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DollarTree Stores, Inc. (NASDAQ:DLTR)

Q32007 Earnings Call

November28, 2007, 9:00 a.m., ET

Executives

BobSasser – President, Chief Executive Officer

KathleenE. Mallas – Vice President, Controller

TimothyJ. Reid – Vice President, Investor Relations

Analysts

MichaelBaker – Deutsche Bank

JeffSonnek – Friedman, Billings, Ramsey & Company

AdrienneShapira – Goldman Sachs

Ivy– Lehman Brothers

PatrickMcKeever – MKM Partners

MitchKaiser – Piper Jaffray

DanWewer – Raymond James

DavidCumberland – Robert W. Baird & Company

RalphJean – Wachovia Securities

Operator

Please standby. We’re about to begin. Good day, everyone, and welcome to the Dollar TreeStore, Inc., third quarter 2007 earnings release conference call. As areminder, today’s call is being recorded. And at this time I’d like to turn thecall over to Mr. Tim Reid, Vice President of Investor Relations. Please goahead.

Timothy J. Reid

-- on ourperformance in the quarter and recent developments in our business. KathleenMallas, our Vice President and Controller, will provide a more detailed reviewof our third quarter financial performance. Bob will then provide our guidancefor the fourth quarter and fiscal year 2007 and offer summary comments.

Before webegin I’d like to remind everyone that various remarks that we will make aboutfuture expectations, plans and prospects for the company constituteforward-looking statements for the purposes of the safe harbour provisionsunder the Private Securities LitigationReform Act of 1995. Actual results may differ materially from thoseindicated by these forward looking statements as a result of various importantfactors included in our most recent press release, most recent current reporton Form 8K, quarterly report on Form 10Q, and annual report on Form 10K, all ofwhich are on file with the SEC. We have no obligation to update ourforward-looking statements and you should not expect us to do so.

At the end ofour planned remarks we will open the call to your questions, which we ask thatyou limit to one question and one follow up question, if necessary. With thatsaid, I’d like to turn the call over to Bob. Bob?

Bob Sasser

Thanks, Tim,and good morning, everyone. This morning we announced earnings for the thirdquarter of $0.38 per diluted share. This represents a 19% increase over lastyear’s $0.32 per diluted share and it is at the high end of our guidance.

We havepreviously announced that total sales for the quarter were $997.8 million,which was an increase of 9.6% over the third quarter of fiscal 2006.

Top storesales increased 1.9% for the quarter and were the result of a 1.6% increase instore traffic and 0.3% increase in average ticket.

Year to datefor the third quarter, sales were $2.9 billion, an increase of 11.1%, anddiluted earnings per share were $1.09, an increase of 21.1%.

Before weturn to the detailed financial results I want to highlight a few operatingefforts. First of all, gross margin improved by 70 basis points over the thirdquarter last year. As we said at the beginning of the year, the gross marginrate would increase as we began to cycle through the recent addition of morebasic, fast returning, and lower margin consumable products. Our gross marginpercent is up for the quarter and year to date.

Second, whilethe SG&A rate is higher in third quarter than last year, I want to pointout that our expenses continue to be well managed and the third quarter lastyear the SG&A rate benefitted from a 50-basis point, benefitted by 50 basispoints from payments perceived for early lease terminations. Absent that, therate this year would have been flat to last year. Our team has continued tohold the line on expenses.

Third, I’mpleased to point to the continued improvement in our inventory management byleveraging our investments and logistics and technology, our store teams andour planning allocations and replenishment organization have been highlyeffective in reducing inventory per store while improving our in-stock ofbasics by developing smarter allocations of product consistent with salestrends and consistently increasing our inventory terms over the past two years.This trend has continued for the third quarter of 2007. Our total inventoryinvestment at the end of the quarter was up about $7 million or about 1% with209 more stores than last year. That’s around 5.3% less inventory per store.Terms are up and our in-stock position is better.

At DollarTree I always like to start with the merchandise initiatives and there wereseveral key merchandise initiatives that drove our sales performance in thethird quarter. First of all, we had a very good performance in our seasonalbusiness throughout the third quarter beginning with back to school. Our uniqueTeachers’ Corner concept continues to differentiate Dollar Tree as a high-valuesource for many of the things teachers and students need in their classrooms.With Teachers’ Corner we’ve been able to broaden our reach and bring value to anew and larger segment of business, larger segment of customers.

Of course,the big holiday in third quarter was Halloween and, once again, our Halloweenvalues and our sell through were strong. While our advertising expense was downin the quarter, we ran an advertising circular on September 30th insupport of the Halloween season and we had some good results. This tab ran as anewspaper insert in 29 markets and covered about 1300 stores, and all of ourstores received quantities of the featured merchandise along with the in-storesignage and copies of the insert. Our stores quickly made a clean transitionfrom fall and Halloween and we’re now well prepared for the Christmas season.

In additionto seasonal merchandise, our expanded assortment of high value basics continuesto contribute to our sales growth. With the growth of our large store formatover the past several years we have expanded our assortment of basic productsand we’re becoming more of a destination for categories such as basic cleaningsupplies, health and beauty care, candy, and snacks. We are more relevant todaythan ever because we offer a lot of value on things that people need every dayand we offer it for just a little bit of money. That’s important to ourcustomers, who are under pressure from high fuel and energy costs.

As we’veincreased our offering of basic every day products, we’ve continued ourexpansion of frozen and refrigerated products to more stores. Our plan at thebeginning of this year was to add 250 new frozen and refrigerated stores thisyear, but we stepped up the pace and we’ve added freezers and coolers to about300 stores so far this year. During the third quarter we added freezers andcoolers to 58 Dollar Tree stores. However, I would point out that in the thirdquarter last year we added freezers and coolers to 172 stores, so weanniversaried a very aggressive roll out from this quarter last year and as aresult got a smaller boost of sales from the initiative than we have inprevious quarters. At the end of the third quarter we had freezers and coolersat 931 stores compared to 532 stores the same time last year. We plan to addfreezers and coolers to another 10 stores by year end.

While we’reclearly feeling the same results of the same macroeconomic pressures that haveaffected retailers with the expansion of every day basics in our merchandiseassortment over the past few years, we’re better positioned than ever towithstand these pressures. Our customers are now finding what they need everyday and it’s giving them a reason to shop Dollar Tree more frequently.

In additionto these merchandise initiatives, the expansion of our payment type acceptancecontributed positively to third quarter results. We currently accept foodstamps in about 1,000 qualified stores. The penetration of debit card usagecontinued to grow in the third quarter providing a lift to average ticket,though less than in previous quarters. We rolled Visa credit card acceptance toall of our stores nation-wide on October 31st, just in time for theholiday season. We are pleased to offer the added convenience of Visa credit toour customers and expect that it will contribute to continued increases inaverage tickets and traffic in the fourth quarter and beyond.

Turning tostore growth, during the third quarter we opened 79 new stores and expandedanother 40. This year for the third quarter we’ve opened 213 new stores, plus93 expansions and relocations. That represents 42 more new stores and 17 morerelocations than last year through third quarter. While we’ve got more storesopen earlier this year, which was one of our goals, this is approximately 21fewer new stores than we planned for the third quarter and the delay cost usabout $3 million in sales relative to our plan in the quarter. We’ve caught upour store openings in November and we expect to finish the year with 3,413stores after adding 240 new stores and 102 expansions and relocations. For yourreference, last year we opened 211 new stores and we expanded and relocated 85stores. And our targeted size remains 10,000 to 12,000 square feet. In thatregard, the stores opened so far this year have averaged around 11,000 square feet.

I have anupdate for you on Deals. As most of you know, we’re using these stores as aplatform to develop an additional format, lifting the restriction of the $1.00price point to offer even more value and convenience while leveraging thestrengths and the infrastructure of Dollar Tree. The key elements of a Dealsstore are surprising value and convenience, and a fun and friendly shoppingexperience. Much of the merchandise in our Deals stores is priced at $1.00, butwe’ve lifted the restriction and we’re in the process of building assortmentsthat are focused on merchandise priced at $5.00 and below.

Customeracceptance of the concept has been good, as I’ve mentioned in the past. We’reespecially excited about the availability of new merchandise opportunities atthe higher prices and the lift that it gives us in average ticket. To give yousome feel for the shopping basket, during the quarter about 25% of thetransactions in a Deals store contained in items selling for more than $1.00.That’s up slightly over the previous quarters. Almost 20% of the sales in theDeals stores came from items over $1.00, consistent with second quarterresults. And the average transaction when the customer bought an over-$1.00item was about $16.00. In the range of but a bit less than the previousquarters and I believe that’s a reflection of normal cyclical factors.

When comparedto our Dollar Tree stores, average transactions of about $7.50 in the thirdquarter, this lift in transaction size is very compelling. In addition, we’veachieved a significant list in Deal’s gross margin compared with the thirdquarter last year.

As I’ve saidpreviously, I believe that our best test of the concept is in the opening ofnew Deals stores and new markets. Through the third quarter this year we’veopened 14 new and relocated three existing Deals stores. We’ve expanded theconcept into new regions, including opening our first Deals stores in thenortheast. And I’ll tell you that we have had outstanding results in the earlydays of the opening. In the third quarter, the new Deals stores outperformedthe existing Deals stores by nearly every sales method. This is consistent withour expectations and it is very encouraging. We opened several more Dealsstores in November and we expect to end the year with 20 to 25 new Dealsstores.

Again, we’revery excited about the Deals concept. We recognize the growth opportunity thatthis concept represents. We believe that Deals fills a unique niche in thevalues retail segment. But I will remind you that it’s a new model and there’sstill a lot of work to be done, especially in refining the concept andespecially in refining the merchandise index. We’re going to continue to investthe time, effort, and patience necessary to make this unique retail concept assuccessful as we know it can be.

Now I’ll turnthe call over the Katie Mallas, our Vice President/Controller, who will giveyou more detail on these and other financial metrics during the third quarter.I will then return and provide guidance for the remainder of the year andsummary comments. Katie?

Kathleen E. Mallas

Thanks, Bob.Good morning, everyone. As Bob mentioned, our earnings per share for thequarter were $0.38, which was at the high end of the range of our initialquarterly guidance and represents a 19% increase over last year’s $0.32.

Theimprovement in diluted earnings per share for the quarter was driven primarilyby a 1.9% comparable store sales increase and improvement in gross margin. Inthe next few minutes I will talk about the components of gross margin, as wellas SG&A expense, balance sheet management, and cash flow metrics.

For thequarter, gross margin was 34.5%, 70 basis points above the 33.8% in last year’sthird quarter. Several factors contributed to this performance improvement.First, we had improved mark up on merchandise delivered during the quarter.Second, our shrink rate for the quarter was lower than last year. Third, thenegative impact from the planned shift toward more consumables continues todiminish.

In additionto these three factors, our freight cost was unchanged as the percent of salesdespite the higher fuel prices relative to last year. These will increase $0.19per gallon on average versus the third quarter of last year. We succeeded inoffsetting these increases through improved operating efficiencies, includingbetter trailer utilization and better routing, which reduced haul miles.

Moving downthe PNL, SG&A expenses were 28.4% for the quarter expressed as a percent ofsales, a 50 basis points increase from 27.9% in the third quarter last year.However, last year’s results included $4.1 million of payments received forearly lease terminations which amounted to a 50 basis point reduction in theSG&A rate last year. Absent this benefit to last year’s results, theSG&A rate was essentially unchanged. Reductions in advertising andinsurance offset slight increases in expenses for store supplies and debit cardfees, which reflect the continued increase in debit card penetration in ouroverall sales mix.

For the thirdquarter, depreciation and amortization was $39.6 million. The overall rate as apercent of sales improved 30 basis points compared with the third quarter lastyear. We expect depreciation of the $158 million to $159 million for the year,which as a rate of sales, should be down about 30 to 35 basis points from lastyear.

Our operatingmargin for the quarter was 6%, a 10 basis point improvement over the thirdquarter last year. This is in line with our forecast last year that we wouldbegin to see improvement in operating margin in the second half of 2007.

The tax ratefor the quarter was 36.5% versus 35.8% for last year. The lower rate last year reflectedthe benefits from the Katrina related watsi (sic). For the first three quartersthe tax rate was 36.9%, which is essentially the same as in the first threequarters of 2006.

Looking atthe balance sheet and statement of cash flow, during the third quarter of 2007we repurchased 4.1 million shares for $163 million. This includes 330,000shares repurchased early in the quarter on the open market for $13 million, 2.4million shares repurchased through a $100 million accelerated share buy-backannouncement in August 2007, and 1.4 million shares repurchased on the openmarket for $50 million near the end of the third quarter following completionof the AFB. Year to date we have invested more than $378 million in sharerepurchases and bought back more than 9.4 million shares.

Reflectingthis share repurchase activity, cash and investments approximated $30 millionat the end of the third quarter versus $119 million at the same point lastyear. In addition, our long-term debt increased by $85 million to $335 million,all of which is in our revolving credit facility. We anticipate that we willpay off the $85 million during December.

In earlyOctober, the board of directors authorized the repurchase of an additional $500million of the company’s stock. We now have approximately $548 million ofauthorization, including $48 million remaining from the $500 million sharerepurchase program authorized by our board in November of 2006. Our sharerepurchase program reflects our commitment to building value for our long-termshare holders and our confidence in the company’s ability to continue togenerate significant cash flow.

Capitalexpenditures were $63.9 million in the third quarter of 2007 versus $51.4million in the third quarter last year. The majority of capital expenditures inthe quarter were for new stores, remodelled and relocated stores, and theexpansions of our Briar Creek distribution centre and our home office and datacentre in Chesapeake. The Briar Creek expansion was completed on schedule inOctober. As a result of these initiatives and the addition of frozen andrefrigerated product to approximately 310 stores, we expect capitalexpenditures in the range of $185 million to $190 million for fiscal 2007.

Moving on toinventory, we continue to focus on lowering our per-store inventory investmentsand increasing turns. Year to date our inventory turns have increased about 26basis points through third quarter as inventory per store finished down 5.3% atthe end of the quarter. You will also note that our payables-to-inventory ratiocontinues to improve from 29% at the end of the third quarter last year to32.2% at the end of Q3 this year. This is a continuation of a trend that beganin late 2005 and is attributable primarily to improved payment terms with oursuppliers. Inventory investment is presently planned about $30 million higheras of the end of this year versus last year, which we believe will result ininventory-per-store being slightly higher than the end of last year, primarilyreflecting merchandise flow for an earlier Easter season next year.

With that, Iwill turn the call back over to Bob.

Bob Sasser

Thanks,Katie. I want to make some comments about guidance for the remainder of theyear and then I’ll leave you with a few summary observations.

Regardingsales and earnings guidance for the fourth quarter of 2007, we’re forecastingsales in the range of $1.31 billion to $1.35 billion and diluted EPS in therange of $0.99 to $1.06. This implies a range of flat to low single-digitpositive comparable store sales.

For the fullfiscal year 2007 we estimate sales will be in the range of $4.25 billion to$4.29 billion based on a low to low-mid single-digit increase in comparablestore sales. As a result of these sales estimates we’re forecasting dilutedearnings per share in the range of $2.06 to $2.13.

As we’vereminded you since the beginning of the year, 2006 was a 53 week year based onthe retail calendar. As previously disclosed, 53rd week added about$70 million to sales, a little over $0.07 diluted earnings per share to lastyear’s fourth quarter and full-year results.

In addition,our guidance for 2007 includes the impact of the $370 million of sharerepurchase activity so far this year. Our EPS estimates also include the reductionof interest income associated with the use of those funds that have beenconsistently invested in tax-free municipal income securities. Thus, ourweighted-average share count may be in the range of 93 million to 94 millionshares for the quarter and then the 96 million to 98 million share range for thefull year.

Beforeturning the call over to you for questions, I want to leave you with a fewsummary observations. In the face of record high fuel and energy prices, as weall know, I’m very pleased with the third quarter results and I could not bemore proud of this management team. We had a strong third quarter consistentwith our guidance and we remain on track to accomplish our long-range goals.

Salesincreased 9.6% with a comp sales increase of 1.9%. Gross margin improved 70basis points for the third quarter and it’s up year to date. With more storesand volume our logistics network continues to become more efficient. As anexample, freight costs in Q3 were flat to last year as a percent of sales eventhough diesel fuel was $0.19 higher per gallon than last year.

Ourinvestments in infrastructure continue to translate into better inventorymanagement, more efficient stores, improved in-stock position, and a betteroverall shopping experience for our customers. As an example, inventory turnswhich have increase each quarter over the past two years increased again by 26basis points for the third quarter.

Our new Dealsconcept is progressing and it is exciting. We’re opening new stores in new markets,customer acceptance is strong, and the gross margin is improving.

For ourshareholders, earnings per share increased 19% for the quarter and we continueto demonstrate the ability to self-fund the growth of our business whilegenerating substantial free cash and rewarding our long-term shareholders bybuying back stock; 4 million shares in the third quarter alone. We’re confidentin the company’s ability to continue generating its significant amount of freecash flow and we remain committed to use our cash to drive shareholder returns.

Once more,I’m proud of our performance in the third quarter and I’m confident about thefuture. I want to be clear, however, that we have a very realistic view of thecurrent retail environment. As we enter the holiday season we know that ourcustomers are somewhat under economic pressure. They’re challenged. Especiallyfrom high and uncertain energy prices. Consumer confidence has declined andthis has affected many retailers. We are not immune to this environment, norcan we change it, but we can adapt and succeed in this environment by beingpart of the solution for millions of consumers across the country, deliveringgreat value to our customers through exciting high-value seasonal product, bybeing in stock with basics that people need, and by providing a bright,friendly, fun, convenient shopping experience.

As we haveevolved to the larger stores we now have what people need and what people wantevery day. Our stores are relevant to these times.

We’re nowready for your questions. Again, so that we can accommodate as many callers astime permits, we ask that you limit your questions to two.

Question-and-Answer Session

Operator

Thank you.The question and answer session will be conducted electronically. (OperatorInstructions) We’ll take our first question from Meredith Adler with LehmanBrothers. Please go ahead.

Ivy – Lehman Brothers

Hi. This isIvy on for Meredith.

Bob Sasser

Morning, Ivy.

Ivy – Lehman Brothers

Hi, how areyou? Great quarter.

Bob Sasser

Well, thankyou.

Ivy – Lehman Brothers

Question foryou. How much flexibility do you have to reduce expenses or to slow new storegrowth if the economy does slow?

Also, couldyou tell us what kind of comp do you need in order to cover your expensegrowth? That’d be helpful.

Bob Sasser

Well, Ivy, asfar as, we have no, announced no plans for our growth, but I guess if you weregoing to slow growth you could do it pretty quickly. Just stop leasing morestores. It’s probably easier to slow it than it is to ramp it up. But that isnot something we’ve talked about at this point.

Flexibilityon, I’m sorry, the first. Expenses, you know, we manage our expenses, we manageit line by line, Ivy. Our organization has been very good to stay focused onthe things that could, that are variable in our business. With our size andwith our buying power we’ve actually managed to reduce our per-unit cost,whether it’s merchandise or whether it’s expenses, in many ways. Given a longview of the environment, you know, sometimes we can’t change things right now, butanything that we can see coming I think we can react to very well.

The one thingthat’s most troubling, if you’re asking this question, is the high fuel pricesand diesel prices. I don’t know, we’ve never been in this rare air before withthe kinds of diesel prices that you’re seeing. We were able to offset $0.19 inthe third quarter and other expenses increase in diesel fuel. Right now dieselfuel is running $0.50, $0.60, $0.70 a gallon higher, so I don’t know what thatmeans. Is that going to go higher again still or is it going to come back down?So we’re observant of that and we are managing our business accordingly, but wereally manage it line by line.

Ivy – Lehman Brothers

Okay. And thelevel of comp you need in order to cover your expenses?

Bob Sasser

Well, we’vealways said somewhere in the 2% to 4% range, but you know, 4% covers it reallywell. Four percent is what we’ve always said.

Ivy – Lehman Brothers

Thank you.

Bob Sasser

Thank you.

Operator

We’ll takeour next question with Jeff Sonnek with FBR. Please go ahead.

Jeff Sonnek – Friedman, Billings, Ramsey &Company

Thanks, guys.Great quarter. The fourth quarter with the 53 week, you mentioned a couplethings there. Could you walk through, you know, what did that do to the grossmargin compare? About last year, we had an increase in incentive comp from thatsolid quarter as well. Just to help us from a kind of apples to applesperspective.

Bob Sasser

Well, theeffect of the 53 week we’ve been reminding everyone all year, if you go back toevery call, remember we’re comparing on 52 when there was a 53 week last year.So I wanted to make sure that I keep saying that. Basically the 53rdweek was about, added about $70 million to sales on the top line. And it wasabout $0.07 on EPS that that was worth. Because basically with a 53 week youhave a lot more sales and not much more expenses. Gross margin was maybe within10 basis points from a 53 week comparison to a 52 week comparison.

Timothy J. Reid

It was morethan 30.

Bob Sasser

Thirty.Thirty. Thirty basis points. Excuse me. As far as the, oh, you asked about,help me with the question.

Jeff Sonnek – Friedman, Billings, Ramsey &Company

Yeah, youtouched on gross margin more than 30 basis point help from the week and thenhow about SG&A? I think there was some incentive comp.

Bob Sasser

Well, notmuch, but as far as incentive comp, we don’t expect that to be a big, it was abig number last year fourth quarter that was an increase. We don’t expect thatkind of a change this year in fourth quarter. We basically feel very good abouthow we’ve accrued for that throughout the year.

Jeff Sonnek – Friedman, Billings, Ramsey &Company

Okay. Andthen I think advertising was up last year in the 4Q.

Bob Sasser

Advertisingthis year in the fourth quarter as a percent in sales is likely to be slightlydown. We expect our merchandise margin to continue to be slightly positive.Markdowns are well managed and within line. Our strength is about the same aslast year. That’s under control. The big bogey, Jeff, this year again is thefuel, the diesel fuel prices and the affect on the gross margin. So if you cantell me what that price is going to be I’ll give you the answer on the rest ofit. That is one that we’re just going to have to wait and see how that turnsout.

Jeff Sonnek – Friedman, Billings, Ramsey &Company

And then,just to follow up on all of this, you know, you’ve talked about strength beinga benefit for a couple quarters. Can you just describe for us, where is thatreally coming from when you really get down to it? Is there more opportunity orare you guys really pretty efficient?

Bob Sasser

You know,we’re pretty efficient. Right now we’re, for fourth quarter strength’s going tobe the same as it was for last year. We’re at the same rates. It had been earlierin the year at a higher rate and through our inventories this year we’ve beenable to see where we can, we have brought that down. There is still moreopportunity and our strength, it’s, I think we’re 2.05 now is where we are. Iwant to get that below 2 and I believe we can. And I think it’s coming. We’rewell on the way to getting there. Frankly it’s coming from just focus andoversight and managing the basics of the business at the stores and doing allthe things that we know how to do to manage our strength. I feel very goodabout how it’s being managed. The pressure is going to be downward on thestrength. I don’t really see that growing.

Jeff Sonnek – Friedman, Billings, Ramsey &Company

Great. Thankyou.

Bob Sasser

Thank you.

Operator

We’ll take ournext question from Patrick McKeever with MKM Partners. Please go ahead.

Patrick McKeever – MKM Partners

Thanks. Myquestion is on the, you recently distributed a holiday circular and I’m justwondering, I think it’s just four pages. Did you do that last year or is it newfor this year?

And then justgenerally speaking, how is your holiday advertising campaign? What is yourapproach this year versus last year? Is it any different? I know you’ve beentalking about shifting add dollars from TV and radio into print. Will that bethe case for the fourth quarter as well?

Bob Sasser

That is thecase, Patrick. And the ad, we’ve just dropped a four-page circular, I believedropped over this past weekend. It was an anniversary of a circular from lastyear, but we added more stores and more markets this year. So we had an eventlast year, this year we’ve expanded the coverage of that event. As far as thefourth quarter, the focus on our advertising is in the print, just as you sawthat circular. We’ve had some success in the past with aligning the store. I’vealways said the store is the ad and it’s the focus on what’s on your front endand your lobby, what’s on the end caps, what you’re showing, what you’restanding for. And then what we’ve don with these circulars is we’ve supportedthat with the print media that we’ve distributed in the tab as well as thestore front signing.

And ifnothing else, I think that half the benefit comes from having everyone of thestores focused on these key items, these great mostly seasonal key items thatwe’ve developed for the holidays. I believe that since we’ve started doingthis, if you go in our stores you’ll find a lot more consistency on these keyholidays with what is on the front table. This week the front table is Christmascards. I think everybody in the country across over 3000 stores knows that thedrive item this week is Christmas cards. So we’ve really put a keen focus withour advertising on our in-store selling effort focusing our stores on these keyitems. That’s where I think we’re getting a lot of the results from theadvertising.

Patrick McKeever – MKM Partners

Yeah, no, thestores look great. And then just my second question is on the Visa roll out andthe question is, are you baking in any benefit to sales in the fourth quarterfrom the Visa initiative or Visa roll out or not?

Bob Sasser

Yeah, well,we rolled it out October 31st, I think was the date. Yeah, we areexpecting some benefit. I think we’ll probably find that there’s more benefitfrom rolling credit out for fourth quarter than any other time of the year. Sowe are baking in some benefit for Visa credit. We already had it in 700 to 800stores, I believe, so this was just getting out across the rest of the chain.But there is going to be a benefit from this.

Patrick McKeever – MKM Partners

Okay. Great.Thank you very much.

Bob Sasser

Thank you,Patrick.

Operator

We’ll takeour next question from Dan Wewer with Raymond James. Please go ahead.

Dan Wewer – Raymond James

Bob, I had aquestion on sourcing. With indications of inflation rate accelerating in Chinaand given the importance of that country to your product mix, what challengeswill this present in your gross margin rate, recognizing that over the shortterm you’re contracts protect you, but over the long term I would assumethere’d be some pressure? So can you touch on your strategies?

Bob Sasser

Dan, we’vedone, our buying group has done just a terrific job in China. I just returnedfrom a week with them on their last trip and there’s all kinds of talk in Chinaabout prices going up and there’s talk about raw materials and there’s talkabout energy and labour and all the things that you know. At the end of theday, we’re buying large quantities. We’ve developed a relationship with people.And we are actually getting lower costs in many cases from our Chinese goods.So on same-same items, we’re actually finding that we’re able to leverage ourpencil into lower costs, even in the face of the concerns about inflation.

And then too,remember that we’ve always built our assortment around the margin rate and thevalue that we want to offer the customer. We’re in complete control of that. Soit’s not always exactly the same item year over year. It might be a differentitem. It might be a different factory. It might be positioned differently inthe mix. And at the end of the day our merchandise margins, two things arehappening right now and have been happening all year. Our merchandise marginshave been going up on our Chinese goods and we’ve also imported a largerpercent of our mix goods from imported goods this year than last year, probablyabout 5% more this year. So the share of those goods have grown and that’s oneof the things that’s impacting positively our overall gross margin this year.

As far as domesticsourcing, there’s pressures on raw materials. There’s pressures. The only thingthat I can tell you that I can point to that we’ve said, well, we just won’tsell this anymore is half gallon quarts size milk. You know, milk has gonethrough the ceiling. We’re now down to pints, I think, on our milk. And in someof our stores we sell actually the soy product and we’re looking for creativeways to manage that piece. It wasn’t a good piece of our business anyway, butthat’s the only piece that I can really point to on our domestic sourcing wherewe’ve just said, well, okay, we’ll go to another product. Some of our dairy,we’ve had some great success, by the way, with converting some of our dairyspace in our frozen refrigerated stores to more refrigerated beverage. Youknow, non-carbonated beverages have been just really high. So we’ve taken doorsin some of our stores and put an assortment of non-carbonated beverages thathave really been more productive than some of the dairy type products thatwe’ve had in there.

Dan Wewer – Raymond James

Okay. AndBob, as a follow up, on the product recalls of Chinese manufactured products,what this is requiring Dollar Tree to do to ensure minimum quality standardsand does that add any extra expenses or expand the number of days in the supplychain?

Bob Sasser

You know,Dan, we’ve always tested for the past five years plus. I know the more usedthird-party testing as a way of making sure that we are meeting therequirements. Whatever the product category is required for safety or health,that’s what we test to and we’ve used it. We’ve always, well, five years ormore we’ve used the third-party testing on that.

It’sincreased my anxiety level, I will tell you. I don’t like hearing these things.I can’t tell you that there’s any more issues that pop up than we have had.They seem to be more prominent when they pop up. We’ve been very good citizens,though, always and been proactive. We will typically find something that ifthere’s a problem with it before anyone else does and report it to the CPSCourselves. That’s, we don’t want things to get through, but sometimes things dohappen and something might get into the system. We’ve had a couple of instancesthis year, but not any great number, but we continue to test. We’re diligent onthat. We have meetings with our factories and we express our sincere, you know,we want to get the right standards and we want to make a product that fits thatquality. And we’ve had pretty good results.

But it’s allover the news and it’s not comfortable and there is anxiety about it beingreally overdramatized in many cases, I think.

Dan Wewer – Raymond James

Right. Well,good luck to you.

Bob Sasser

Thank you.

Operator

We’ll takeour next question from Mitch Kaiser with Piper Jaffray. Please go ahead.

Mitch Kaiser – Piper Jaffray

Thanks, guys.Good morning. I think on the last call Kent talked about the stock being a goodvalue. I think it was about 42 at that point. Today the stock’s at 27, as we’reall painfully aware of. What level of debt would you be willing to take on tobuy the stock at this point, especially given that you thought, at least Kentthought it was certainly a good value at 42? And then I have one follow up.

Bob Sasser

Well, ourposition, Mitch, has always recently been to use our free cash flow to buy backour stock. And we’ve done that fairly consistently this year. Obviously ifwe’re buying back at 40 we feel 27 is also a good time to be buying. But as faras taking on more debt, you know, right now I’m looking at the opportunity, Icontinue to see the opportunity and Dollar Tree stores and continuing to opennew Dollar Tree stores is a better opportunity for us and a better way to serveour shareholders by continuing to increase our market share to drive our topline. And also to continue to improve our efficiencies and our business.

I’m veryproud of our logistics network and every store that we open now makes it moreefficient. But we did just expand our Briar Creek facility because our businessin the northeast has grown faster than we had anticipated. All good news. So wewent up there this year and we added a few more hundred thousand feet to ourBriar Creek facility.

So investmentin our business, investments in the future, we’re still about growing thiscompany. We have opportunities with the Deals concept that are just becomingsomewhat clearer, but that’s before us. We would prefer, I would prefer to tellyou that I’m going to use our capital, our cash, our capital to fund ourbusiness first and foremost. Now, $27 stock we’re going to stay, we have anauthorization from our board still of over $500 million availability, and we’llcontinue to look at the opportunities to buy back our stock as we have earlierin the year. I have no immediate plans to borrow money to buy back the stock.

Mitch Kaiser – Piper Jaffray

Okay. Andthen you mentioned, you didn’t mention the multi-price point in the existingDollar Tree store, so it’s my recollection that you were trying an additional25 this fall. Maybe you could comment on how those were going this far. And anyplans that you might have.

Bob Sasser

I’d love tocomment. The reason I didn’t say any more is because the other 20, actually 27is still fairly new. So we’re having a good time with them. We’ve seen a lot ofexcitement. Just as a reminder, we call it Oops. We know it’s not a dollar, butthe value’s too good to pass up and we’ve put 20 to 25 feet into now 50-ish stores across the widegeography. What we’ve found is really three things. First of all, the extremevalue seasonal items have a great attraction for our customers. We’ve had somegreat success with some toy trucks recently at $5 and holiday candles andcheerleader dolls. We’re selling, you know, that’s pretty good numbers in someof these stores on those items.

The secondthing we’ve really gone after is to stock up and save bigger sizes on theconsumable items, particularly brands. Sometimes not possible at a dollar, butit is at $5 maybe. And we’ve had some good results on bigger sizes, biggersavings, and stock up and save. And then the ability to sell some new productthat would never have sold at a $1.We had some lined storage baskets that wesold at $5. There was fleece blankets at $3. And microfiber blankets at $5. Soitem by item we’ve had some pretty good success and it is really exciting. It’stoo early to say what that means across the chain.

Again, thereare some issues with the ability for the customer to accept it and our abilityto roll that out over a larger geography without contaminating, if you will,the value statement that we have with our customer where everything’s $1. SoI’m very careful about that. But let’s get through the fourth quarter. As Isaid on the last call, we just rolled these out. Let’s get through the fourthquarter and then we’ll know more and we can talk more about plans for future.Right now I have no more plans more than the 50, I think it’s 53 that we havenow. Although I’m excited about it. It’s been fun.

Mitch Kaiser – Piper Jaffray

Okay. Goodluck over the holidays. Thanks.

Bob Sasser

Thank you.

Operator

We’ll takeour next question from William Keller with FTN Midwest. Please go ahead.

William Keller – FTN Midwest

Good morning.Thanks for taking my call. I believe for the last quarter you gave us some ideaof what the comps pace was through the quarter sort of by month. I wonder ifyou could do that again.

And then anyupdate on the CFO search would also be appreciated. Thank you.

Bob Sasser

Yeah. I can’tgive you, we don’t disclose by month what the comps were. I will share thiswith you that they started off stronger than they ended. So there was a littlebit of a, to get to the 1.9% it just coasted down really through the threemonths a little bit. That’s one, just to give you some colour.

As far as CFOsearch, we have search companies employed out across America. I actually havetwo: one on the east coast and one on the west coast. We’re looking for thebest CFO person we can find. We’re excited about the names that I’m seeing andthe opportunities to bring in highly qualified candidates. If you have anyideas, let me know. I’d certainly appreciate some insight on to people. I wouldwelcome input on that. But I don’t expect a new CFO until after the holidays.People are busy, the people I’m trying to hire are employed, and they’reemployed at good companies and they’re busy running a business right now. Soit’s likely going to be after the holidays before we can get with these peopleand really get down to the brass tacks of hiring one.

In themeantime, my finance team, Katie and Roger and the rest, are pretty darn good.I think you’ll have to say this business is in great hands. Any more questions?

Operator

Yes. We’lltake our next question from Adrienne Shapira with Goldman Sachs. Please goahead.

Adrienne Shapira – Goldman Sachs

AdrienneShapira. Bob, just, you know, in light of the pressures that you highlightedannouncing on the consumer, can you just talk about what the competitivelandscape is out there? How aggressive have you noticed pricing in like items?Thanks.

Bob Sasser

You know,Adrienne, I don’t look at pricing in like items as being a part of ourpressure. Frankly, we are, we’ve always had an opportunistic point of view. Onbranded items especially, things that you can compare directly, we buy themopportunistically. We bring them in, we sell them through, and by the timeanybody else notices that usually those are gone. And then as far as the restof our mix a lot of it is things that we build and create the value ourselves.They’re maybe just a little different than what you’ll find in some of the bigstores. I have not seen pressures from, other than there are just a lot ofpeople out there, but I can’t tell you that I’ve seen a pressure from acompetitor that’s oh, my goodness, and they’re taking share away from us. Idon’t mean that to be crass. We actually look at ourselves as the mostcompetition. We continue to open more stores in these markets and every time Iopen one I have one that’s up against it. So we compete with ourselves.

But as far asgoing out in pricing, first of all, like items you have to really look hard tofind exactly the same items in our store as is at a Wal-Mart or a Target orthose other stores. And when you do it’s usually, if it’s a branded item it’susually a close-out or an opportunistic buy.

Adrienne Shapira – Goldman Sachs

Okay. Iappreciate that you work hard to differentiate the assortment, but I’m justwondering, perhaps maybe not like items, but in same type of categories. Whenyour managers go out and perhaps price in the market. Could you just share withus perhaps where your pricing advantage has been and has that changed?

Bob Sasser

We reallylook at our differentiation as the key issue. That and our shopping experience.The idea of coming, people shop at Dollar Tree, Adrienne, because they likeshopping with us in addition to the value. They never know what they’re goingto find. It’s that surprising value and then everything’s $1. When they comeinto our store everything’s $1 and, oh, my goodness, it’s only $1. It’s disarmingand the value is great. You’ll find things in a Dollar Tree store that you’renot going to find anywhere else.

If you gointo our seasonal offering right now, take a look at our decorations wall.You’re not going to find that anywhere. Yes, you’ll find Christmas decorations,tree ornaments other places, but you’re not going to find these with thesethemes that our people have put together that coordinate to make these themesfor these trees. You’re not going to find that anywhere else. The Christmascards on the front table for a buck. I mean, I’ll stand that value againstanybody’s.

When we lookat Family Dollar, Dollar General, anybody else that’s out there in thebusiness, they have an offering too, but we have been very successful indifferentiating our products and also offering something, we worked very hardto offer that shopping experience. So when you come into our stores they’reclean, they’re bright, they’re fun, people are friendly. How much is this isstill the question that I hear the most in our stores. Oh, it’s only,everything’s $1. Everything’s $1? That’s the idea of a Dollar Tree. And thatdoesn’t exactly lend itself. Everybody knows the price; it’s $1. Once they getin there they can’t believe the price. That’s really what makes us who we are.

Going out andputting together a list of cleaning supplies, basic consumer products andcomparing them against, you really gotta work hard to find exactly the sameitem across the network of competitors.

Adrienne Shapira – Goldman Sachs

Okay, Bob.That’s helpful. But just maybe then, following up, when you look in the basketsand you highlight and seasonal were strong, but as you’re expanding basics,could you just take us through, when you were looking at the basket, thepercentage in there that’s perhaps discretionary. How much is, how much hasbeen seasonal? Where is that percentage? Where is it heading, especially, asyou grow basics and perhaps as the consumer is perhaps tightening up a littlebit more on the discretionary spending?

Bob Sasser

That’s reallya good, that’s a really good question because one of the things that we’ve doneover the past five years especially is we’ve evolved and built these biggerstores. We have put more of the consumer fast return and things that people needevery day product in the stores. We used to, probably five, six, seven yearsago I would tell you that about 30% of what we sold was needed and 70% wasdiscretionary. That’s closer now to 40% to 50%. It might be 45% needed consumerproducts, 55% discretionary. And that too will change by store and by market.But we have grown that mix. I call it things you need. You know, the thingsthat people need every day. We’ve grown that mix of product. That is part ofwhy this year we’ve had the opportunity to increase our traffic. We sell thingsnow that people buy more frequently. They make more trips. And by the way, whenthey’re in the store they buy more and it lifts the tide, so to speak, on ourdiscretionary product, too. So I’m going to say 45% needed and 55%discretionary, which is up considerably from 30% a few years ago.

Operator

Thank you.Due to time constraints we only have time for two more questions. And we’lltake our next question with David Cumberland with Robert W. Baird. Please goahead, Sir.

David Cumberland – Robert W. Baird & Company

Thanks. Onthe gross margin increase, was the improved mark-up mostly due to the higherpercentage of imports that Bob mentioned and will Q4 see a similar increase onthe import percentage versus Q4 ’06?

Kathleen E. Mallas

It’s really,you know, we saw some help in terms of the merchandise mark-up across almostall the departments. We do anticipate seeing a similar trend in terms of themerchandise margin itself in the fourth quarter as well. That should stay thesame.

David Cumberland – Robert W. Baird & Company

Thanks. Andas the credit penetration likely grows with Visa chain wide, would you expectto call out higher credit related fees as you have on the debit card fees?

Kathleen E. Mallas

Yes, we dobelieve we will see a similar trend. We’ve seen some up-tick in that this yearas the debit penetration ramped up and the credit will continue to put somepressure on that expense.

David Cumberland – Robert W. Baird & Company

Thank you.

Operator

And we’lltake our next question with Ralph Jean with Wachovia Securities. Please goahead.

Ralph Jean – Wachovia Securities

Great. Thankyou. Just a couple quick questions. One, Bob, you’ve gone about the roll out ofthe coolers at a very managed and measured pace. Do you see that pace remainingstable as you go forward?

Bob Sasser

Is this RalphJean or Sean Jean?

---Laughter

Ralph, wehave grown as we’ve been known to do at Dollar Tree. We take a measuredapproach on these big initiatives and we’ve been very consistent with that.We’re going to continue to grow and roll out at somewhat lesser levels as we goforward. I’d like to say 200 to 250 stores maybe next year, in that range, asopposed to the bigger numbers that we’ve done. But we’ve only in it, we’re inless than 1,000 stores at the end of this year with more than 3,000 storesoperating. So we do have a little more runway on that initiative.

Ralph Jean – Wachovia Securities

Yeah. Andthen just what you’re seeing so far on the Visa implementation. I know it’sbeen about a month, if that. Is it coming along as you expected? Is it takingout faster or does it take a little while to ramp up? How is it progressing sofar?

Bob Sasser

It’s tooearly to tell, Ralph. It’s only been a couple weeks. I mean, we have seen someincreases in our average ticket from the Visa roll out. But it is just soearly, it’s hard to – It’ll be there. I have confidence that it’s going to bethere. Especially in the fourth quarter. You know, people tend to use creditcards more and ride that float a little bit in the fourth quarter. So I believefirmly that we’re going to be able to see it in the fourth quarter. But it’sjust so early I can’t tell you a number.

Ralph Jean – Wachovia Securities

Sure. Thankyou.

Bob Sasser

Thank you.

Operator

And we’lltake our last question with Mike Baker with Deutsche Bank. Please go ahead.

Michael Baker – Deutsche Bank

Great.Thanks. Slid in there. So I wanted to ask you about the new store productivitybased on your sales guidance in the comps and how many stores you’re going toopen, etcetera. We gotta make some estimates. But I get to around 55% to 60% iswhat we should assume for new store productivity in the fourth quarter. Is thatright and, so it’s a little bit of a slowdown. Are stores opening later in the quarteror is it just in a tough economy, stores don’t ramp up as well, or am I justcompletely off base on my calculation?

Bob Sasser

I’m not surewhat the 55% to 60% you’re talking about. I’ll tell you this: we got two goalson our real estate plan. One was to open more stores earlier. Missionaccomplished; we did that. We also wanted to open stores more productively thisyear. So far to date, to date I can’t tell you that we’ve had any improvementin that. Now, I still have some stores. Part of it is the mix of stores thatwe’ve opened. When we open a more higher mix of suburban and rural stores, theproductivity on the stores are a little less than the metro stores. Mostrecently we’ve opened up in some of these urban markets in the northeast thataren’t end much productivity numbers yet because we can’t annualize them yet.

So right nowI’m running just a little bit behind plan. I believe that by the end of theyear my store productivity this year is going to look a lot like it was lastyear, which means that we did not accomplish our goal on that. I think there’sstill an opportunity in merchandise and grand opening and driving those storeson the first few weeks of opening them up better. I think that’s something wecan work on for next year.

Michael Baker – Deutsche Bank

Okay. Thanks.That’s simple. And the true follow up is, within the store counts that yougave, does that include or exclude the Deals stores?

Bob Sasser

It includes.That includes the Deals stores.

Michael Baker – Deutsche Bank

Okay. That’sall. Thank you very much.

Bob Sasser

Thank you.

Operator

Thatconcludes our question and answer session. I’d like to turn it back over tomanagement for any additional or closing remarks.

Timothy J. Reid

All right.Well, thank you all for participating on the call at this time. I hope you allhave a happy and prosperous holiday season. Our next conference call isscheduled for Wednesday, February 27th, 2008, when we will announceour full-year results. Thank you.

Operator

Once again,ladies and gentlemen, this will conclude today’s conference. We thank you foryour participation. You may now disconnect.

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