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CHESAPEAKE, VA-High gas prices did not hurt, and may have helped Dollar Stores Inc. deliver another positive quarter by nearly all measures. As traffic, total sales, comp-store sales and profits grew, margins took a slight dip to 33.2% in this year’s second quarter, compared with 34% in second-quarter 2005.

Management of the locally based dollar store chain attributed the margin slide to higher transportation costs, the continuing integration of the 138 Deal$ stores it acquired from Supervalu Inc. for $30.5 million this March and an ongoing planned shift to more consumables.

Bob Sasser, president and CEO, said raising margins represents “our biggest opportunity for growth.” Management is focusing on increased inventory turns, particularly as frozen and refrigeration sections expand to more stores.

Comp store sales rose 4.2% for the quarter, and this marked the company’s second consecutive quarter of increased traffic, despite rising gas prices. The increases make it hard to detect any negative effect of rising gas prices, Sasser said.

Although second quarter has no big holidays, Dollar Tree successfully exploited Mother’s Day, Father’s Day, graduation and the Fourth of July with innovative programs, such as “build a basket.” This combined with seasonal business, such as water blasters and inflatable beach and pool toys, along with a wider selection of consumable basics for everyday needs.

As a result, “we had solid performance each month,” Sasser said. “With rising gas prices, consumers can’t afford to waste a trip,” he reasoned, “and we’re a ‘right for the times’ shopping location.”

Freezer and refrigeration sections were added to about 100 stores, bringing the total to 360. The company plans to have them in more than 500 of its 3,156 units by the end of this year. The chain is moving to a larger footprint of between 11,000 sf and 12,000 sf. It added 242 new units this year, including Deal$.

The company is lifting the restriction of a $1 pricepoint at some former Deal$ units and is in the process of painting, training, cleaning up and fixing up at all of them. So far, “response has been good,” Sasser said, adding, “we’ll tell you more about the multi-pricepoint effort in our next call.”

The chain expects to add another 250 stores in 2007. “We’re building a supply chain to deliver ahead of the need,” Sasser said. “It will be a planned roll-out versus ‘lets just put one everywhere’.”

The roll-out of debit card acceptance has now reached to virtually all of the company’s stores, and food stamp acceptance is following. By year-end, about 500 units will accept food stamps. “Debit card transactions have a higher average ticket value,” Sasser said, “and food stamps also have a decent average transaction value.” He declined to disclose Dollar Tree’s average ticket sale.

Total sales for second quarter were $883.6 million, up 14.9% from $769 million in the same quarter a year ago. Estimated sales for third quarter are in the range of from $895 million to $915 million, and full-year sales are forecasted to reach between about $3.9 billion and nearly $4 billion.

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