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Dollar Tree, Inc. (NASDAQ:DLTR)

Q2 2011 Earnings Call

August 18, 2011, 09:00 a.m. ET

Executives

Tim Reid - VP, IR

Bob Sasser - President and CEO

Kevin Wampler - CFO

Analysts

Dan Wewer - Raymond James

Peter Keith - Piper Jaffray

Scott Kaufman-Ross - Goldman Sachs

Neil Currie - Dahlman Rose

Joseph Parkhill - Morgan Stanley

Meredith Adler - Barclays Capital

Scot Ciccarelli - RBC Capital Markets

David Mann - Johnson Rice

John Zolidis - Buckingham Research

Tom Nikic - Cowen and Company

Anthony Chukumba - BB&T Capital Markets

Brian Innes - Telsey Advisory Group

Operator

Good day and welcome to the Dollar Tree, Inc. Second Quarter 2011 Earnings Conference Call. As a reminder, today’s call is being recorded.

At this time, I would like to turn the conference over to Mr. Tim Reid, Vice President of Investor Relations. Please go ahead, sir.

Tim Reid

Thank you, Alicia. Good morning to all and welcome to the Dollar Tree conference call for the second quarter of fiscal 2011.

Our call today will be led by Bob Sasser, our President and Chief Executive Officer, who will provide insights on our performance in the quarter and recent developments in our business. Kevin Wampler, our Chief Financial Officer, will provide a more detailed review of our second quarter financial performance and provide our guidance for the remainder of 2011. Before we begin, I’d 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 the 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.

In addition, as we have previously disclosed, in the first quarter of last year we recorded a non-recurring, non-cash charge of $26.3 million or $0.13 per diluted share, relating to a change in retail inventory accounting. Diluted earnings per share in the first quarter of last year were $1.10 including the charge. You are advised that all earnings or margin comparisons in today’s remarks from this point forward will exclude that charge unless otherwise noted.

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

Now, I’d like to turn the call over to Bob Sasser. Bob?

Bob Sasser

Thanks Tim. Good morning everyone and thank you for joining us. This morning we announced our sales and earnings for the second quarter 2011 and I’m very pleased with the results. This was the 10th consecutive quarter of more than 20% EPS growth and we are well on our way to another record year.

To recap the quarter comparable store sales increased 4.7% that’s on top of 6.7% comp in the second quarter of last year. I’m very pleased to see that the comp was driven by both a 3.6% increase in traffic and a 1.1% increase in average ticket. And total sales increased 11.9% to $1.54 billion.

Earnings for the second quarter were $0.77 per diluted share. This represents a 26.2% increase over last year’s $0.61 per share. Operating margin for the quarter was 10%, an increase of 70 basis points over the second quarter of last year. And just to note this is our highest second quarter operating margin ever as a public company.

Operating income was $153.5 million, an increase of 25.7 million or 20.1% over last year. And net income rose 21.7% to 94.9 million. For the first half of 2011 compared with last year, sales were 3.09 billion, an increase of 13.1% and comp store sales increased 5.9%. First half 2011 earnings per share were $1.59, an increase of 30.3% compared with $1.22 per share in the first half last year, and that excludes the charge in the first quarter last year as Tim said it’s pure apples-to-apples.

Operating income increased by 58.5 million. Operating margin was 10.2%, an increase of 80 basis points compared with the first half last year and net income rose 24% to $195.9 million.

Customers continue to respond enthusiastically to our assortment of low price and high value basics. We’re gaining new customers every quarter and when customers shop at our stores, they like our compelling variety of discretionary product. Shoppers are buying more on each trip.

Sales growth came from increases in both basic and discretionary products. Our top performing categories included food, party supplies, toys, health and beauty care basics and products for the home. Our ever-changing assortment of seasonal businesses continued to drive sales and merchandise excitement throughout the quarter, and most importantly, we provided value to our customer’s and brought a record level of second quarter earnings to bottom-line.

Our success speaks to the power and flexibility of the model and a high level of execution across the organization. Our stores, merchants and support teams are guided by strategic vision that involves every element of the business. Everything revolves around the customer at Dollar Tree and we make a coordinated effort to wile them every time they visit our stores. We have a flexible merchandising model which we use to our advantage.

Our merchants build categories of merchandise, not SKU specific planograms. Since, we’re not locked into any specific items our buyers can develop assortments that offer the greatest value to the customer for $1, and at a cost that delivers our planned merchandise margin. History shows that we are consistently able to manage our margins effectively through economic cycles by changing the product or changing the source.

Our solid and scalable infrastructure is another strategic advantage, which we continue to upgrade to support growth. Currently, we are expanding our distribution center in Savannah, Georgia from its current size of 600,000 square feet to 1 million square feet to support continued growth of our business in the Southeast. This project involves $19.5 million of capital investment using existing cash and it is on-track for completion in the third quarter.

Our logistics infrastructure provides efficient service to our stores today, room for store expansion, and continuing asset leverage. With the completion of the Savannah expansion the network can support up to $8 billion in sales, with no meaningful additional investment.

Our retail technology is tailored to our unique business model, it helps in our efforts to provide a better customer experience through improved in-stock of basics, higher sell-through of seasonal products, and increased inventory turns. Our inventory turns increased once again in the second quarter as they have consistently for the past six years.

Looking to the future, we intend to continue to grow and improve on our performance and I have every reason to believe that we will. Over the next few years, it appears likely that consumers demand for value will continue to grow and intensify. We are uniquely positioned to take advantage with this trend by providing more value to a broader range of customers.

We’re expanding our business by opening more stores, better stores, and developing new formats, new markets and new channels. During the second quarter this year, we opened 76 new stores and relocated and expanded another 23 stores. Through the first half we added 159 new stores and expanded or relocated another 64 stores.

Selling square footage increased 8.9% relative to the same time last year, and we ended the first half with 4,242 stores. Our plan for the full-year includes 275 new stores and 90 relocations expansions for a total of 365 projects. As of note this is a few less new stores and a few more expansions and relocations than our original plan. The result is selling square footage growth of about 7% similar to our original guidance.

Along with opening new stores, we are focused on operating more productive stores. Efforts are being concentrated on improved site selection, on rightsizing our stores and on opening new stores earlier in the year. Average new store productivity is increased in each of the past five years and the trend has continued in 2011.

Our expansion of frozen and refrigerated products continues. We installed freezers and coolers in 84 additional stores in the second quarter and now offer frozen and refrigerated products in 2,041 stores. We intend to roll this product out to approximately 170 additional stores by year-end for a total of 375 installations for the full-year.

This represents an increase to our original plan by another 50 stores since our last quarterly update. We have the ability to expand this category and we’re doing so because it serves the current needs of our customers, it drives traffic into our stores and provides incremental sales across all categories, including our higher margin discretionary product. In addition to expanding the availability of frozen and refrigerated product to more stores, we continue to refine our frozen refrigerated assortments to provide more value and excitement.

Turning to new formats, Deal$ our multi-price format continues to gain traction, extending our ability to serve more customers and increasing our growth potential. We’re offering more variety in our Deal$ stores, more brands, more overall value, and customers are responding favorably. In second quarter traffic, ticket and average unit retail continued to increase. Deal$ sales increased across many categories, including food, party, housewares and hardware, including our automotive and lawn & garden products.

We’re extremely excited about the growth potential of the Deal$ concept and the opportunity that it gives us to serve even more customers across the country. We currently operate in 177 Deal$ stores. In the first half 2011, we opened 18 new Deal$ stores and expanded and relocated six Deal$ stores. For the full-year, we now expect to open 27 new Deal$ stores and expand or relocate seven Deal$ stores for a total of 34 Deal$ projects.

Our expansion into Canada is proceeding on schedule. You may remember during the fourth quarter of 2010 that we acquired 86 Dollar Giant stores in Canada. This year, we intend to expand the store count by about 15 to 20% while establishing an infrastructure of store teams, systems and logistics to support more aggressive growth in 2012 and beyond. In the first half of this year, we’ve opened four new stores and now operate 90 stores in Canada.

We solidified our logistics model in Canada and are supplying product to our stores through distribution centers in British Columbia and Ontario. The merchandising team has been integrated to leverage Dollar Tree’s buying power particularly on imports. Customers are now beginning to see broader, more exciting assortments and better values. This will gain momentum as we move into the second half of the year.

The installation of store level POS and enterprise level merchandising systems will be complete in the third quarter ahead of the holiday season. These integrated systems drive purchasing, allocations, sales data and vendor management. They also tie our Canadian logistics with our Warehouse Management System in the United States.

Once complete, the Canadian operation will be on an identical platform to the merchandising and sales engines that drive the U.S. stores, resulting in the Canadian stores benefitting from higher value merchandise and more efficient and streamlined deliveries of merchandise to their stores. Over the long term, we believe that Canadian market can support up to a 1,000 Dollar Tree stores. This is in addition to 7,000 store potential for Dollar Tree in the United States, plus additional growth in our Deal$ format.

Dollar Tree Direct, our e-commerce business is providing an opportunity to reach new customers through an additional channel of distribution. We now offer more than 2,200 items online including many great seasonal items. For example, we’ve recently transitioned the site from Summer Fun to our new fall fling theme featuring items for back-to-school, back-to-campus, fall decor and Halloween. Dollar Tree Direct continues to gain new customers.

Traffic on the website increased 38% compared with the second quarter last year. In addition, there are now more than 100,000 Dollar Tree loyalists interacting with us on Facebook and Twitter. We’re leveraging this web traffic to communicate the Dollar Tree value message, when people visit Dollar Tree Direct, they learn about the great values available at our 4,200 stores, while they make their online purchases. Dollar Tree Direct provides a channel with a huge potential to serve more customers, expand the brand and increase sales and profits. We are gaining customers every quarter and I’m pleased with the progress.

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 Wampler

Thanks Bob. As Bob mentioned, our diluted earnings per share increased 26.2% in the second quarter to $0.77. The increase resulted from our strong sales and expense controls, which resulted in a 70 basis point improvement in operating profit margin compared to the second quarter last year.

Starting with gross profit, our gross profit margin was 35.2% during the second quarter compared with 35.1% in the second quarter last year, several factors contributed to this performance. First, IMU on many categories increased in the second quarter, reflecting continued improvement in sourcing, the flexibility of our merchandise model. Second, we recorded a favorable inventory adjustment related to immaterial corrections to prior periods.

These two factors were partially offset by increased freight cost reflecting higher rates for ocean freight attached to imported merchandise sold during the quarter and diesel prices that averaged nearly $1 per gallon above the same period last year. In the continuing shift in our merchandised mix as basic consumable products increased by about 130 basis points as the percentage of our mix in the second quarter.

In addition, shrink expense increased due to more favorable true-ups on inventories taken in the second quarter last year. This was partially offset by a decrease in mark-down expenses as a percent of sales relative to the second quarter last year. We also leveraged occupancy and distribution costs slightly as positive sales leverage in the U.S. offset higher expense relative to sales in our Canadian stores.

SG&A expenses were 25.2% of sales for the quarter, a 60 basis point improvement from the second quarter last year. Payroll related expenses declined by 30 basis points driven by leverage on payroll and incentive compensation, lower bonus accruals and a reduction in insurance benefit expense.

These reductions more than offset increases in stock compensation expenses, and retirement plan contributions, and a less favorable adjustment to workers compensation reserve in the second quarter last year. Depreciation declined by 25 basis points. Store operating expense declined by about 10 basis points due to reductions in utilities and maintenance expense as a percent of sales.

Other operating expenses increased about five basis points due primarily to increases in debit and credit card fees. In the second quarter compared to the second quarter last year, debit card penetration increased 100 basis points and credit card penetration increased 110 basis points. As most of you know we accept debit cards, Visa credit, Discover credit, American Express and EBT in all of our stores. We also accept SNAP or food stamps at about 90% of our U.S. stores. SNAP penetration although small continues to grow.

Operating income increased $25.7 million compared to the second quarter last year. Our operating margin for the quarter was 10%, a 70 basis point improvement compared to the second quarter of last year. Dollar Tree’s operating margin remains among the highest in the value retail sector. The tax rate for the quarter was 37.7% compared to 37.6% in the second quarter last year.

Looking at the balance sheet and a statement of cash flow, cash and investments at quarter end totaled $545.4 million versus $480.3 million at the end of the second quarter of 2010. Cash net of debt was $279.9 million at the end of the second quarter of 2011.

During the second quarter we repurchased 131,000 shares of Dollar Tree stock for $8.2 million. During the first half share repurchases totaled 1.9 million shares for $96.7 million. At quarter end, we had $249.2 million remaining in our share repurchase authorization. The diluted weighted average shares outstanding for the second quarter was 123 million. We continue to view share repurchase as a good use of capital.

Our consolidated inventory at quarter end was 8.3% greater than at the same time last year and selling square footage grew by 8.9%. Consolidated inventory per selling square foot decreased by 0.7%. Our U.S. inventory increased 5% as of the end of the quarter while selling square footage in the U.S. increased 6.8%. Inventory per selling square foot in the U.S. decreased by 1.7% year-over-year. Inventory turns have been increasing for the past six years and we expect this trend to continue for the full-year of 2011.

Capital expenditures were $63 million in the second quarter of 2011 versus 45 million in the second quarter last year. For the full-year, we are planning capital expenditures to be in the range of 220 to $230 million. Capital expenditures will be focused on new stores and remodels, the addition of frozen and refrigerated capability to 375 stores, IT system enhancements, and approximately $19.5 million for expansion of our distribution in Savannah, Georgia.

Depreciation and amortization was $39.6 million compared to $39.4 million in the second quarter of last year. We expect depreciation expense of $160 million to 165 million for the year and the depreciation expense as a percent of sales will continue to decline throughout 2011.

Our guidance for the remainder of 2011 includes a couple of assumptions. First, the state of the economy is very uncertain. Second, for Q3 last year, we had a very strong comp sales gain of 8.7%, which is well above trend. Third, we expect the diesel prices will be significantly higher throughout fiscal 2011 than they were last year despite the recent pullback in crude oil prices. Regarding ocean freight, we are pleased with the overall results of our May 1st contract negotiations and those new rates are incorporated in our guidance.

Also as we have previously disclosed for the third quarter of last year, we recorded two unusual items amounting to a one-time benefit of about $0.03 per share. As a reminder, those two items were a realized gain of $2.7 million relating to the favorable resolution of a legal matter, and a dividend income of $5 million and other income based on a dividend declared by Ollie's Holdings, Inc. which we are a 10% owner of.

Finally, our guidance also assumes a tax rate of 37.7% for the third quarter and 37.7% for the full-year. Weighted average diluted share counts are assumed to be 122.5 million shares for the third quarter and 122.9 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 third quarter of 2011 we are forecasting sales in the range of $1.56 billion to $1.60 billion based on a low single-digit comparable store sales increase and 9% square footage growth. Diluted earnings per share are expected to be in the range of $0.77 to $0.83, an increase of 5.5% to 13.7% over the third quarter 2010 EPS of $0.73.

For the full fiscal year of 2011 we are raising our guidance we are now forecasting sales in the range of $6.53 billion to $6.62 billion based on a low to mid single-digit increase in comparable store sales and 7% square footage growth. Diluted earnings per share expected to be in the range of $3.82 to $3.95, representing an increase of between 18.3% and 22.3% over our record earnings per share of $3.23 in fiscal 2010, excluding the non-cash charge that we took in the first quarter last year.

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

Bob Sasser

Thanks Kevin and I’d just like to say it once more I’m pleased with our company’s second quarter performance and our first half performance. Sales grew 13% and earnings per share were up 30% on top of 42% increase in the first half last year. Comp store sales increased 5.9% we are attracting new customers. Our traffic continues to grow and shoppers are buying more on each visit our average ticket is increasing.

Despite high fuel prices and a tough economic environment, our operating margin increased by 80 basis points to 10.2%, and net income rose 24% to $196 million. We are positioned to do even better and we are on-track to accomplish our goals. Our business model is powerful and flexible.

We can adapt to a changing environment, it’s been tested by time and validated over the company’s 25 year history. Through good and bad economic times our record of superior sales and earnings continues and we’ve never been better positioned for the future. Our balanced mix of high value consumer basics and unique assortment of fun compelling seasonally correct discretionary products positions us to be relevant to customers in all economic circumstances.

In challenging times, we have the values that customers need on every day basics and when times get better, which they will and customers have a few extra dollars in their pocket, our assortment of fun, compelling, seasonally correct discretionary product can’t be beat. At Dollar Tree, you can even afford to splurge, yes you can afford it. These discretionary items are still just $1.

The customers are focused in our stores and our product. Stores are strategically located to serve Middle America, they are bright, convenient and they are fun to shop. Dollar Tree has a solid and scalable infrastructure that we’re leveraging for better inventory management, increasingly efficient supply chain logistics, more productive stores and crisper execution overall.

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 use our capital for the long-term benefit of our shareholders. It’s an exciting time at Dollar Tree. We had a great first half, our merchandise values are better than ever and our future has never been brighter.

We’re now ready for your questions. So that we can accommodate as many callers as time permits, we ask that you limit your questions to two.

Question-and-Answer Session

Operator

(Operator Instructions) We will go first to Dan Wewer from Raymond James.

Dan Wewer - Raymond James

So, I guess the key question this morning is going to regard the comp sales guidance of low single-digits instead of the normal low to mid single-digit. Does that primarily reflect this crazy year-over-year comparison that you have in the third quarter or are you saying something in the month of August that concerns you about the pace of sales growth.

Bob Sasser

It’s simply the comparison that we’re up against. That third quarter of last year was above trend and we see no reason why we can’t go up against that very well, but it was above trend and it was extraordinarily high for last year.

Dan Wewer - Raymond James

Can you remind us last year was the sales growth front loaded or back loaded or was it consistent throughout the period?

Bob Sasser

It was consistent. Last year third quarter was consistently strong throughout the quarter and we’re trying to be prudent. We’re looking at that and while we’re excited about our business, it is the biggest wall we’re leaping over this year, so still our guidance is we’re expecting a good third quarter.

Dan Wewer - Raymond James

My other question, you had already stated that you did not want Dollar Tree to become just another small box grocery store that you always wanted to preserve the elements of variety store for Dollar Tree and you had if you look at your consumable mix it continues to grow over 100 basis points as a percent of your revenues. Is there a line in the sand where you ask your merchants to say enough is enough and we can’t let Dollar Tree look like all the other dollar store competitors?

Bob Sasser

Dan, thank you for asking that question. We are not a grocery store, we are not now, we never have been and we never will be as far as, as long as I have anything to do with it, it’s not in our DNA. We are selling more consumer products which is not just food items, but also snacks and beverage and HBC and paper towels and chemicals and basics that people need because that’s what customers want now. And as long as the economy stays tough, high unemployment, record high unemployment and record high fuel prices, they are going to want more of that stuff and they are looking to us to provide that for them. So, we are going to keep following the trends with that and given the customers what they need. At the same time, we are really focused on continuing to grow our discretionary product. We still put our seasonal product at the front of the store when you walk into a Dollar Tree, you don’t see groceries and paper towels, what you see is seasonal product, you see Christmas or Halloween and from there you walk in into toys and party and stationery and all of those fun things that we’ve always done even when we were just the small stores in the malls, but we do have that basic component of things that people need now that drives traffic into our store. They are looking for value, we can offer it and that’s why we offer the rest of the consumer products. Our customers want it, and we are always going to listen to them.

Operator

We will go next to Peter Keith from Piper Jaffray.

Peter Keith - Piper Jaffray

I had a question on the relocation strategy you are accelerating that a little bit up to 90 stores. Is that something that you can continue to accelerate any out year or are you restricted by lease expiration to some sort?

Bob Sasser

Well, we generally do our relocations and expansions as our leases expire. Sometimes, we’ll do it and then that will especially maybe the same landlord, but the acceleration that you saw in the first half was really opportunistic. We had some really great opportunities at better real estate and that resulted in a few more relocations than we had planned, but at the end of the day our square footage growth is still around that 7% range is what we’re talking about. So, a few more relocation opportunistically with the few less new stores and still coming up to the same square footage.

Peter Keith - Piper Jaffray

And then I did have one other question too just on the share repurchases. It was a little bit lower than what you guys have been running at historically. Could you remind us on how your repurchase authorization works, is it a combination of opportunistic purchases and some type of predetermined program? I guess, could you explain some more detail around that outflow to the second quarter?

Bob Sasser

Sure. As we’ve looked at share repurchase over the years we’ve done it in many flavors in the sense that we’ve done ASRs, we’ve done 10b-5, we’ve done over the market purchases. So, it’s really dependent upon, where we’re at within the quarter and various things like that. Within the second quarter, we probably didn’t repurchase as much maybe as we have in the last few quarters. Part of that, on a regular basis, we kind of step back and take a look at our capital structure and try to see what’s going on a little bit and then you had the overhang of the economy, as well as what was going to happen with the debt ceiling and some things like that. So, it’s just kind of period of time where we were going through the process of looking at everything. We still believe it is a great use of our capital and great way to return shareholder value to our shareholders. So, I don’t think that our overall thoughts on it have changed.

Operator

We will go next to Adrianne Shapira from Goldman Sachs.

Scott Kaufman-Ross - Goldman Sachs

This is Scott Kaufman-Ross on for Adrianne. I just wanted to ask a little bit about the 2Q comp. It’s certainly a 4.7% comp it’s certainly nothing to be ashamed off, but it did come in a little bit below recent trends, it looks like 200 or 300 basis point deceleration on both one and two year basis? Now obviously, the first quarter does include a later Easter, so that’s about 100 basis points of it. Can you give us a little more color on the breakdown of the comp in the second quarter versus the first? Maybe on the consumables versus discretionary and where things maybe came in a little bit weaker than the first quarter?

Bob Sasser

Scott, the 4.7 comp was a bit lower than the recent run rate, but I would not characterize it as a deceleration in the fundamentals of our business. There were some unusual events, you called out one of them, the Easter was late. We love late Easter. We do very well in first quarter with the late Easter. This year it was April the 24th and then the quarter ended. First of the months are big times, our customers spend a lot of money with us in first quarter especially leading up into that April 24th Easter. Then there was only about a week there before the first of the month. So, the first of the month of May wasn’t quite what it traditionally is. When I think that was because of the customers, that really maybe that spend a lot money for Easter and there wasn’t much time to recover from that and immediately followed by Mother’s Day. So we saw early May especially just a little weaker than we expected.

But the comps accelerated throughout the quarter. June was better than May and July was better than all of them, and frankly, it ended with the run rate that we would have expected. So I don’t look at it as a deceleration of comps. I think it’s just of those calendar issues in this tough economy and people are watching what they are spending. It was a great first quarter and it was a terrific second quarter. Our consumables comped up about 7% in the quarter. Our variety, discretionary merchandise comped up about 2% in the quarter and that’s how you got to the 4.7. But there is nothing unusual there other than the trend that we’ve been seeing that consumers are under pressure and fuel prices are high and so they are looking for a value and so they are buying a little more of their consumable products from us and by the way we have terrific values on it. You should buy yours there too Scott, it’s the best game in town. But nothing really bothered me. It was the terrific second quarter, the highest operating margin in the history of the company in the second quarter. So, it’s hard to complain much about that.

Scott Kaufman-Ross - Goldman Sachs

And then my second question is probably more for Kevin, on the flip side. The gross margin actually seems like it came in a little bit better than you expected. Diesel was still a drag and from your comments it seems like ocean freight was still a little higher in the second quarter. So can you give us a little color on where things were maybe a little bit better than your expectation, potentially on the IMU? And then as you look to the back half, given what the transpacific rates over in China have done. It seems like it’s an opportunity especially given the capacity issues you had. So, maybe a little bit about the gross margin cadence throughout the year?

Kevin Wampler

In general in the quarter, IMUs were up in many categories as we spoke to and our merchants worked very hard every day to go out there and find the best values, the best prices and they’ve come through again. We’ve spoken in the last probably six or seven quarters about the fact that each of the trips that our merchant group has made to Asia has come back with better IMUs than the year prior. So, we’re continuing that process and it is a process. They work very hard at it.

So, really that is a very positive thing. Obviously diesel is going to be a headwind all year long and that’s been expected. It gets a little easier potentially towards Q4 if the rates don’t change much from where they are at because by Q4 last year, the diesel rates will start to come up a little bit. So, the comparison gets a little bit better. As we’ve said, ocean freight, we feel good about where we came out with our May contracts and if you look better than a year ago then the other thing that we got going on that is helpful overall is the fact that if you remember last year, there was container shortages basically and getting goods, getting containers to get goods across the ocean came at a premium. So, that has abated and since last year and it’s not an issue and not only was a cost issue, it was really a flow of goods issue to a certain extent too because it didn’t flow quite as smoothly as we would have liked to see it flow. So, I think that’s potentially a positive for us as we go through the rest of the year. So, I think that’s kind of how we look at it.

Operator

(Operator Instructions) We will go next to Neil Currie from Dahlman Rose.

Neil Currie - Dahlman Rose

I just wanted to know if I could ask about Halloween this year. It’s obviously a very important holiday for you and it looks like one of the days before Halloween was in your third quarter last year, and is going into the fourth quarter this year. Is that significant? And if so, how much of an impact do you think that will have on your third quarter and positive on the fourth quarter?

Bob Sasser

Neil, you are very astute. We do have a few days of Halloween selling that’s moving into our fourth quarter this year. We’ve known that for the long time and our merchants and our stores have really made some great plans to offset that as we go into the Halloween season. Halloween is an important season for us. We’re well prepared. It’s already selling. We’ve got Halloween merchandise at stores right now and it’s doing very well. So, yes, some of it does move into fourth quarter, so there will be some benefit in to fourth quarter from Halloween more benefit than we had last year and a little bit less on that last week in the third quarter, but we have plans to offset that.

Neil Currie - Dahlman Rose

So the low single-digit comp expectation in the third quarter is really driven by that Halloween shift, but also the very tough comparison. So that would explain really why this is not your usual low to mid single-digit.

Bob Sasser

Yes. I think, two, it’s not like we’re holding back, I mean, it’s just the biggest quarter we were up against and there is a little shift to that of the season. So, we think it’s prudent that we consider that when we’re giving our guidance.

Neil Currie - Dahlman Rose

And also just on the current quarter, obviously it is a tough comparison. So, if we just look at the weekly run rate of sales, you said that really improved throughout the second quarter. Obviously we’ve had a lot of headlines in the last few weeks hitting stock markets and hitting the headlines. Have you seen any sort of tail off in those weekly sales rates, or is it still progressing nicely?

Bob Sasser

Progressing nicely, very nicely.

Operator

We will go next to Joseph Parkhill from Morgan Stanley.

Joseph Parkhill - Morgan Stanley

I was just wondering about your full-year guidance. It seems like you beat this quarter by $0.02 but raised your high end of EPS guidance by $0.10. I was just wondering what gave you more confidence in raising the high end towards in the back half.

Bob Sasser

Joseph, I think, it’s like anything else. We’re three months further down the road. We have better visibility to a lot of things which obviously makes us feel little bit better as we’ve talked about. Diesel hasn’t continued to go up it’s kind of settled in for the moment at least. We were going against record shrink results for us last year. We’ve seen those come in and stayed fairly flat, so that feels pretty good. If you’ve got a better feel for that. We’ve done a good job of leveraging our payroll costs. The store operators have done a nice job of picking up the productivity and that is by far our biggest SG&A item at the end of the day is our labor. So when we can see things like that and we feel good about that, that gives us a little more confidence as we look out to the future. So, I think those are some of the things that we look at and know a little bit more about and gives us comfort to look at our guidance and go forward.

Joseph Parkhill - Morgan Stanley

Okay, great. And with gross margins trending a little bit better than normal, is there any change in what type of comp you believe you need in order to lever SG&A or operating margins?

Bob Sasser

I don’t think so. Obviously, any comp helps us leverage at the end of the day, but I don’t think our top process has changed there on a SG&A basis, typically roughly 2% comp probably gets us pretty close there. So, nothing has really changed from that standpoint.

Operator

We will go next to Meredith Adler from Barclays Capital.

Meredith Adler - Barclays Capital

Most of my questions have been asked, but can we talk just a little bit about ocean shipping? I’ve been reading some stuff that suggests that it’s even better maybe than has been expected, that there is more capacity of containers and space on ships. Is that something that you have a chance to take advantage of? I know you renegotiated in May. But is there a chance to get it down even more?

Bob Sasser

Meredith, we do our contracts in May and from May on that’s as good or as bad it get usually. We had very favorable contracts this year based on more capacity than it was available last year and more, I guess certainty I suppose. But we have some benefit from that and we’ve included that in our guidance.

Meredith Adler - Barclays Capital

Okay, great. And then I’ve been a big bull on share buybacks and I understand you are cautious. I’m just wondering if you are holding back on buying back shares for any reason other like that you have another use for the cash, like acquisitions or something like that. I don’t know whether there are any acquisitions to be done, but anything else you want to comment on in terms of use of cash.

Bob Sasser

Meredith, it is just as Kevin described. We still see it as a great use of free cash. The buyback in the second quarter was really just as Kevin said, it was stepping back and taking a look at our capital structure in its entirety and thinking about it strategically and thinking about now and next year and the next year and how we’re going to manage that, and at the same time, the uncertainty that was in the political environment, the general economic environment in the world, and just uncertainty with that. We thought it was a good time just to stand still, look around, and assess the situation and the landscape and then put our plans in place. So we still see it as a great use of our capital, but there is no acquisition that I know of right now, not that we’re not always open to good acquisitions, but there is nothing that we’re undertaking at this time.

Operator

We will go next to Scot Ciccarelli from RBC Capital Markets.

Scot Ciccarelli - RBC Capital Markets

Something that tends to be topical and hasn't been brought up yet has been kind of margin outlook going forward, most recent buying trip. Any kind of color we can get on that at this point?

Bob Sasser

Well, again, we bought through basically next spring and summer on our imports, and I’m happy to report that our buyers once again captured the price. They put together assortments that are just really compelling, just huge value. Customers are really going to be jazzed by. I know I’m excited about the plans that they put together between now and next year. The margins hit our targets, and as always we change the product, not the price. We know the retail. Our buyers are focused on putting together the most value they can for our customers and at a cost that will fit our margin structure. So, we are very excited about not only just the fact that we hit our margin targets on the upcoming trips, but the merchandise and the value that that’s going to represent in our stores.

Scot Ciccarelli - RBC Capital Markets

That’s helpful. And then any kind of comment in terms of the performance of Deal$? Is that trending above the Dollar Tree chain? Is it below? Any kind of color on that would be great. Thanks.

Bob Sasser

We are excited about Deal$. I’m particularly excited about Deal$. We can see they’re gaining more traction all the time. We are still working on the brand identity and what that means to the customer, and we’ve got 4,200-ish Dollar Tree stores across the country and Canada now and people kind of know that. There is a big Dollar Tree sign up everywhere you turn, and we’ve established that brand. We’re still working hard on getting the Deal$ brand and what that customer expectation should be established, but we’re gaining a lot of traction in the quarter. The top categories were across the board. Our food categories were up, our housewares, our hardware, our HBC, our home and domestic, we’re offering broader assortments on things you just can’t buy at Dollar Tree, some of the houseware items and home items like blankets and quilts and sheet sets and some of our best selling items are those type products. We also accept coupons at Deal$ stores because we have all that kind of products and with the quest per value that customers are on now. Our coupon business is getting traction actually when they use a coupon the basket is about 25% higher than when they don’t use a coupon. So that’s a good impact. We’re continuing to grow Deal$ stores. We’re continuing to see our average unit retail go up. Our traffic is expanding and we’re excited about it. As we go forward, we’re going to continue looking for ways to grow the Deal$ stores, especially in those high cost markets that I’ve always talked about, the high cost, but high volume markets.

Operator

We will go next to David Mann from Johnson Rice.

David Mann - Johnson Rice

Can you talk in terms of the inflation issues, in terms of what you’re seeing in food just given some of the commodity concerns that we’ve had in the past? How is that looking right now?

Bob Sasser

Our buyers worked really hard in the changing economic climate to continue to offer the best value for what we offer to our customers and more and more customers are looking to us for those kinds of items. As I said, earlier, we’re not a grocery store and they don’t expect us to be a grocery store. So, that gives us the opportunity to buy and offer value on the thing that we can afford that our margin structure and at the same time offer great value to our customers. We have an ever changing mix of product in our food area. Sometimes, you may find just as a terrific value on an item, but buy it now because it may be gone next time you’re in the store, but our customers sort of give us a buy for that because we’ve never set the expectation that a grocery store might have said that we would have this product all the time. So many times our customers come for us for a broad list of things and they shop us, maybe they shop us first and then they go over to the grocery store and finish their shopping trip, but more and more we’re able to offer value. Now we may not be able to offer the value on the same item 365 days. Sometimes we offer a dozen eggs, sometimes we offer a half a dozen eggs, but our buyers are very astute in being able to manage through this inflationary period and still get that best value for the customer in the category that we choose to participate in.

Operator

We will go next to John Zolidis from Buckingham Research.

John Zolidis - Buckingham Research

Can you guys talk about the store openings? You took down the guidance for the year about 25 locations. Is there anything happening from a dynamic with the new stores with real estate that is making it harder to hit your targets? Is there more competition out there in the channel? Any color you could provide, thanks.

Bob Sasser

Well, sometimes it’s opportunistic. Again, it’s the same work and the same cost and the same everything when you expand and relocate a store as it is to open up a brand new store. So when you look at the square footage we’re growing about the same as we guided. How we’re getting to that is a few more relocations and a few less new stores. I wouldn’t really characterize it as, oh my gosh, we can’t open more new stores or we’re having trouble opening new stores, as much as it was shooting for a square footage target as we’ve always done. And when we get to this time a year, as you’re entering third quarter, you’re going to start making some decisions on how you’re going to continue that growth for the rest of the year, so we didn’t take it down much in terms of projects, just a few because we’re doing more relocations and expansions also and the square footage is about the same. So I wouldn’t read anything into that more than just the way the stores are falling this year and of course we have a cut off, we don’t want to go into our busiest season in fourth quarter opening up new stores, so you make some decisions about when you’re going to stop opening. We do anyway when we’re going to stop opening new stores.

Operator

We have time for one or two more questions. We will go next to Laura Champine from Cowen and Company.

Tom Nikic - Cowen and Company

This is Tom Nikic for Laura Champine today. I was also wondering a little bit about lowering the store growth a little bit. Is that all in the U.S. or are you planning on opening fewer stores in Canada this year also?

Bob Sasser

It’s across the board, I can’t tell you that I can characterize the numbers because again some of this was moving around some relos and some new stores and alike but I’d say maybe couple in Canada and the rest in the U.S, something like that would be the way to characterize that, but again I’ll tell you I wouldn’t read anything into it more than we’re managing our business and managing the projects appropriately and still aiming for sales numbers, that’s what we really are focused on and then how do you get there and with aiming at the square footage growth which is about 7%, which is exactly where we started the year pretty much.

Tom Nikic - Cowen and Company

Okay, great. And just a quick follow-up, just I guess regarding the locations where those 25 stores would have been, is that something where you think maybe just the timing isn’t right for a store? Or is it something about those markets you feel differently about then, than you did three months ago or?

Bob Sasser

It’s just not that specific when we start out with our store growth plans. We don’t build locations typically. We don’t go out and typically although we deal with it. We don’t go out and plan years ahead and buy the dirt and develop these projects. We’re always subject to availability where we want to go. So, we target where we want to go. We look at our list of stores where we already are. We look at where the competition maybe, we look at where the opportunity is for our model and we target those corners and those locations and then we set out across the country and now across Canada looking for the spots that fit those locations. Sometimes, we plan in the beginning of the year to do new stores this many relocations this many and sometime as you get into it, things may change and maybe opportunity, but it may be a relocation opportunity or an expansion of a small store opportunity and we make decisions then we decide well, okay we are going to spend the capital, let’s spend it here on this relocation this year instead of another store that we may have been working on. But it’s not that specific that we decided not to open a store on the southwest corner in Miami, Florida. It’s really more about the progress and the process that we go through and developing our go-to-market strategy for our store growth.

Again, we give ourselves a little break and I hope you will too on the fact that we are opportunistic and we always have not only have to be in the place where we wanted to be, but it has be a good store economics and a lot of times we negotiate really strongly to get those economics. So, I may be able to grow a little faster in some areas of the country this year, little faster next year in another area of the country. But always overall, we’re aiming at that square footage and that sales number. Again, we are not building these things from the ground up.

Operator

We will go next to Anthony Chukumba from BB&T Capital Markets.

Anthony Chukumba - BB&T Capital Markets

I had a couple of questions on Dollar Giant. I guess you’ve been operating in Canada for a few months now and just wanted to see if you could give us any kind of early read in terms of what you’ve seen there. And then in addition to that, and maybe this is nitpicking a bit, but previously you said you thought you could operate 900 to 1000 stores in Canada. Now you’re saying up to 1000. I’m just wondering if that change is just due to what you are seeing so far there.

Bob Sasser

It’s no change in my mind, I may have just said it differently, but up to 1,000 is what I think. Maybe it’s 1,010 who knows, maybe we could even exceed that. I didn’t intend to change the target when I said it that way. We’re making great progress in Canada. We like Canada as we said, when we entered Canada buying the Dollar Giant stores, we thought that we’ve modeled up to a 1,000 stores, we still believe that. What we’re doing right now is we’re in the process of really building the infrastructure for Canada. We’re building the store teams. We’ve got our logistics in place. We’ve integrated the buying organizations especially on the import buying and we’ve got steps coming into our Canadian stores now from a seasonal nature. We’re putting in our planning we’re about launch into putting in our POS and our retail technology and our goal is to have all of that done before fourth quarter.

So, really working hard to get the infrastructure in place, to get the people needs in place, so that we go in to fourth quarter and then come out next year and grow at a better pace. We have two real estate reps focused on Canadian, real estate reps right now, focused on Canada and we’re building our sites and our location opportunities at this very point. But if you would ask me how we’re doing, I’m very excited about where we are, we’ve made great progress, we’re doing a lot of heavy lifting now, to set Canada up beginning next year as a terrific opportunity for us to grow the model and to be accretive to our earnings next year.

Operator

We will go next to Joe Feldman from Telsey Advisory Group.

Brian Innes - Telsey Advisory Group

Brian Innes calling in for Joe. Thanks for taking two quick questions. First, just regionally, did you see any pockets of strength or weakness in the quarter?

Bob Sasser

Brian, it was across the board, there is some higher differences. I would say that the Southwest was the strongest, but not by much, followed closely by the Southeast and then it sort of went to the Midwest. But it was pretty close across the board, as we looked to the second quarter in terms of comps.

Brian Innes - Telsey Advisory Group

Okay. And then secondly, just in terms of general competitive landscape, anything you are seeing there or changes in the second quarter?

Bob Sasser

Brian, we are so focused on what we do, we watch competition and we admire them and then we turn to what we know how to do and that’s offer value at the Dollar price point and continue to grow this brand and satisfy our customers. I don’t see anything in second quarter that change from first quarter really or last year.

Operator

This is all the time we have for questions. I would like to turn the call back over to Mr. Tim for any closing comments.

Tim Reid

Thank you, Alicia and thank you all participating in the call and for your interest and investment, particularly in Dollar Tree. Our next sales and earnings release and conference call are scheduled for Thursday, November 17, the week before Thanksgiving. Thank you and have a great day.

Operator

That does conclude today’s conference. We thank you for your participation.

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