美元樹 (DLTR) 2015 Q1 法說會逐字稿

Good day everyone and welcome to the Dollar Tree first-quarter earnings conference call.

Today's conference is being recorded.

And at this time I like to turn the conference over to Vice President of Investor Relations Randy Guiler.

Please go ahead, sir.

Thank you, Amy.

Good morning and welcome to our call to discuss Dollar Tree's performance for the first quarter of fiscal 2015.

Our call will be led by CEO Bob Sasser who will share insights on our business performance and initiatives.

Kevin Wampler, our CFO, will provide a more detailed review of the first-quarter financial performance and will share our outlook.

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

Results may differ materially from those indicated by these forward-looking statements as a result of various factors.

These factors are included in our press release, most recent 8-K, 10-Q and 10-K which are all on file with the SEC.

We have no obligation to update our forward-looking statements and you should not expect us to do so.

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

Acquisition-related costs are included in the adjustments column of the consolidated income statement in today's earnings release.

Following our prepared remarks we will open the call to your questions.

Please limit your questions to one with one follow-up if necessary.

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

Thank you Randy and good morning everyone.

This morning we announced results for the first quarter of fiscal 2015.

Same-store sales on a constant currency basis increased 3.4% in the quarter driven by both increased traffic and increased average ticket.

Adjusted for the impact of Canadian currency fluctuations the same-store sales increase was 3.1%.

Total sales grew 8.8% to $2.18 billion.

Operating income increased by $11.3 million, or 4.9% and operating margin for the quarter was 11.2% compared to 11.6% from the prior year's first quarter.

Net income increased 5.8% to $146.3 million and adjusted earnings per diluted share increased 6% to $0.71 compared with first-quarter 2014 earnings of $0.67 per diluted share.

First-quarter results continue to validate the relevance of Dollar Tree.

Customers are shopping with us more often, we're attracting new customers every day and when the customers are in the store they are buying more.

Comp sales for the quarter grew as a result of increases in both traffic and average ticket.

This was a unique quarter with several external factors impacting Dollar Tree and other retailers.

In particular the calendar shift with Easter falling two weeks earlier this year, we estimate the impact of the holiday calendar shift was a negative $8 million to sales and additionally the recent West Coast port slowdown increased in severity, it lasted longer than expected and it negatively impacted our earnings as higher margin import merchandise was delayed in getting to the stores.

This resulted in lost high-margin sales in the first quarter, incremental transportation and delivery cost for shipments that had to be diverted to alternate facilities and increased labor cost as stores managed uncertain product flow and delivery schedules.

The good news is that we are reasonably caught up in the DCs, the merchandise floor of our imports coming through the West Coast has more normalized, product is shipping to the stores more efficiently and our customers are seeing fresh new high-value merchandise in the stores.

I am particularly proud of our merchandise, logistics and store teams who worked hard to execute to plan during this time frame.

Despite these challenges both sales and earnings were at the midpoint of our range of guidance for the quarter.

Dollar Tree continues to be part of the solution for millions of consumers as they strive to balance their household budgets.

We serve a very loyal and growing customer base.

Our commitment is to continue serving our existing customers better while taking every opportunity to gain new customers in every store every day.

Our merchants do a great job sourcing product that exceeds customer expectations for what $1 can buy at a cost that fits our margin requirements and our store teams focus on providing a clean, fun and friendly shopping experience.

Customers know that when they pull into the parking lot at Dollar Tree everything is going to be priced at just $1 per item.

Our merchandise values are better than ever and our operating margin continues to lead the discount retail sector.

First-quarter same-store sales on a constant currency basis were solid at 3.4%.

Both traffic and average ticket increased and as expected March was our strongest comp month reflecting the Easter calendar shift.

Adjusting for the holiday shift same-store sales were relatively balanced by month throughout the quarter.

Sales performance across the home, seasonal and basics divisions were tightly grouped and our sales increase resulted from strength in both basic consumables and discretionary products with discretionary products leading the way.

Top-performing categories included party supplies, food and household products.

Geographically with the exception of our Western zone, comp sales performance across the country was relatively consistent in the first quarter.

Delayed receipts related to port congestion primarily impacted our Western stores.

Despite these challenges our Western zone still produced slightly positive same-store sales in the first quarter.

Seasonal energy was high throughout the quarter beginning with Valentine's Day.

In addition to party essentials our stores were well-stocked with cards, gift bags, balloons and candy for that special purpose or that special person.

Seasonal sell-through was good and stores quickly and efficiently transitioned to St.

Patrick's Day and Easter.

While the seasonal displays shout red in February they quickly turned to green in early March with hats, necklaces, socks and party supplies for St.

Patrick's Day.

And for Easter our customers found jellybeans, Easter bunnies, chocolate candy baskets and basket stuffers, everything necessary to build colorful, cost-effective Easter baskets for the kids.

And for the party planners our high-value assortment of entertaining needs including baking products, plates, bowls, cups and napkins was well received.

We continue to invest in our customers by offering high-value product.

In addition to the seasonal energy in first quarter our Presidents' Day event emphasized unbelievable values on many namebrand bonus buys especially in our food, snack, beverage and household supplies.

We offered tremendous values and all priced at just $1 per item.

And not to forget the basics, throughout the quarter we highlighted our million-dollar brands with signing and special displays of these everyday items that provide great values to our customers especially to meet their spring cleaning and spring decorating needs.

We ended the quarter with our inventory clean, well-balanced and stores prepared for Mother's Day and summer fun.

As we entered May and our fiscal second quarter we've been pleased with early sales and traffic trends.

Looking forward we are positioned for increased relevance to our customers' sustained growth and improved profitability.

We have multiple opportunities to continue growing and improving our businesses through opening more stores, increasing the productivity of all of our stores and further developing our new formats, new markets and new channels as growth vehicles.

In the first quarter we opened 93 new stores and we relocated and expanded 10 existing stores for a total of 103 projects.

Total square footage increased 7.1%.

We ended the quarter with 5,454 stores and we're on track with our plan for fiscal 2015 which includes 400 new stores and 75 relocations and extensions for a total of 475 projects across the US and Canada.

As a reminder square footage growth for the full-year is planned to increase 7.2% over fiscal 2014.

In addition to new stores we continue to execute our strategy to improve productivity of our existing stores.

Some of our drive to business initiatives include first of all our category expansions where customers are realizing more value as we rationalize and expand assortment in pet supplies, hardware, health care, beauty and eyewear as well as home and household products.

Seasonal relevance, always important at Dollar Tree.

Our storefronts change with the seasons.

At Dollar Tree we want to own the seasons at the $1 price point.

Merchandise energy and the thrill of the hunt is throughout the store at Dollar Tree.

You always find an unexpected value.

And being first of the month ready is important.

We place special emphasis on basic consumable core items at the beginning of each month when many customers are shopping for basic needs.

Additionally we are continuing the expansion of our frozen and refrigerated category.

In the first quarter we installed freezers and coolers in 96 additional stores.

We currently offer frozen and refrigerated product in 3,716 stores and we're growing.

Frozen and refrigerated merchandise is generally lower margin.

But it's faster turning, more frequently purchased and the increase in shopping frequency provides Dollar Tree the opportunity to drive incremental sales across all categories including the higher-margin discretionary product.

Most importantly the product serves the needs of our customer.

In addition to Dollar Tree stores in the US, Dollar Tree Canada and Deal$ are key brands in our portfolio and key components of our growth strategy.

In the first quarter we grew our store counting Canada by opening 10 new stores, bringing our Dollar Tree Canada store base to 218 stores.

We are building the merchant and store teams in Canada to better serve the Canadian customer.

We are 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 be pleased with the progress we're making in Canada and we followed our strong Q4 performance with another solid quarter in Q1, growing comp sales through increases in both average ticket and transaction count.

We have significant growth potential in Canada.

We're confident that Canadian market will support up to 1,000 Dollar Tree stores and this is in addition to the 7,000 store potential for Dollar Tree in the United States.

We want to be recognized by customers as the leading retailer in Canada at the single price point of CAD1.25 just as we are in the US at the $1 price point.

Our Deal$ format further extends our ability to serve more customers.

By lifting the restriction of the $1 price point is providing the opportunity to serve more customers with more categories.

Our Deal$ stores provide great values on everyday essentials, party goods, seasonal and home product.

The stores operate using a multi-price point strategy and have the potential to generate greater revenues with a higher average ticket.

We concluded the first quarter with a total of 221 Deal$ stores.

In addition to Dollar Tree, Dollar Tree Canada and Deal$ we're pleased with the growth and performance of our online business.

Dollar Tree Direct provides an opportunity to broaden our customer base, drive incremental sales, expand brand awareness and attract more customers into our stores.

For 2015 we have a focused commitment to driving traffic to our website.

In addition to creating brand awareness and brand advocacy we are committed to driving sales to both our e-commerce division and our stores.

In the first quarter we saw more than 12 million visits to our website through desktops, laptops, pads and phones.

To help drive traffic to our site we are employing a tremendous effort to reach out to existing and potential customers using a variety of marketing mechanisms.

These include emails, social media, search engine marketing, video marketing, and our Value Seekers Club.

In fact in Q1 we connected with 2 million customers via Facebook, YouTube, Twitter and Pinterest.

These avenues enable us to better understand what our customers like, what they want and how we can serve them better.

Additionally we continue to utilize themes on our site that display our exciting lines of products to support events.

Whether the theme is Valentine's Day, St.

Patrick's Day, Easter, spring fling or summer fun we have great selections of products at tremendous values.

In April we launched our graduation event which runs through June.

Our stores are well stocked with the right colors to provide their customers with fantastic values for their graduation party needs.

Customers are using our store color finder tool on our website to quickly identify which of their local stores have their school colors.

We recently distributed our summer catalog to more than 600,000 existing and potential customers.

The catalog is chock full of amazing offers to provide customers with great summer items all priced at just $1.

As technology evolves and markets change our e-commerce team continues to have success in staying on point with our tech savvy customers and connecting with them effectively and efficiently.

With multiple formats inventory management is very important.

It's something we watch carefully and our inventory continues to be extremely well-managed and our turns continue to increase.

In the past 12 months we've grown our store base by 7.4%, yet our overall inventory dollars have grown only 4.9%.

Our seasonal sell-through in first quarter was strong, our basic in-stock was maintained and when the customers were shopping our stores we are ready to serve them.

Thanks to the efforts of our merchant, logistics and store teams inventory turns increased for the quarter again and we're all well prepared to support second-quarter 2015 sales plan.

As you know we have always supported our plan growth with infrastructure and distribution capacity ahead of the need.

We are now in the final stages of determining the location for a new and an additional DC in the Southeast.

We plan to break ground on DC11 this year and have the facility online, up and running and operating in Q3 of 2016.

We will provide more details on this project as our plans are finalized.

Now I will turn the call over Kevin to provide more detail on our financial metrics and our outlook for 2015.

Thank you, Bob.

As Bob mentioned our adjusted first-quarter earnings increased 6% to $0.71 per diluted share.

Once again we are pleased with another quarter of strong same-store sales.

Our constant currency 3.4% comp sales performance was composed of a 2.1% increase in traffic and a 1.3% increase in average ticket.

Geographically our sales performance was nicely balanced across the zones with the exception of the Western zone as they experienced the majority of the port disruption impact.

However, despite experiencing delayed shipments our Western zone still produced slightly positive same-store sales.

Starting with gross profit, our gross profit margin was 34.4% during the first quarter compared with 34.8% in the prior year's first quarter.

The year-over-year decline was primarily attributable to the following factors.

Freight costs as a percentage of sales increased as domestic trucking rates were higher.

The increase was partially offset by lower diesel cost.

Additionally we incurred added freight cost by rerouting some imports to alternate ports.

Secondly, we incurred an approximate 10 basis point unfavorable impact related to the $2 million non-cash charge for the change in the inventory accounting method for our Canadian operations to conform Canada's policy to our US policy.

This charge was expected and disclosed in the guidance provided in February for the first quarter.

Shrink results for the quarter also negatively impacted our margin results.

Excluding acquisition-related costs SG&A expenses were 23.2% of sales for the quarter, flat as a percent to sales compared to the first quarter last year.

Payroll-related expenses increased 10 basis points for the quarter as store bonuses increased based on the Company's sales performance and insurance costs related to healthcare claims increased.

These were partially offset by reduced store payroll due to improved productivity.

Depreciation expense decreased by approximately 10 basis points as a result of leverage from the same-store sales increase.

Adjusted operating income increased $11.3 million compared to the first quarter last year and adjusted operating margin declined 40 basis points compared to last year's Company record first-quarter operating margin of 11.2%.

Non-operating expenses for the first quarter increased $111.5 million from the prior-year quarter primarily due to an increase in interest expense related to the financing of our pending acquisition of Family Dollar.

As projected on our prior earnings call our tax rate for the quarter was 38.4% versus 38.2% in the first quarter of last year.

Looking at the balance sheet and statement of cash flow, cash and cash equivalents at quarter-end totaled $870.4 million compared to $387.1 million at the end of the first quarter of 2014.

We also have restricted cash of $7.2 billion related to the proceeds from the issuance of the senior notes and term loan B for the Family Dollar acquisition.

Proceeds are being held in escrow account until the closing of the acquisition.

Our consolidated inventory at quarter-end was 4.9% greater than at the same time last year while selling square footage increased 7.1%.

Consolidated inventory per selling square foot decreased 2.1%.

Our inventory turn increased in the first quarter and we expect continued improvement in inventory turns for the full-year.

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

Capital expenditures were $66.9 million in the first quarter of 2015 versus $71.9 million in the first quarter of last year.

For the full-year 2015 we are planning for consolidated capital expenditures to range from $465 million to $475 million.

Capital expenditures will be focused on new stores and remodels including additional fee development stores, the addition of frozen and refrigerated capability to approximately 320 stores, IT system enhancement and the construction of our new Southwest distribution center.

Depreciation and amortization totaled $52.8 million for the first quarter versus $50.7 million in the first quarter of last year.

For 2015 we expect depreciation and amortization to range from $215 million to $225 million.

Our guidance for 2015 takes into account the actual performance in the first quarter and except for small refinements to the share count and the tax rate is unchanged from that which we issued on February 26.

It includes the following assumptions.

First we completed our May 1 ocean freight negotiation with no material change from our prior assumptions.

As always we cannot predict the direction of diesel prices for the next year.

For this reason our guidance assumes that diesel prices will remain similar to the current levels on average throughout fiscal 2015.

We also cannot predict future currency fluctuation so we have not adjusted our guidance for changes in currency rates.

Our guidance also assumes a tax rate of 38.3% for the second quarter and 38.1% for the full-year.

Weighted average diluted share counts are assumed to be 207.1 million shares for the second quarter and for the full-year.

Sales and earnings per share outlook then for the second quarter are as follows.

For the second quarter of 2015 we are forecasting sales to range from $2.17 billion to $2.23 billion and diluted earnings per share excluding acquisition-related costs in the range of $0.63 to $0.68 which would represent a 3% to 11% increase compared to the second quarter of 2014 earnings excluding acquisition-related costs of $0.61 per diluted share.

The sales range implies a low to low mid-single-digit comparable store sales increase and 8% square footage growth.

Additionally we have not included any acquisition-related costs in our second-quarter outlook because we cannot currently forecast the timing of when these costs will be incurred.

Our outlook for the remaining three quarters remains unchanged.

For the full fiscal year of 2015 we are now forecasting sales in the range of $9.24 billion to $9.42 billion based on a low to low mid-single digit increase in same-store sales and 7.3% square footage growth.

Diluted earnings per share excluding acquisition-related costs are now expected to range from $3.32 to $3.47.

This represents an increase of 6% to 11% over 2014 earnings per diluted share excluding acquisition-related costs of $3.12.

I will now turn the call back over to Bob.

Thanks, Kevin.

Before going to Q&A I know that you all want to hear the latest news on our acquisition of Family Dollar.

I hope you have seen the press release.

In addition I will tell you that the strategic rationale for the deal is more compelling than ever.

We know much more now that we did 12 months ago and are even more enthusiastic about the long-term transformative nature of this transaction for Dollar Tree.

I know you are aware this is an extremely large and complex transaction involving more than 13,000 retail store locations.

It is the largest of any previous retail merger.

Needless to say this process has taken longer than any of us anticipated.

We are continuing to work very hard to close the transaction as soon as possible and our current expectation is that we can have this transaction completed in early July.

Throughout this lengthy process we have continued with our integration planning.

Our integration teams have developed detailed strategies, objectives and tasks with assigned milestones for achieving these tasks.

We have great confidence in our opportunity and ability to achieve at least $300 million in annual run rate synergies by the end of year three.

These synergies will be achieved through a combination of both direct and indirect sourcing, banner optimization also called rebannering, logistics and overhead.

Our priority areas of focus will be on the customer, evolving the merchandise assortment to increase value and better meet their needs.

The customer experience in the stores, we want to create a more exciting (technical difficulty) customer friendly environment.

To do that we're going to have to lower the field turnover, we're going to have to support the store initiatives and develop a more performance-based culture throughout the Company.

Of course we want to and are continuing to work very hard on plans to increase store productivity by modifying assortments to improve sales and inventory productivity in existing stores while improving new store remodel and expansion performance.

We plan to employ a disciplined approach to driving key strategic initiatives to the combined organization through improved communication, analysis, collaboration and incentives.

We're confident that placing our initial emphasis in these areas can materially enhance operating performance at the Family Dollar brand through improvements in sales, margins, expense control and greater customer satisfaction.

Both Dollar Tree and Family Dollar are ready to integrate.

Our teams are incredibly excited about this opportunity to grow our business for the long term by adding the Family Dollar banner to the Dollar Tree portfolio of brands.

As always we will manage this business with a focus on what is best for our stakeholders including our customers, our vendor partners, our associates and importantly our long-term shareholders.

I'm pleased with our position at Dollar Tree in the market as the leader in value retailing at the fixed price of $1 and I'm incredibly excited about Dollar Tree's future.

The Dollar Tree business model is powerful, flexible and more relevant than ever, providing extreme value to customers while recording record levels of earnings.

Our model has been tested by time and validated by history.

For 29 consecutive quarters Dollar Tree has delivered positive same-store sales increases.

Through good times and difficult times and all retail cycles consumers are looking for value no matter the state of the economy.

Our operating margin continues to lead the discount sector.

We remain committed to the concept our customers love and we are positioned for continued profitable growth for many years ahead.

We have a talented management team that has a long history of retail success.

And importantly we look forward to welcoming the Family Dollar organization into our Company.

With the addition of Family Dollar we will be a bigger, stronger and more diversified business, better able to serve more customers in more markets with exactly what they are looking for, great value.

It's a great time to be Dollar Tree.

Our inventories are clean and fresh, the shelves are full of the right product and our values have never been better.

Operator, we are now ready for questions.

(Operator Instructions) Stephen Grambling, Goldman Sachs.

Hey, good morning and thanks for taking my question.

I appreciate all the color on the port but is there any way to quantify the impact more specifically on comps and margins or even relative to the Easter shift?

You know, it's hard to quantify the exact impact.

We've looked at it seven different ways and there's always this and that and the other but the evidence is there that are West Coast stores underperformed.

We scrambled all quarter really starting last year but got a little more severe in first quarter.

We did all the things that we were able to do as far as shipping merchandise earlier to get it into the stores earlier.

We've used alternate ports.

We used different modes of transportation once we got into those ports to get it to the right place.

And we just scrambled all quarter.

Which the effect was we actually had our Easter product in and our Valentine's product in but it was all the other things, all the basics that we import, the housewares and all the textiles and all those apparel items for the upcoming summer season and all those things that were slow in getting in.

Then of course once they hit the coast as you know they were just anchored out there, lots of ships anchored with lots of containers.

They continued to unload but it was slower and all the freight that was coming into those West Coast ports starting backing up which made it even more complex.

We were negatively impacted in multiple ways, first of all top-line sales especially in the West Coast stores.

And it was the higher margin product that was delayed that was our imports.

Top-line sales were impacted, margin was impacted.

Freight, we spent more money on transportation and we had more cost as product was rerouted to alternate ports.

And then of course the disruption in the stores as the store teams had plans to set whatever product or whatever promotion it was just always came, but it was late and the timing was off which made our stores really work a lot harder.

There was more uncertainty in unloading the product when the product was coming in and getting it on the shelf.

So all of that together it's just really hard to put your fingers around.

I will tell you that we finished, we still with the disruption we still hit the midpoint of our range of guidance on sales and earnings.

If not for the port disruption it would have been better.

And so I guess as we look forward as a related follow-up, did the port disruptions actually open up some opportunities for some excess product that you could potentially buy and some of these better values and position your better as you look forward?

And we'd already seen some of these in the store, so I guess the question also is how many more opportunities are there to expand those better value products across the chain?

Thanks.

That's a good point.

We look at that all the time, we work on it every day.

We have part of our organization focused on just that opportunity all the time taking advantage of product that is maybe a little late or could be for all the reasons that the product may be distressed and we could buy it even cheaper and offer greater values to our customers.

So that opportunity is there.

We intend to continue to take advantage of that.

But most importantly for the most part this port issue is behind us.

And as we entered second quarter, early in second quarter we were able to set our Mother's Day product, we had really nice Mother's Day sell-through sales and some nice performance in our stores for Mother's Day product.

We're seeing new product on the shelves.

When our customers come in now they are seeing all the things that we expected them to see that we wanted them to see and they are reacting pretty well to it.

So we're pleased to be past the best news about the port slow down is we are pretty much past it.

Sounds good.

Thanks so much.

I will jump back in the queue.

Meredith Adler, Barclays.

-- Kras on for Meredith.

Thanks for taking my question.

Just wondering if you guys are seeing any changes in the competitive environment?

And some competitors are adding store labor, wondering if this is something that you're considering for some stores?

Well, two questions.

First of all I'll jump in there, competition is always there and retail is extremely competitive, always has been.

We compete with a very wide variety of retail.

I really can't tell you that I'm seeing anything extra special.

It seems like it's always been competitive to me.

Our focus continues, has always been and will continue to be on our business first and foremost, what can we do better to serve our customers?

We shop other retailers, we watch what they are doing.

We strive to be proactive and not reactionary to what others are doing.

That said we're not seeing, I don't see any significant changes in the overall competitive landscape.

It's always been very competitive.

As to I think you talked about the minimum wage and the hourly rates we watch the industry trends carefully and of course we're compliant with all the state and federal regulations.

Those are changing.

We are watching that, responding appropriately to those.

Our goal is to pay a competitive wage by market in order to fill our workforce needs based on the prevailing rates.

We made no plans for a sweeping change to our minimum wage rates.

As always we will work very hard to be competitive on that rate while working to offset cost increases in general to increase sales and productivity initiatives.

Thanks for that.

And just to clarify just it seems like you're not contemplating actually adding more incremental labor to stores but obviously you have thoughts on actual wages themselves.

But just no anticipated changes in actual amount of labor is what you're saying?

Probably not in the way you're thinking.

We've always ramped our store labor to the sales.

So when you say aren't planning to add any more labor to stores we're planning to increase sales.

So as we increase sales we'll continue to manage our labor and our payroll to match that sales component.

But we have no initiative like we've seen maybe in some other retailers to just ramp up carte blanche across the board.

Thanks, Bob.

I appreciate that.

I will get back in the queue.

Scot Ciccarelli, RBC Capital Markets.

Good morning, guys.

Can you give us an idea of how big your Western division is and maybe the magnitude of performance that that experience versus maybe the other divisions?

I can give you the first part of the question.

If you look at just the West Coast DCs and the store service data there it's about 30%.

And it changes throughout the season and the year, month over month, quarter over quarter but just for the most part around 30%.

If you add in the Texas distribution, Oklahoma distribution center it goes up to 38% to 40%, something like that.

As a percentage of our product of imports that are coming through, I think that's what you -- I believe that's what you were trying to --

Yes, absolutely, Bob, and was the Texas DC also impacted?

Absolutely.

Matter of fact it may have been the most highly impacted.

Because once we got it unloaded the snarl unloaded and got possession of the goods.

The Texas DC product then has to go on rail.

And by the way lots of people were trying to do the same thing and then there was a shortage of railcars and it was the usual debacle that when everybody is looking for the same commodity at the same time.

So frankly the Texas DC has been the last one to recover I guess from the snarl that we had from the West Coast port strike.

Got you.

So in other words 40% of your sales, as much as 40% of your sales were impacted by the port strike as well as the mix of product.

That's helpful.

And when did inventory flow start to normalize?

It was actually just to clarify 40% of our imports coming through the West Coast and Oklahoma.

So imports are maybe 40% of our sales.

So 40% of 40% of our merchandise for that period of time was disrupted, slowed down and entangled.

When did it mitigate?

Just recently, I would say end of April, first of May did we start thinking that it's just mopping up around the edges as far as getting the product into the store.

So really just recently.

Got you.

All right, very helpful.

Thanks guys.

Dan Wewer, Raymond James.

Thanks.

I just want to change the focus to margin trends.

And if you could talk about two of their pressure points, one the higher freight cost, is that a longer-term issue with driver wages that will persist for the next couple of years?

And then also, surprised that shrinkage rate is higher given that the inventory per square foot is actually reduced year over year.

I would think that would create fewer opportunities for shrink.

Yes, Dan, this is Kevin.

In regards to the first part of your question of the freight cost, we do expect freight cost to be a headwind as we go through the year.

And it's not only the driver piece of it but it's also the fact that as we went through the economic downcycle there are many less firms out there today, trucking firms, and so the competition has gotten less in some respects.

And I think the trucking industry has taken a different view of understanding that the lane, certain lanes need to be profitable.

And so they've relooked at their models to make sure that it made sense, so there's been pressure on an overall basis.

So we started seeing that in the second half of last year and a lot of that was driver-related but some of it again was just the firms themselves.

And so again we expect to see that throughout the year and it is built into our guidance.

As far as it relates to shrink, it has been a little bit tougher start of the year for shrink than we had anticipated.

The loss prevention team and the stores are very focused on it.

As always anything that we always view that things that we focus on we can make changes to and affect and so that is our focus right now.

And I wouldn't disagree with your concept of the fact that less inventory should make it a little easier to protect it.

So it's a little bit of a trend that we didn't anticipate but we are very focused on getting it corrected going forward.

Okay, just as a follow-up on the closing of the Family Dollar transaction I guess it was the third or fourth instance now where the closing has been delayed.

Is it solely finding buyers for the divested stores that made the FTC approval, is that the only hangup?

Or are there some other topics with the acquisition that's creating the delays?

Dan, look, we're as anxious to get this thing done as you can imagine.

It's not what you said.

It's more just a large and complex transaction involving more than 13,000 stores.

So the largest, in fact I believe it's the largest retail merger in the United States ever.

So it's large, it's complex.

We're making progress.

We will continue to provide updates in a public fashion as we're able to do so.

What we gave you this morning is where we are now.

We have clarity; there's 330 Family Dollar stores that we will be divesting representing about $45.5 million of operating income.

The Company intends to reach an agreement with the divestiture buyer in the coming days and secure FTC clearance thereafter.

We intend to close the proposed merger in early 2015.

I know you will understand that this is everything around this is subject to confidentiality.

We could close -- it's possible that we could close in late June but early July is what we're saying is more likely.

We'll continue to provide updates in a public fashion as we're able to.

Okay, thank you.

Laura Champine, Cantor Fitzgerald.

Thanks Bob and congratulations on continued growth in your business today.

But can you talk about once this merger does close, where do you think the revenue synergy opportunities would be if any?

Or if I should be asking this differently what do you think is the potential for cannibalization when Family Dollar and Dollar Tree combine?

Gosh.

One of the really exciting things about this combination is that it is complementary.

We are side-by-side now as a matter of fact in many places in many cases.

We aspire to different customers and we aspire to different real estate.

But we're both large companies and there are instances now where we have Family Dollar and others in most cases frankly within a few miles of us.

When we open a new store it's my understanding and what I believe is it doesn't really impact the Family Dollar business.

When Family Dollar opens a new store near us I can tell you it does not materially impact our Dollar Tree business.

We exist very well together as far as serving different customer needs, different products and for different reasons.

So we're complementary in real estate, we're complementary in customers.

We aspire to more of the suburban customer although we have some of all.

We aspire to the suburban customer.

The Family Dollar model aspires to that urban, lower income customer and a rural customer.

So these two companies just fit incredibly well together as the opportunity is there to grow both banners to put the right store in front of the right customer.

We have tremendous room for growth at Dollar Tree.

We've got over 5,000 stores now.

We have for years been saying we could have 7,000 Dollar Tree stores; it's probably more than that, we just need to remodel it.

And on the Family Dollar side I only know what I've read and what you've read.

But they have over 8,000 stores and they've said in their public comments that they could have 12,000.

So we believe that that is still there to be done.

We believe that through the combination we can leverage the size and scale of our buying power.

We know that there are synergies in cost of goods sold as we combine these companies.

We know there are many back-office synergies and savings that we can have.

We know that there is huge opportunity; combined we have billions of dollars of spend on indirect product, things that we buy not for resale.

So with that size of an opportunity together we expect that we will get better cost, more efficiencies and improve the overall business of both companies.

So it's just a huge opportunity, it's transformational.

This is the one opportunity where you put the two together, one plus one does equal two point something.

One does not take away from the other from the customer's point of view.

And Bob if I can have a follow-on, so are there are items, strong items that Dollar Tree sells in that everything for $1 world view that you can add to Family Dollar stores that should actually drive better results in sales per square foot for Family Dollar stores?

Well there's certainly things that we carry in our Dollar Tree stores that could be added.

The way we're looking at this, though, is we're looking at the floor plan first.

And we're looking at the productivity, both sales and margin productivity by department.

So when you start at the higher level and you are looking at where your most productive departments are, then we drill down to the categories and we're doing the same thing.

Now we're doing this through a clean room now, so I don't have access, direct access to all the details of cost and things but we have through our clean room we can get the information, we can get enough feedback to know that what we're thinking is right or directionally right.

But it's first about the floor plan.

What do you want to show the customer, where is the opportunity to serve the customer better, by expanding this category can we improve sales per foot and margin per foot in our Family Dollar stores?

Then the real power of this is the combination of the two companies and the buying power of each.

So even if we don't sell the same item we're dealing with the same categories.

In Dollar Tree we have the same departments, we have the same vendor base, we deal with the same vendors.

It's just that we buy different items in many cases.

So leveraging these common vendor relationships with a larger size and larger scale we believe can be more productive and more efficient for the vendor base and that should turn into better prices for the combined Family Dollar-Dollar Tree.

We already know, we've been doing a lot of work, we already know there is huge synergies in exact items both sale sell that we can get lower costs on; one of us has a lower cost than the other now, so we know what that is.

Then there is these similar items where it's not exactly the same item but it's a similar item.

It may be a four-pack at Dollar Tree, it might be an eight-pack at Family Dollar but it's the same item with a different put up and the same vendor.

The idea of going out to bid or working with those vendors to get the best price for the total Company is a powerful synergy that we have and one that we intend to begin leveraging on day one.

Got it.

Thank you.

Michael Lasser, UBS.

Thanks a lot for taking my question.

I know this has been asked a few different ways but maybe you could just tell us what you think the quantitative impact of both your sales and to your margin from the West Coast port slowdown?

I think you multiply 16% of your import sales times assuming it's a couple hundred basis points lower in those categories in those stores that would be a 30 to 40 basis point overall impact to your sales.

Is that in the right ballpark?

I would say -- it's anecdotal.

This is not the math that you just did but anecdotally I think it was more than what you just said.

Now it's different by DC, it's different by market, it's different.

And by the way you had the impact when we knew that there was going to be a problem we started shifting things and we started changing the playing field so that it just became hard to quantify exactly.

I'd love to do that for you.

We attempted to do it and at the end of the day we said well there's really lot of judgment here and what sales trend worthy stores on before and what sales trend were they then and what sales trends are they now, how much of those our external factors, how much are created by the port strike?

And it's just complex.

So we chose to not quantify it.

I will tell you that we hit the midpoint of our guidance on sales and earnings; without the West Coast port strike it would have been better than that on both lines.

Your math is one way of doing it, I would think that it would actually be, my opinion, more of an impact than what you just penciled out.

And on the margin side it is going to impact both the cost of goods and the SG&A?

Cost of goods and transportation and SG&A in those stores.

If you can imagine we are ready to set and we are planning to set a certain promotion throughout the store and some of that product and is not going to be available for two weeks more let's say.

So scrambling to set something else in those locations by those stores, that's more cost.

And then when the goods comes in two weeks later you've got to change those displays, take that product off, put on what was supposed to be there, put that part of it.

So it just affects the whole supply chain when things get off to that magnitude.

There's always something late and there's always something early.

We deal with that, it's retail, and we deal with that all the time and we deal with it very well all the time.

This was unusual though.

This was major ports in the country just really slowed down and snarled up, not only our freight but everybody else's which put pressure on the whole supply chain then I said.

Then there was a shortage of railcars and delays because of that getting the product into the right place.

Just managing all that became as much -- so it affected our sales, it affected our margin because it was a high-margin product.

It affected our SG&A because we spent more in transportation and we spent more in stores to accommodate these snarls.

And I know these are more shorter-term oriented questions but I think it's important.

My last one is you mentioned that you've been pleased with what you've seen in May so far, so presumably you're not going to be pleased with something that's lower than what you experienced all-in in the first quarter.

Is that fair?

Let me just say this.

We've given you guidance now for second quarter and for the year basically other than changing for the actual first-quarter results the rest of the year forecast is all but the same.

There's I think share count changes and things like that.

But tax rate changes maybe, but basically the guidance remains the same that we gave you are originally for the rest of the year.

So I will tell you that it's early on in the first quarter, so it's hard to declare victory right now but we feel like we started off where we needed to start.

We had a good Mother's Day.

We're pleased with our Mother's Day sales.

We had good response from our customers and the new merchandise as they saw it hitting the counter.

Some of the summer merchandise in the West that finally got onto the counter, the customers are loving it.

So they are seeing new product that always creates good sales trends.

Okay great.

Thank you so much and best of luck with closing the merger.

Thank you very much.

At this time we have time for a couple more questions.

Next we will hear from Charles Grom, Sterne Agee.

Hi, thanks.

Good morning.

Just to follow-up on the last question, Bob, is it safe to say that those stores on the West Coast are trending closer to the Company average at this point in time?

You know, I don't break it out that close.

But I will tell you that the new merchandise is having an impact and everything is improving on the West Coast and also in the Oklahoma, Texas stores that were serviced from the West Coast port.

Great.

And then just a two-part question on the Family Dollar side.

I was wondering if you could give us some quantification of how many stores you think you could look to rebanner which obviously could be a big opportunity?

And then from a sales per square foot perspective clearly Family Dollar has lagged Dollar General by a wide margin for five to seven years now, and wondering if you could opine on why you think that gap exists and how quickly do you think you can raise that sales per square foot level over the next three years?

Thanks.

Well starting with the rebannering opportunity I'd tell you that is one of the ones that is probably one of the biggest opportunities we have.

I've not quantified the exact number of stores for anyone because it's still changing but I have said there are hundreds of opportunities to improve the productivity through our rebanner strategy.

Again we see this as one of the largest opportunities as we get the right banner in front of the right customers, the appropriate customers for that banner.

It's an opportunity also to take a less productive store and quickly improve the productivity.

The process is going to go something like this.

Upon completion of the transaction we're planning to quickly rebanner a small group of test stores to verify that our analysis is correct and that our procedures are efficient and that we are touching the right things in the right order.

We're going to closely track that analyze it and if necessary modify processes at that time for again efficiency and then proceed to rebanner additional stores in waves.

All of our initial rebanners are going to be Family Dollars to Dollar Trees.

Once we close and we have complete access to the Family Dollar real estate information and their predictive model we will run the same process on Dollar Tree stores to determine if some of them would be more productive as Family Dollar stores.

And my point of view is that there will be some that should go the other way.

Ultimately our strategy will be to have the banner in each market that best serves the customer of that market and provides the greatest return on investment.

Second part of that question was sales per square foot.

Family Dollar versus the lagging of sales per square foot.

Well look, I think as we've gone through there's a couple of big issues.

First of all the real estate strategy in our opinion and what we've seen is the move more towards the suburban markets has not been as good.

The Family Dollar stores tend to be more productive in those urban and rural markets.

And I think again with the merchandise mix going a little more suburban and a little bit away from the diversity customer, the diverse customer, that low income customer they have already identified and announced that their high-low strategy was not working and Howard and the Family Dollar management team rightfully in our opinion chose to go back to an everyday low price strategy and they have seen some, by their reports, they've seen some good results from that.

And by the way I think that's the right action especially with that low income customer they serve.

So why is the sales per square foot lagging?

Well I believe they've gotten away from their customer.

I believe by getting back to that lower income customer, owning those opening price points that those customers need so far as merchandise allocation of space in their stores and providing better opening price points and better merchandising strategy as far as price point, namebrand, private label, how do you offer the most value to the customer, expanding the floor plans, expanding those departments that those customers respond more to and shrinking the ones that they don't.

So that's it.

I believe it's retailing 101, honestly.

I'm not trying to make it sound simple because there's a lot of stores and there's a lot of geography and there's a lot of diversity and there's a lot of competition, all the things that we face as retailers.

Nothing is ever simple.

But it is very clear to me the missteps and why they are lagging and it's very fixable in my mind.

They've already begun some of it and I think we'll absolutely bring more power to that.

Great, thanks very much and good luck.

Paul Trussell, Deutsche Bank.

Good morning.

Bob, I appreciate all the color you've provided on the call to date.

Just following up on Chuck's question around rebannering.

Where does the Deal$ format fit into your thought process?

And also if you can give us some color on how those multi-price points stores performed this quarter?

Also as you think about your Canada operations is Family Dollar an opportunity for rebannering or opening up stores in that market?

And also when it comes to your store growth going forward, obviously 7% year-over-year square footage growth for the Dollar Tree banner, how should we think about the growth potential for the combined entity?

You've exceeded my ability to remember all those questions but let me start with the few that I can remember.

All good questions.

Deal$, we have great excitement around our Deal$ brand.

We've built it from the beginning.

Organically we bought a company called Deal$ from Supervalu which was mostly a single price point company.

And we've transformed it into a multi-price point banner that sells.

We've lifted the restriction of the price point to sell more product and more assortment and serve more customers.

We like where we are with that.

At Deal$ everything is not $1 but everything's a value.

The mix in a Deal$ store is not exactly like a Family Dollar store, it's a little more discretionary product whereas Family Dollar is 70%-plus consumer products.

Deal$ is more like 60% consumer products, so it's more of a 60/40 split.

We think the Deal$ brand has made some inroads into the suburban markets with a multi-price point strategy.

And we think the acquisition and the merger of Family Dollar will just only help that now.

Down the line I can't tell you that Deal$ location here or there there's 200-plus Deal$ stores.

I can't tell you that the location here or there might not change to any of the others but that's not contemplated at this point in time.

My goal is to continue to build the Deal$ brand at this point.

Family Dollar in Canada.

I think Family Dollar would be terrific in Canada.

I think the Canadian market would respond very well to another, a value, a multi-price point value retailer like Family Dollar.

So down the line over the course of the future at some point we will consider aiming that.

Right now as I know you know this but we're focused with a laser focus on closing this deal and integration.

We need to get the companies integrated, we need to get the infrastructure reallocated, we need to get the merchandise mix reassorted, we need to get the customers reengaged, we need to do a lot of things with the integration.

So anything that we would do with Family Dollar in Canada would come more than three years out probably, sometime off into the future.

We're going to stay focused on integration and the combination as long as we need to.

7% growth, I'm not sure what your question was there but --

Just commenting on the square footage growth of the combined entity, will you be opening -- you said you will initially convert or rebanner some Family Dollars into Dollar Tree as a test.

Will you continue the store opening plan that Family Dollar has initially outlined?

We will continue to open up new Family Dollar stores.

It will be I think they've already pulled back from their original plan.

I'm not really sure on that yet.

Basically you've got to ask them on that right now.

We don't own the company.

But I believe they pulled back on where they were at their high, store openings for sure.

They've reduced their new store opening not because there is not plenty of room for them but because as they looked at their business they weren't happy as we wouldn't be happy with the productivity of those new stores.

And they were pulling back as they were reviewing their strategy, again changing everyday low price, resorting the stores to a large degree.

And so two questions there.

One is I will try to answer it, for the near term I believe that Family Dollar brand we will continue to open new stores but it will be at a reduced rate would be our plan for the near term.

For the long term there are huge opportunities for growth in the Family Dollar brand.

And again I believe the management team there has said the potential for 12,000 Family Dollar stores in the US and I think that's probably right.

Alongside growing our Dollar Tree brand we've not changed our Dollar Tree growth or square footage or square footage growth strategy.

Now we will have to take a look at how many stores can you rebanner and how many stores can you open and how many stores should you open at one time?

As always we will do this very methodically and very thoughtfully and we will do it as efficiently as possible.

We're driven more by doing it right than by the numbers but anecdotally I'm not looking to pull back the growth on Dollar Tree.

And just lastly, a quick P&L question for Kevin.

As we look to the second quarter going forward, there was a negative impact from the opening of the Windsor DC I believe in 2Q last year.

How should we think about gross margins as you lap that?

Should there be a favorable bounce here in this upcoming period?

And what comp do you need to produce SG&A leverage in the next quarter and the second half?

As it relates to the Windsor DC we actually opened that in June of 2013 so it's been open almost two years now.

So again it does -- we did take a hit back at that point in time and felt that for the better part of a year.

That DC continues to become more efficient as we continue to add stores to it.

It opened up obviously with less than a full load of what it's capacity would be and it has ramped up over time and it probably has a little bit more capacity left.

So again we're always looking to get more efficiency out of our distribution centers.

But I don't necessarily I don't feel like there's a large benefit coming in the second quarter because of that.

And then as far as the second part of your question, Paul, related to what comp does it take to leverage SG&A?

I think historically we've said a 2 to 3 comp will typically get us some leverage, a little leverage.

It did not this quarter.

I think if you go back a year ago in Q1 we had a 2% comp and we have 40 basis points of leverage in SG&A.

So as I've stated before it ebbs and flows depending on what's going on in the business and what kind of initiatives we may or may not be driving through the Company.

So I still think that roughly 3% comp, 2% to 3% comp is a reasonable range to think about as far as leveraging SG&A.

Thank you.

Dan Binder, Jefferies.

Hi, good morning.

I just had a question as it pertains to the integration process.

I think back to your Canadian acquisition, as I recall there was a little bit of bumpiness early on in the integration.

I'm just curious if you could refresh our memories on what those issues were, what your learnings were and how you can apply that to the Family Dollar integration?

Well, fair question.

I will tell you that it was a much smaller acquisition but it was a whole new country and it wasn't the 51st state.

Canada is clearly a different country, regulatory requirements, culturally, language, believe it or not duplicate labels or languages on your labels.

There's a lot of intricacies in entering Canada.

I thought we handled most of it them a fairly well.

The big challenge that we've had in Canada in my opinion is first of all even though people you would think would be aware of the brand is we had no brand density.

So we've rebannered all -- rebranded all those stores early on to Dollar Tree Canada from Dollar Giant because we didn't think Dollar Giant had any brand equity either.

We've built a more stores and as we're getting more market density we are building brand awareness and we're seeing some of that improvement now.

So that's one of the things.

Secondly we had to build a brand-new management team in Canadian merchants and get that in place.

So as always the devil is in the details and most of the time it's people.

People, culture, Family Dollar is not a different country but is a different, little different culture, it's a different concept and we have to be very -- we have to work together very well is one of the learnings that I would say on any acquisition we've ever done, it really comes down to the people and the culture and the motivation.

Having said that I really have great admiration for the Family Dollar organization.

What they do, they do some things much better than we do and we see that and we are happy to join in on the things that they do better.

And there are some things that we think we can lend to the Family Dollar team also and they have been very open to anything that we talk about so far.

Still running their own business, we don't own the business yet but in our discussions, pre-integration discussions we're always talking about those types of things and cultural things and how do we benefit from the combination and where's the opportunity to reduce cost, increase margin and drive sales.

So we are of one mind of that.

But that's really the big learning, I guess, and over my history and years of doing this we've done several acquisitions.

I've always asked other people that do acquisition, so tell me one thing we ought to be very careful of and it's always a people issue, it's always about culture, it's always about combining a diverse organization, a different organization.

There are egos involved that have to be respected and of course everybody has a role, you've got to get everybody pulling together.

So we're aware those things.

I think we're going to be just fine as long as we stay aware of it.

I've shared this with our management team and with our organization.

And by the way I have also shared that we own that part, not the Family Dollar people, we own the concept of bringing them in with respect and respecting what they've done and what they've built over 50-some years, building that brand, the infrastructure that they've failed that is very strong very solid, the organizations they've built, the technology that they've built, the process and procedures.

So it's up to us to engage with them and to bring these two cultures together.

And then just as a follow-up I was curious you talked a lot about operational improvement.

How do you feel about price reinvestment, just trying to reconcile your earlier comments about benign pricing environment yet their results have been still a little bit soft.

Do you think there's a need for further price investment to get those sales per square foot up?

I don't think it's a simple as that.

I think it's a little bit of that, it's a little bit of this but it's more about the merchandise assortment.

There are many ways to bring value to a customer, especially a low income customer.

What they, what a low income customer needs may be not the same as someone with a higher income level.

And what I mean by that as we go through the assortments there's price competitiveness, we would intend to be competitive in the market on all the namebrands on all the same items.

That's sort of cost of poker; if you're going to be in this business you have to be competitive on the namebrands, the same items.

I think there's an opportunity for product development.

They have some pretty good private labels already.

I think there's probably more room for that and rationalizing the assortment so that every item has a place, every item has a mission.

What's the value statement in the category and is it good, better, best, is it private label versus namebrand?

Is it twice as much for the same price or is it the same amount for half the price?

I think more attention to opening price points.

A customer that has limited income may want the biggest package of the namebrand and it may be very competitive, you can buy it for the same price anywhere, but you may just not have that much money in your pocket.

So you may also have to have an option for that customer that says it may not be the namebrand but it's a big jug of whatever and it really works and we stand behind the quality and all that goes with that.

So it's not as simple as just same price reinvestment.

I believe we can lower retails and improve margin.

But having said that I'm talking about the mix frankly.

And we're going to be very focused on that customer, especially that low income customer, what they need, what the price points are that really motivate them, how do we deliver value overall with a combination of namebrands, private labels?

And then also the discretionary product.

I believe that people even if you're poor you don't want to feel poor.

When you walk into the store you want a shopping environment that you're happy with, that respects you as a human being and offers you the things that you need.

So a lot of effort is going to be focused on the store and on the customer from day one.

And we will invest I would say more than price investment I would say investment in the stores is where we're going to be really focused.

Now we are going to have to pay for that somehow.

There is no free investment.

So we are going to have to look really hard at where we can find synergies and the opportunity to reduce cost in order to reinvest in the store.

Some of it may be price, some of it may be anything that increases the value to that customer, might be the shopping experience, too.

And I believe there's a big opportunity with that.

Great, thank you.

Thank you.

That does conclude our question-and-answer session.

I'd like to turn it back over to Mr. Guiler for any additional or closing remarks.

Thank you, Amy.

Thank you for joining us on today's call and for your continued interest in Dollar Tree.

We look forward to providing an update on our next earnings call currently scheduled for Thursday, August 20.

Thank you.

That does conclude today's presentation.

Thank you for your participation.