Good day, and welcome to the Dollar Tree Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Randy Guiler. Please go ahead. .

Thank you, Marquita. Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the second quarter of fiscal 2014..

Our call today will be led by our Chief Executive Officer, Bob Sasser, who will share insights on our second quarter performance and an update on our business initiatives.

Kevin Wampler, our Chief Financial Officer, will then provide a more detailed review of the second quarter financial performance and details related to our outlook for the remainder of 2014..

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

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors included in our most recent press release, most recent current report on Form 8-K, quarterly report on Form 10-Q and annual report on Form 10-K, 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..

On July 28, 2014, Dollar Tree announced it had entered into a definitive merger agreement to acquire Family Dollar Stores. The transaction is expected to close by early 2015. In the second quarter 2014, Dollar Tree incurred approximately $7.5 million in acquisition-related costs.

Unless otherwise noted, all margin, net income and earnings comparisons presented today exclude the impact of the Family Dollar acquisition-related costs for the second quarter and year-to-date..

The purpose of this call today is to discuss Dollar Tree's earnings for its second fiscal quarter. As mentioned, Dollar Tree and Family Dollar have a definitive merger agreement. We are continuing to work on the proposed transaction. You have likely seen Dollar General's public letter from yesterday and Family Dollar's response this morning.

Bob will have a very brief statement on that, but we want to focus on Dollar Tree's earnings this morning and we do not intend to make any further comment at this time, neither in the Q&A session following our prepared remarks nor in follow-up calls. Thank you in advance for respecting our position. [Operator Instructions].

Now I will turn the call over to Bob Sasser, Dollar Tree's Chief Executive Officer. .

Thanks, Randy, and good morning, everyone. This morning, we announced Dollar Tree's results for the second quarter 2014. Comp store sales on a constant currency basis increased 4.5% in the quarter, driven by both increases in traffic and average ticket.

Adjusted for the impact of Canadian currency fluctuations, the comparable store sales increase was 4.4%. This was on top of a 3.7% comp in the second quarter last year and a 4.5% comp the year before..

Total sales grew 9.5% to just over $2.03 billion. Operating income increased by $11.2 million, or 5.6%, and operating margin for the quarter was 10.5%. Net income, excluding acquisition costs, increased to $126.1 million. And adjusted earnings per share increased 8.9% to $0.61 compared with second quarter 2013 earnings of $0.56 per share..

For the first half of 2014, compared to the prior year, total sales were $4.03 billion, an increase of 8.4% compared to the first half of 2013 and comp store sales increased 3.1% for the half. Earnings per share were $1.28, an increase of 11.3% compared with $1.15 per share in the first half last year.

Operating income increased by $26.6 million to $212.5 million. Operating margin was 11.0%. And net income rose $6.1 million to $264.3 million..

I'm very pleased with second quarter performance. With customers under continued pressure, our plan at Dollar Tree is to be a part of the solution to help them balance their budgets by offering higher values on more of the things they need every day and higher values on things they want.

We intend to serve our existing customers better while taking every opportunity to claim new customers and gain market share as we demonstrate that Dollar Tree is a convenient and fun place to shop. .

At Dollar Tree, yes, you can afford it. Our merchants continue to deliver products that exceed customers' expectations. Our values are higher than ever, and our price is always $1 in every Dollar Tree store every day..

Our sales initiatives are producing results. Sales growth in the second quarter was a result of strong performance across the store in both our basic consumable and discretionary products. Top-performing categories included pet supplies, hardware, household products, food, electronics and party.

Sales strengthened throughout the quarter with our strongest comps in period 6, July, and the momentum continues. We're pleased with the initial sales trends we've seen in the third quarter..

Performance in the second quarter was relatively consistent across the country and all zones achieved positive comp store sales. The highest comps were in our Southern zones..

Looking forward, we're positioned for continued relevance to the customer, sustained growth and increased profitability. We have room to grow and the ability to grow in many different ways.

We plan to continue growth by opening more stores, by increasing the productivity of all stores and by developing new formats, new markets and new channels as growth vehicles..

During the second quarter we opened 90 new stores and we relocated and expanded 20 existing stores for a total of 110 projects. Total square footage increased 6.8%. We ended the quarter with 5,166 stores.

While our opening cadence is a bit later this year, we're on track to achieve our opening plan for the full year, which includes 375 new stores and 75 relocations and expansions for a total of 450 projects across the U.S. and Canada. As a reminder, square footage for the full year is planned to increase 7% over fiscal 2013..

In addition to opening more stores, we continue to execute our strategy to increase productivity in all stores. As discussed in prior quarters, our sales and productivity initiatives include category expansions.

Our customers are finding more value as we continue to rationalize and expand assortments in pet supplies, hardware, health, beauty and eyewear, as well as home and household products. .

Across the chain, customers are seeing more powerful seasonal and party presentations that create excitement and a fun shopping experience. Our seasonal assortments are creating merchandise energy with our storefronts changing with the seasons. We want to own the seasons at the $1 price point. .

Store associates are working to provide more effective customer engagement throughout the store and especially at the front end to drive impulse and related item sales through cross-merchandising and suggestive selling.

Our stores are keenly focused on providing value and a shopping experience that exceeds the expectations of every customer in every store every day..

Merchants and stores continue to focus on being first-of-the-month ready with an increased emphasis on not just full, but chunky displays of basic consumable core items at the first of the month when more customers are shopping for their basic needs.

We've reintroduced our See What $20 Buys, along with our Stretch Your Dollar campaigns through in-store promotions, signing and digital media and we're pleased with the consumer response. It's ripe for the times. .

And to satisfy basic needs and to drive increased shopping frequency, we continue to expand our frozen and refrigerated category. In the second quarter, we installed freezers and coolers in 141 additional stores. We now offer frozen and refrigerated product in 3,410 stores with plans to continue growing.

While this category is lower margin, the product serves the needs of our customer. It's faster-turning, more frequently purchased and the increase in shopping frequency provides the opportunity to drive sales across all categories, including higher-margin discretionary product..

In addition to our Dollar Tree stores, a key component of our growth strategy is the continued expansion of our portfolio of brands including Deal$ and Dollar Tree Canada. Our Deal$ brand extends our ability to serve more customers with more categories and increases our overall unit growth potential.

Deal$ stores deliver low prices on everyday essentials, party goods, seasonal and home product. The stores operate using a multiple price point strategy. They offer a higher consumable mix than our Dollar Tree stores and they produce a higher average ticket.

By lifting the restriction of the $1 price point at Deal$, we're able to serve more customers with more products at value prices every day. We ended the second quarter with a total of 216 Deal$ stores..

Our Dollar Tree Canada brand expansion continues. We opened 7 new Dollar Tree Canada stores, ending the quarter with 196 Canadian stores and we're on pace to meet our expansion plans for the year.

Leveraging the buying power of Dollar Tree, our merchants are sourcing higher-value product and our Canadian customers are finding broader, more exciting assortments and better values in the stores. We continue to see enormous potential for growth in Canada. As we grow and improve, we believe the Canadian market will support up to 1,000 stores.

This is in addition to the 7,000-store potential for Dollar Tree in the United States, plus additional growth in our Deal$ brand. Our goal is to be recognized by customers as the leading retailer in Canada at the single price point of $1.25, just as we are in the U.S. at the $1 price point..

In addition to Dollar Tree, Deal$ and Dollar Tree Canada, our online business at Dollar Tree Direct is growing in size and performance. Dollar Tree Direct provides an opportunity to broaden our customer base, drive incremental sales, expand brand awareness and attract more customers into our stores.

In the second quarter, we launched a newly created section on our website called Xtreme Values & New Arrivals. This provides online customers the opportunity to efficiently shop for amazing bonus buys, fantastic deals on manufacturers' closeouts and exciting new arrivals. We continue to see growth in customer outreach through social media.

A few examples include our loyalty club, the Value Seekers Club, which has grown 120% over the past 12 months. Our email database has grown more than 130% over the past year to more than 1.3 million subscribers and we now have more than 1.2 million followers on Facebook.

Social media provides a tremendous opportunity to communicate with our customers about exciting events and great products, both in our stores and online..

Lastly, as always, our practice has been to build infrastructure to support growth ahead of the need. Earlier this year, we broke ground on a 250,000-square foot expansion of our Joliet distribution center.

The expansion will bring the total size of the facility to 1,450,000 square feet and will include a second sorter to the existing material handling system to enhance capacity and efficiency. The project is on schedule for completion by year end..

Before turning the call over to Kevin, who will give you more detail on our financial metrics and provide guidance, I will comment very briefly on Family Dollar. As you know, we have a definitive agreement with Family Dollar and we are committed to the transaction.

We believe that we are offering Family Dollar shareholders compelling, immediate and certain value for their investment and the opportunity to participate in the upside potential of the merger. We will, of course, be watching these new developments closely. We look forward to completing our transaction as soon as possible..

With that, I will turn the call over to Kevin. .

Thanks, Bob. As Bob mentioned, our adjusted earnings per diluted share increased 8.9% in the second quarter to $0.61 per share. We are very pleased with our comp sales performance, which accelerated throughout the quarter..

Starting with gross profit. Our gross profit margin was 34.2% during the second quarter compared with 35% in the prior year second quarter, a change of 80 basis points. The majority of the decrease was a combination of increased freight and merchandise mix. .

Freight expense increased by nearly 40 basis points, reflecting higher trucking rates related to driver shortages. Merchandise mix negatively impacted margin, which declined by approximately 30 basis points. As Bob mentioned, we have made strategic decisions to expand assortments focused on providing greater value to our customers..

Distribution expenses increased nearly 10 basis points, primarily driven by the expense associated with our new distribution center in Windsor, Connecticut. This facility opened in June of last year. We should annualize the year-on-year expense impact of this additional facility in the second half..

Excluding acquisition-related costs, SG&A expenses were 23.7% of sales for the quarter compared with 24.1% in the second quarter last year.

Payroll-related expenses drove the majority of the improvement, representing 30 basis points, as we had lower expenses as a percent of sales for insurance benefits, payroll, incentive compensation and payroll taxes..

Adjusted operating income increased $11.2 million compared to the second quarter last year, and adjusted operating margin decreased 40 basis points to 10.5% when compared to the second quarter last year..

The tax rate for the second quarter was 38.2% compared to 37.9% in the second quarter last year. The increase in the tax rate is due to lower Workers' Opportunities Tax Credits in the current year, resulting from the expiration of certain tax provisions..

Looking at the balance sheet and the statement of cash flows. Cash and investments at quarter end totaled $467.7 million compared with $413.7 million at the end of the second quarter of 2013. .

As you may recall, in September of 2013, our board authorized a $2 billion share repurchase program. Under this authorization, the company invested $1 billion for share repurchases through an accelerated share repurchase program that was launched on September 17.

The ASR was funded by $250 million of available cash and $750 million from the private placement of senior notes completed in September. During the second quarter, on May 15, the company received 1.2 million shares, completing the ASR.

Altogether, the company received a total of 18.1 million shares under the $1 billion accelerated share repurchase program. The company has $1 billion remaining on its share repurchase authorization. The company did not repurchase shares during the second quarter.

And the diluted weighted average shares outstanding for the second quarter were 206.6 million..

Our consolidated inventory at quarter end was 6.5% greater than at the same time last year while selling square-footage increased 6.8%. Consolidated inventory per selling square-foot decreased 0.3%. Our inventory turn increased in the second quarter and we expect continued improvement in inventory turns for the full year.

We believe that current inventory levels are appropriate to support scheduled new store openings and our sales initiatives for the third quarter..

Capital expenditures were $88.3 million in the second quarter of 2014 versus $96.4 million in the second quarter last year. .

For the full year 2014, we are planning consolidated capital expenditures to be in the range of $360 million to $370 million.

Capital expenditures are focused on new stores and remodels, including additional fee development stores; the addition of frozen and refrigerated capability to approximately 460 stores, which has been increased from our previous estimate of 320 stores; IT system enhancements; the expansion of our Joliet, Illinois distribution center; and the initial phases of work on our 11th DC..

Depreciation and amortization in the second quarter totaled $49.9 million versus $46.6 million in the second quarter last year, an improvement of approximately 5 basis points as a percent of sales. .

We continue to expect depreciation expense to be in the range of $200 million to $210 million for the year..

we anticipate that freight costs will continue to be a meaningful headwind to gross margin, primarily as a result of driver shortages and related wage increases; product margin will remain under pressure based on strategic decisions to invest in certain product categories and drive increased market share.

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

Our guidance also assumes a tax rate of 37.2% for the third quarter and 37.9% for the full year. Weighted average diluted share counts are assumed to be 206.6 million for the third quarter and 206.9 million shares for the full year.

Additionally, we have not included any acquisition-related costs in our second half guidance as we cannot currently forecast the timing of when these costs will be incurred..

With this in mind, for the third quarter of 2014, we are forecasting sales in the range of $2.02 billion to $2.07 billion based on a low- to mid-single-digit comparable store sales increase and 7.2% square footage growth.

We anticipate the gross profit margin will continue to be challenged by year-over-year freight increases as well as our commitment to providing greater value to our consumers in this challenging macro environment.

Diluted earnings per share, expected to be in the range of $0.61 to $0.66, which would represent a 5.2% to 13.8% increase compared to third quarter 2013 earnings of $0.58 per diluted share. .

For the full fiscal year 2014, we are forecasting sales in the range of $8.44 billion to $8.55 billion based on low- to low-mid-single-digit increases in comparable store sales and 7% square footage growth. Diluted earnings per share, expected to be in the range of $2.94 to $3.06.

This represents an increase of 8.1% to 12.5% over 2013 earnings per share of $2.72..

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

Thanks, Kevin. Our initiatives to drive comp store sales are finding enthusiastic acceptance with the customer that, by all accounts, continues to be under pressure to balance their household budgets. Our in-stock on basics is the best ever. Customers are finding more of the things they need and want on each trip.

Stores are first-of-the-month ready with chunky displays of basic products. When the customer has money in their pocket and they are ready to shop, we want to be ready with the product they want. We think of the first of the month as 12 additional holidays and we prepare for them as such..

The expansion of wow items are providing customers with bigger sizes, bonus buys and bigger savings across the store. Our category expansions in pet supplies, hardware, household supplies, food, electronics and party are producing company-leading results and comp sales increases. .

We continue to roll out frozen and refrigerated product to more stores. Our customers like this product. They shop us first and frequently to get the values they need. .

Seasonal product adds excitement and merchandise energy to the shopping experience with an ever-changing assortment of fun and colorful product right at the front entrance. .

Our stores are full, fun and friendly with more customer engagement as we strive for the same great experience for every customer in every store every day. .

As you've likely heard from many retailers, the consumer continues to be under pressure. Our sales initiatives are aimed at responding to those customers' needs by being a part of the solution in their efforts to balance a household budget. We are investing in our customers, they are responding enthusiastically and you can see it in our results.

Our second quarter comp store sales increase of 4.5% was our best quarterly comp performance in 2 years. .

We're expanding market share. Sales came as a result of increases in both traffic and average ticket with the largest increase coming from traffic. Sales growth came from across the store with comp increases in basics and variety fairly evenly divided.

Sales strengthened throughout the quarter with our highest comp sales in July and sales momentum has continued into August. .

Total sales grew 9.5% and we exceeded $2 billion in second quarter sales for the first time in company history. We achieved 10.5% operating margin, down from our record high in second quarter last year, and still the highest performance in the discount retail sector.

And earnings per share grew 8.9% to $0.61 per diluted share, in the middle of our range of guidance..

We have multiple platforms for growth. In second quarter, we opened 90 new stores, expanded and relocated 20 stores and we ended the quarter with 5,166 stores and square footage growth of 6.8%..

The Dollar Tree brand is a benchmark of value for our customers, and there's a great opportunity to grow and expand the Dollar Tree brand in the United States through more stores and more productive stores..

The Deal$ brand is serving customers with increased value on even more categories. .

Dollar Tree Direct continues to broaden its reach to customers throughout North America, and Dollar Tree Canada is growing in size and customer acceptance..

As I look to the future, I see exciting opportunity. Our balance sheet is strong. The Dollar Tree business model is powerful, flexible and more relevant than ever, providing extreme value to customers while recording record levels of earnings. It's been tested by time and validated by history.

We remain committed to a concept that customers love and we're positioned to continue growing profitably for many years ahead. We have a vision of where we want to go and the ability to get there with infrastructure, capital, and most importantly, a talented management team that has a long history of retail success.

It's a great time to be Dollar Tree. .

Our inventories are clean and fresh. The shelves are full of terrific merchandise, our stockrooms are in great shape and our values have never been higher..

We will now address your questions about our second quarter. [Operator Instructions].

[Operator Instructions] We'll take our first question from Paul Trussell with Deutsche Bank. .

You highlight that pet supplies, hardware, I mean, household, food, electronics, party goods were the categories that were leading the comp growth.

But if you can just kind of clarify for us that when you say you invested in expanded assortments of high-value product, exactly what categories are -- does that reference? And how do we think about IMU and mix pressure going forward because of those investments?.

Paul, we've always said we're in control of our merchandise markup and we still are. And this was a very conscious decision to -- in a time when the customers were under pressure and traffic was stubborn and everyone was complaining about it, really starting back last year in the third and fourth quarter.

We responded by being the solution to their problems and not part of the problem. So we have invested in product. We have expanded some categories. There's really 2 parts to your question.

The highest-comping departments, the ones that you listed, the pet supplies and hardware and household products, food, electronics, party, are amongst the highest-percentage comp departments. A couple of those are our highest-volume departments, party and food.

So we've had increases by increasing and driving the business in these key departments for our customer. Across-the-board, our variety has grown as well as our consumer products have grown. Our home, especially, was very powerful in second quarter. Some of the items or some of the categories is licensed party goods.

We've added license -- the Disney license and Marvel license to our mix. We added Rubbermaid food storage into our housewares. Branded pet food, for an example, when you see pet supplies popping up as one of the leading comp departments. We're offering the king-sized candy bars, not the small candy bars anymore.

We've expanded in our dish in our home -- our dish detergent in our home area with some of the cleaning supplies with brands like Dawn and Palmolive. In HBC, we've driven the business on our -- we have branded toothpaste, Crest toothpaste. We have -- in our food and snacks business, STAX potato chips.

In our home area again, in our home supplies, household supplies, national brand toilet paper, national brand paper towels. So throughout the store, we've expanded in more space and more inventory and more of the things that our customers are looking for in a tough time, drive the business and -- driving the business in those categories.

And we've also been looking at special opportunity buys, wow items, multi-packs, larger sizes for the same prices and really delivering as much value for our customer every day. When they go in the store, they're seeing more value than they've ever seen. And as I said, the proof is in the numbers. Our traffic was up.

Our average ticket was up, which has always been stubborn, as you know. It's -- everything's $1, so the average ticket, you've got to sell some more. So more people are shopping us more frequently, our traffic is up. They're staying longer and they're buying more, our average ticket is up. .

And just as a follow-up, just to kind of shift gears, Bob. Obviously, in seeking to do the acquisition of Family Dollar, there were some questions from investors looking in on how confident you guys are in your ability to run multi-price point stores.

And so perhaps, if you can just give us some additional color on Deal$, the current quarter's performance, but also if you can just take us back a little bit about how the productivity and the operating margins have improved over the time frame of your ownership, what have you learned and how you can benefit from those learnings in your upcoming endeavor?.

Paul, I'm going to answer your question in a little different way. I'm not going to comment on the Family Dollar acquisition, as I said -- or Randy said in the beginning. Sorry, Randy. We just can't comment on that and I'm not going to comment on this. If your question is about our Deal$ format, I'm very proud of Deal$.

And we are seeing a lot of expansion, a lot of traction in our Deal$. I'll give you a little color on our Deal$ business. We ended the quarter with 216 Deal$ stores. Our comps were single-digit positive in our Deal$ stores. The merchandise mix in our Deal$ stores is a little different than what you find in the Dollar Tree.

In addition to lifting the restrictions of the price point, we have a little more consumable mix in our Deal$ stores. Consumable mix for the quarter was about 62% versus 38% for the non-consumable. And as you compare that to our Dollar Tree stores, at Dollar Tree we're about 50-50.

And for the quarter, it was -- consumables 50.4% and 49% -- 49.6% in the non-consumable at Dollar Tree. So you can see that the Deal$ mix is a little more consumable. The basket, a little bit about the basket, our average ticket is higher at Deal$, it was $9.51 for the quarter.

At Dollar Tree, we're about -- we're always around $8, a little less, $7.80, I think, for Q2. We have lifted the restriction of the price point in our Deal$. So the average ticket with items that are greater than $1 was $14.23. 53 -- almost 54% of all transactions had items greater than $1 also.

So our customers in the Deal$ stores are responding positively to the merchandise that we sell that's not $1. Our average unit retail for anything that's over $1 that we sell is $3.15. That's been pretty much where it's been for the past year. We like to see that grow and working on ways to make that grow. I think that's a big opportunity.

Greater than $1 item represented 48.5% of Deal$ total sales. So as we've lifted the restriction of the $1 price point, we're seeing exciting growth in Deal$. Again, at Deal$, we can serve more customers with more categories in more ways. .

We'll take our next question from Scot Ciccarelli with RBC. .

Gross margin-related questions as well. Bob, I know you guys have always tried to provide value to consumers. And for the last several years, you've kind of pointed to improving merchandise margins. It sounds like that was not the case this quarter.

So I guess the question is does this signal a potential, just kind of philosophical, change going forward regarding how we're viewing merchandise and -- the merchandise sales versus margin mix?.

It's a fair question, and I'm happy to say no. It's not really a change in our direction, it's more of a response to the times. We're always, as retailers, it's incumbent upon us to remain relevant to our customers. And as the customer pressures change, we have to react. Other retailers you might see lowering prices. Our price is $1.

Instead of lowering prices, and you've heard me say this before, we will invest in more value in tougher times. And we started seeing pressure on traffic and we started hearing from customers back late last year. And our comps weren't as robust as they had been.

And as a result, as we always do as good retailers, we chose to drive for traffic and market share. We can sit back and bemoan the fact that customer is under pressure and remains stubbornly under pressure, or we can do something about it.

We have done that and we've done what's very core to what we do at Dollar Tree and that is to exceed the customers' expectations for what $1 buys. And in this day and time, as customers are really looking for a way to help balance their budget, we have become a solution to their problem. They look for us to help them out.

And if you look at the results, the traffic was up. It drove most of the comp sales, but our average ticket was up also. So as I said earlier, they're coming more often. And when they're there, they're staying longer and they're buying more. They're seeing more product. These values are across the store, too.

We speak of things as if it's really just that simple as consumer versus discretionary. It's never really just that simple. We have those 2 big buckets. But if you looked at a little more granular level, you would see that our home business was really driving and carrying a big load in second quarter.

And our home business is made up of things that really are either both discretionary and consumable. There's things you need. There's things you want. There's food containers. You need them. You want them. They're high margin. They're not as high margin as our seasonal business, but they're higher margin than our basic consumable business.

So we were driving traffic throughout our store. We're looking to gain market share. And frankly, the big issue that hit second quarter, and probably it's going to continue to hit us in the rest of the year, was the freight. As I've always said, when we see an issue, we're always able to respond accordingly.

And if we see cost pressures in one area, if we see it coming and we can make plans for it, we can always make allowances and find other ways to save. And we can do the same thing with our freight costs. But this freight driver shortage issue came upon everyone pretty suddenly.

We've been expecting something, but we weren't really seeing it until recently.

So along with investing in our customer, which I will do again, and driving more sales at a slightly lesser gross margin rate, that was about 30 basis points, in addition to that, in second quarter, we had a 40 basis point pressure on freight, which is also in our gross margin. So that's something we'll deal with as we go forward.

This management team is really good at figuring out how to swallow some of these cost pressures and take advantage of other ways of delivering the gross profit. But in the meantime, we're responding by giving our customers more value. That's who we are, that's what we do. .

We'll take our next question from Vincent Sinisi with Morgan Stanley. .

Wanted to, first, ask you about really the consumer behaviors that you're seeing. I know you said remains constrained, though, of course, are responding to your initiatives and that fairly increased from a comp perspective throughout the quarter.

But can you give any color around stores that may be in relatively higher-income areas versus some that may be on the lower end? And if you are still seeing some differences between kind of the 3 buckets of income of your customers?.

Yes. Frankly, it's across-the-board. We really don't see anything that you could point to as a stark demarcation line between the higher income and the lower income. There's always markets wherein some of the lower-income markets and the urban markets, it's always been more highly consumable.

But across-the-board, if you start looking at the higher income versus the Middle America suburban, everybody's looking for a value. And everybody likes shopping at Dollar Tree. One of the things that we always pound the table about is it's not just shopping at Dollar Tree because you're looking for something you need. People do that. And it's only $1.

It's great value. But our customers also shop us because they enjoy the shopping experience. It's fun. You come in. You walk into the seasonal product. You walk into fun, colorful product, an ever-changing mix. There's always something that you find that you didn't expect to find as a customer.

So we have discretionary business, about 50%; consumer business, about 50%. If you look at the mix, you're seeing it's pretty much the same. It's just 50-50. It might be, one quarter, one's up a little and one the other -- differently the next. But still around 50-50.

So my answer is that the customers are under pressure, mostly middle income and lower-income customers as anecdotal, I mean, just from what we see. They continue to be burdened and concerned. We've said that. We're not alone in saying that.

They're facing higher taxes, higher health care costs, stubbornly high unemployment, although it looks like it might be getting a little better on the unemployment side. Higher cost of living really and no improvement in wages to speak of. They continue to face uncertainty.

And we are, as I said, we're responding to them with offering expanded assortments of basic, more wow items, bigger sizes, bonus buys, overall values for the dollar. And they're responding to it. Again, I'm really pleased that several things this quarter, but our sales growth came across a broad range of categories, not one or the other.

Our sales growth came from traffic largely, which is, in the retail business, you've got to have the traffic. So we didn't give up our traffic. In tough times, we invested in keeping the traffic coming in the store. But also, in the quarter, our average ticket was up.

So when they were in the store, they not only -- more traffic, more footsteps, but when they're in the store, they stay longer and they bought more. Our frozen and refrigerated product continues. We've grown that out to more stores. Our customers respond favorably to that through increased shopping frequency.

And on the seasonal and party and toys, discretionary items. By the way, yes, you can afford it. It feels good to walk into a Dollar Tree and you can still buy toys for the kids because they're only $1. And you can still buy party goods for the birthday. Everything's only $1. So that shopping experience in tough times is really worth something.

We place value on that. .

Great. And if I just could ask another question about the expanded high-value items.

Can you give a little bit of discussion around do you think that just having some new products into the store is really driving those sales? Or is it how your merchandising? Is it your See What $20 Buys, your Stretch Your Dollar campaigns? Just maybe a little more around the advertising? Or if there's incremental advertising for those products specifically?.

It's not so much more advertising. As you know, we're really not an ad-driven company. And advertising price points, there's no price reductions. Price is $1 today, it was yesterday and it's going to be $1 tomorrow. So getting that urgency in our concept has never been something that we've invested a lot of funds in. But in-store is a different story.

And yes, we've employed all of the above with signing in the store, with printed material in the store, with merchandise in the store, really beefing up some of those displays and those end caps and those value items and showing them and signing them up and telling the story of what great value saving.

By the way, we don't -- we make money on these items. It's just that it's a slightly less margin than maybe our highest-margin seasonal department.

So when you go into our home area and you start talking about food containers and storage bags and wraps and all of the things that you need in the kitchen for your household supplies and mops and brooms and all of those kinds of things, we're selling more and more of those products. It's not loss leaders. We make a lot of money on that.

But it's not just not quite that highest margin that you get from some of those clearly discretionary products like the seasonal areas. So you're going to find some Bounty in our stores. You're going to find Angel Soft toilet paper. You're going to find STAX potato chips. You're going to find Rubbermaid. You're going to find some name brands.

You're going to find some non-name brands, but you're going to find bigger sizes. In other words, a 12-ounce item might be 18-ounce item and it's all $1. Still, it's the same item that you loved in the past at Dollar Tree and we've beefed up the sizes and we've beefed up the value.

And we're offering that and they're recognizing it because they're buying it. And our comps are up in tough times, like we are in now. Our 4.5% comp is, I think, probably going to match up very favorably to what you see out there in retail. .

We'll take our next question from Dan Wewer with Raymond James. .

So Dollar Tree's gross margin rate of 35.9%, you reached that every year from 2010 through 2012 and you'd have to go back to 2003 before you had a higher gross margin rate than that. But last year, margins were down 30 bps, were down 60 bps in the first half of this year.

Do you think that we have finally reached the point where it's really difficult to protect margin rate for Dollar Tree with that single price point strategy? This has been a topic for the last decade, but do you think that we've finally reached that tipping point?.

I don't. It's not -- I'd like to tell you that the pressure is not on the initial markup of product. It's on our choices. It's still about what we choose to sell. It's still about understanding the value that we need to offer the customer to drive their purchase decision. At the $1 price point is not the issue at hand here.

It's really this long and stubborn pressure on the middle income customers, especially the lowest-income customers. And it's been several years now. And it's somewhat not -- it's going to get better, I'm optimistic. But there's not much light at the end of the tunnel. And customers continue to look at -- for value.

I would remind you, too, that we still have sector-leading operating margin. We pale only in comparison to our own previous operating margin. But it's a matter of choice, still.

We can drive higher margins, but we have chosen to, instead of sitting back and resting on whatever, the 11% or whatever it was, operating margin in the previous year, we've chosen to invest in the customer. We've chosen to invest in more value, more traffic, higher average ticket.

We want our customers to think of us as, if money's short, go to Dollar Tree. If you want to have a fun shopping experience, go to Dollar Tree. If you want party supplies, go to Dollar Tree. It's all $1 and it's all great value. So it's a matter of choices. It's not pressure on the cost from an inflationary standpoint.

We can still -- we turn down more product than we sell. .

A different topic. On the potential of a 7,000 Dollar Tree stores in the U.S., that's primarily focused on your traditional suburban-market real estate strategy.

What precludes the Dollar Tree concept from working in smaller, not necessarily rural markets, but smaller markets than you have historically focused?.

Nothing. And by the way, we've been saying 7,000 stores for a long, long time. I can't tell you how many years it's been that long. And the world has changed and our business has changed and our stores have gotten larger and our mix of product has gotten more to the consumer product needs. 50% things you need, 50% discretionary.

So we do very well in small markets. We do very well in urban markets. We do very well in rural markets. Our strength is in the suburban markets and Middle America, but there's nothing that precludes us from continuing past the 7,000 mark. I'm not announcing a new number out there, but certainly, we haven't done the math on that for quite some time.

You can't find a place where we don't do well, frankly. And I know that sounds like it's bragging, but our stores, 99-point-some percent of our stores are profitable. And as you know, we have stores in the boroughs in the northeast, in Brooklyn and the Bronx, and we have stores in Idaho so... .

But you're thinking that if real estate opportunities were to become available in markets, say, of 50,000 in population, that could work for Dollar Tree?.

We're always looking for great real estate at prices that fit our model. .

We'll take our next question from Matt Nemer with Wells Fargo Securities. .

My first question is a follow-up on gross margin. I just wanted to understand the timing around the IMU decision.

Is it fair that, that's the kind of decision you make sort of 6 to 12 months earlier? And then should we think of this as a 4-quarter investment cycle that you kind of have 4 quarters of that hit and then it goes away?.

Well, I don't know if it goes away or not. It depends on the customer. But certainly, at some point, you start anniversary-ing some of these. But the import goods are a little longer -- a little longer buying cycle.

If you remember, we started talking back in fourth quarter about initiatives to drive sales and it's not new to hear us talk about more wow in our stores and those kinds of things. In first quarter, if you went back and looked at our -- I know I spoke about the same kinds of things.

And first quarter, we had the terrible weather early on, but then it got better as the quarter went on as the weather went away. So we started getting some traction on some of the strategies that we were talking about then. And of course, that carried on into second quarter.

And I think at the end of the first quarter, I said, and by the way, momentum continues into second quarter. And it did. And it got better throughout the second quarter, fourth -- period 4. Period 5 was better than 4. Period 6 was the best of all in the quarter. So we have begun ramping up on initiatives that were begun some time ago.

Now looking forward, I will tell you that we think about this as flying an airplane. It's a little stick and a little rudder. We're flexible. We have a flexible model. And when times are tough and we need more traffic, we'll err a little more towards the consumer products.

And when times are a little better, or costs are going down sometimes, we may invest in more customers or we may invest in margin. So it really is all about the current environment and how you feel about that future environment. I think it's going to remain tough for the rest of this year.

We're not planning on any, in the second half, any macro news that says that things are going to be a whole lot better. So we're planning on continued pressure. And we're planning also on continued pressure on our gross margin from freight. It's in our guidance. So it's baked in there. And of course, we're always working to offset that in other ways.

But I think it's -- but we're in control of it. That's I guess the point that I'd like to leave you with, is we're not victims. We're running the business. We've always done it. We've been doing it now for 28, 29 years. And our gross margin, we have ups and downs. And it's all relevant to the customer and what's going on in the world. .

And then just as a follow-up on freight. What are -- could you talk to some of the areas that you would look to, to mitigate the impact of that? And with diesel, I know that diesel is down, I think, $0.15 or $0.20 from its peak.

Is that one area that we can see as a potential benefit? Or is that actually reset relatively frequently?.

I mean, diesel, as we look at it so far this year, it's really tracking fairly close to last year. So not a big difference one way or the other compared to last year. So there's not a lot of positive or negative there. And it's kind of been in that range for the last almost 3 years, realistically.

So whether we could get some, and listen, we'd love for diesel prices to continue to fall and be able to take advantage of that, but there's no guarantee of that at the end of the day. I think, as we look at freight going forward, it's no different than any other item. It's about process. It's about looking at new ways to potentially deal with it.

But I mean, I think it's, as we said in giving our guidance, we expect it to be a headwind as we go through this year. And it's really the effect in the second quarter was just a little bit more than what we talked about in Q1. Q1, I think, we said it was about a 30-basis-point effect, negative effect, on our gross profit.

In Q2, it was a little closer to 40. But the biggest thing we can do to help ourselves at the end of the day is continue to drive sales, keep market share, take market share, keep people coming in the stores. And good sales help in a lot of ways and I think that's the way we think about it. .

And we'll go next to Joan Storms with Wedbush Securities. .

I just -- I was very impressed with the discussion about the ticket because the ticket has been flat for a really long time. And if you could delve into that a little bit. It seems like you're investing in the high-value products and the increased traffic and then that's leading to the ticket. So I was wondering if you could go into that a little bit. .

Yes, it's more traffic largely. It's driven by more traffic in the quarter, but also our ticket and that seems to be a trend. It's coming from -- they're coming more frequently to the stores, they're staying longer and they're buying more. We're challenging them to buy more products.

We've taken, it's not just the low -- high -- low-margin, fast-turning consumer products that we have ensured that we're going to be in stock in, the things they expect and get when they come in our store. But it's also the surprising value when they come in the store.

And some of the stuff is not a low margin, it's just a little less margin that we would normally sell it for. And what it's doing is it's tempting that customer to buy one more item -- wish they would buy one more item, that'd be a big comp. But when they're in the store, we want them to come for whatever the things they need.

While they're in there, we want to sell them on trend and on style and on fashion and on wow. Look at this, this is a great item. By the way, I've used this before and it's 20% more this time. So I'm going to buy some more on this trip. Or it might be a new item that they haven't seen before that we've invested in and stacked up front.

So it really is and -- it's our buyers creating more value and it's our stores merchandising in such a way to drive more sales. We've talked about customer engagement. We've talked about related sales. We've talked about drive items at the front of our store with the cashier suggesting just one more item as they go out the door.

We're tempting our customers to buy more in every way. And we saw the results, good result from that in the second quarter. .

Great. And then, could you also comment, you talked a little bit about making sure you're really ready for the first of the month and being in stock. Can you comment like on how you've -- are the in-stock that much better for the first of the month. You're really making -- it seems like you're making an effort to have that on time. .

Well, first of the month, there's a lot of payroll checks out there. A lot of people get paid at the first of the month. A lot of the government checks go out the first of the month. There's a lot of things. There's a lot more spendable income around the first of the month.

And many of our customers, especially the lower-income customers, wait until the first of the month because they just really don't have the ability other times. When they come to the store, we want them to have the best experience possible at the first of the month.

So our stores and our replenishment people and our merchants are working ahead of the first of each month for the plans, what's going on which end cap, what's the highest sales opportunities, where can we stack things out, where can we make a difference in the store.

By the way, on the basic things, the key items that we know they want on every trip, let's make sure that we're in stock in business. We'll refresh our categories during that period of time. We will stack out more during that period of time. We will plan our end caps around first-of-the-month ready.

And it's, as I said, it's sort of like having another season. It's when you set Easter and you first roll it out and you put it all on the sales floor and you build the end caps and you build -- put the signing in place. And the night before, you're walking around and you patting it down and looking to make sure and checking it off.

Our entire organization is focused on the first-of-the-month sales. Whether it's the stores and the store managers, the buyers, the replenishment people, the logistics people, we all plan our business, to a large degree, around those firsts of the month, especially in the basic categories. Don't tell others we do that, by the way.

We're going to keep that our secret. .

We will take our final question from Meredith Adler with Barclays. .

I'd like to talk, first, about just brands and you clearly are carrying more brands.

Is there any change in your discussions with vendors? Are they more willing to make smaller packaging? Are they excited about the potential of having broader distribution of their products? Or are you just now deciding to carry those items?.

give us the best cost, let us take possession of it as early on in the supply chain as possible. We'll get it to the right store at the right time. But I will need the lowest price and I'll buy it in a way that really works for you. I might buy it in your down production time, but I need -- the main thing is we need value that's worth more than $1.

We'll bring it to our stores. We'll get it in the right place. And we want to pass those savings along to our customers. So that's the way we work with everyone. That's the way we work with our brands.

When you see us talking about introducing more brands, it's usually a decision that says we're looking for, really, to add a little more sizzle, add a little more excitement. We know it's a little less margin, but it's an investment in the customer and it's investment in traffic. .

Great. And I just have one other question about you mentioned fee development and that was, I guess, included in CapEx. But does that imply that you are building -- starting to really focus on building more freestanding stores? Because presumably, you don't have fee development if you're going into a shopping center. .

No. Meredith, a couple of years ago, we did start looking at fee development and bringing a few projects out of the ground ourselves. Obviously, if you think back a couple of years ago, the developers were still capital constrained and many of them still are today, and so there were not as many new projects.

And the other thing we found, as we went through this process, is we really like the idea of having a store located where we want it, the right size, the right shape, it has 4 walls instead of 6 or 8 at the end of the day. And basically, the linears lay out better, the adjacencies for merchandising lay out better. And we can put our best foot forward.

And we've found that these locations have performed very well, the ones we've done. Now it's a small subset of our overall openings in any given year, but it's something that we like and will continue to be part of our overall portfolio process. .

Thank you for joining us on today's call, and thank you for your continued interest in Dollar Tree. Our next scheduled earnings conference call will be Thursday, November 20, 2014. Have a good day. .

That does conclude today's conference. We appreciate your participation. You may now disconnect..