of you for your participation in today’s call, for your interest in our Company and as always most importantly thank you for your investment in Dollar Tree. Our next conference call is scheduled for August 21, 2014, when we will discuss our results for the second quarter. Thank you.

Operator

And this does conclude today conference call. We appreciate your participation.

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Source: Dollar Tree's (DLTR) CEO Bob Sasser on Q1 2014 Results - Earnings Call Transcript
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