美元樹 (DLTR) 2015 Q4 法說會逐字稿

Good day and welcome to Dollar Tree, Inc.'s fourth-quarter earnings conference call.

As a reminder today's conference is being recorded.

At this time I would like to turn the conference over to Mr. Randy Guiler, Vice President, Investor Relations.

Please go ahead, sir.

Thank you, Keith.

Good morning and welcome to our conference call to discuss Dollar Tree's performance for the fourth-quarter and full-year fiscal 2015.

Participating on today's call will be our CEO Bob Sasser, CFO Kevin Wampler and Family Dollar's President and Chief Operating Officer Gary Philbin.

Before we begin I would like to remind everyone that various remarks that we will make about future expectations, plans and prospects for the Company constitutes 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 8-K, quarterly report on 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.

At the end of our prepared remarks we will open the call to your questions.

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

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

Thanks, Randy.

Good morning everyone.

This morning we announced results for the fourth-quarter and full-year fiscal 2015.

Total sales for the quarter increased to $5.37 billion and same-store sales on a constant currency basis increased 1.7%.

Total sales for fiscal 2015 which included nearly seven months of Family Dollar sales were $15.5 billion.

Net income for the quarter was $229 million and adjusted net income was $239.4 million, near the high end of our range of guidance.

EPS was $0.97 and adjusted diluted EPS was $1.01.

I'm extremely pleased with our Company's accomplishments in the fourth quarter.

Sales were solid and at the midpoint of our range of guidance.

SG&A expenses were leveraged and well-managed.

Our Dollar Tree segment continues to deliver sector leading operating margins and earnings were very near the top of our guidance.

Our customer base is large and it's growing and we continue to meet our milestones and remain on schedule with our integration of Family Dollar.

We have truly an incredible opportunity ahead of us as a combined organization and the strategic rationale for the combination continues to be as compelling as ever.

In the early stages of integration there been no surprises that diminish our vision and plans for value creation.

In fact, as we improve retail operations there is increased enthusiasm for the opportunity to grow and to serve more customers in more ways as a combined Company.

We have confidence in our disciplined approach to continue improving the customer experience at Family Dollar and in our ability to capture synergies for the combined organization.

With a focus on managing our business in real-time our eyes are on the horizon as we develop the foundation for a larger, stronger and more diversified business that will generate cash and build shareholder value for years to come.

Only two quarters into the integration our teams are aligned strategically and collaborating effectively to deliver solid results.

Accomplishments in the fourth quarter were numerous, including another solid quarter for our Dollar Tree banner.

As expected Dollar Tree delivered a low single-digit same-store sales increase.

Same-store sales on a constant currency basis increased 1.7% and that was on top of a strong 5.6% increase in the fourth quarter a year ago.

Same-store sales increased as a result of growth in both basic consumables and discretionary products and sales growth was driven by increases in both traffic and average ticket.

Top-performing categories include party supplies, beauty and eyewear, snacks and beverage and candy and food.

Geographically Dollar Tree's same-store sales growth was strongest in the Northeast and Midwest.

I'm extremely pleased with a consistent growth and strength of the Dollar Tree business.

This was the 32nd consecutive quarter of positive same-store sales.

That's 32 straight quarters, eight straight years of comp growth and everything is still a dollar.

Cycling comps of 5.6% last year and through a difficult consumer environment fourth-quarter results again validate the relevance of the Dollar Tree brand.

Customers are shopping with us more often and we are tracking new customers every day.

And when the customers are in the store they are buying more.

Both traffic and average ticket increased for the quarter.

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

We serve a very loyal and growing customer base.

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

Our merchant teams do a tremendous job sourcing products that exceed customer expectations for what $1 can buy at a cost that meets our margin requirements.

Merchandise margin increased in the fourth quarter.

Our store teams are focused on providing a clean, full, fun and friendly shopping experience.

Merchandise values at Dollar Tree are better than ever.

As we entered fourth quarter store presentations boldly communicated a message to our customers that Dollar Tree was the go-to store for basics and your holiday needs.

In early November we focused on first of the month basic consumables and Thanksgiving-related foods like chicken broth and vegetables and soups.

We placed emphasis on taking care of customer needs related to holiday meals with baking basics, mixing bowls, foil pans, turkey basters and food storage containers and we addressed the customers' needs related to holiday entertaining with catering trays, bowls and servers.

Our home for the holidays promotion featured dinnerware, glassware, table linens and snack foods like cookies and mints and party mix and everything was just $1.

Immediately following Thanksgiving our stores made a swift transition to Christmas holiday decorations, toyland and great gift ideas.

And the merchants and stores continue to build on our last 10-day strategy by bringing all of the last-minute categories together and re-merchandising the front of the store with a purpose.

Our goal is to be to gift supply headquarters for items like holiday tins, gift bags, tissue, wrapping paper, scissors and tape.

Our customers understand that if you need to wrap it, bag it, box it or tag it Dollar Tree is the store for you.

If you are buying your wrapping supplies anywhere else you are paying too much.

In addition to our seasonal energy customers continue to look at Dollar Tree for their basic needs.

Throughout the quarter our stores continued to highlight and promote our million-dollar brands.

These are brands that they know and trust like Pringles, Nabisco, Scotties, Crest toothpaste and many more.

Looking forward the Dollar Tree segment is positioned for increased relevance to our customers, sustained growth and improved profitability.

We have multiple opportunities to continue growing and improving our business through opening more stores and increasing the productivity of all of our stores.

In the fourth quarter we opened a total of 63 new Dollar Tree stores.

We relocated or expanded 11 Dollar Tree stores.

We rebannered 58 Family Dollar stores to Dollar Tree stores and we rebannered 52 Deal$ stores to Dollar Tree stores for a total of 184 Dollar Tree projects during the fourth quarter.

Total Dollar Tree bannered square footage increased 10.3% compared to the prior year and we ended the fiscal year with a total of 5,954 Dollar Tree stores across North America, an increase of 587 stores this year.

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

Some of our drive to business initiatives include category expansions.

Customers are realizing more value as we rationalize and expand assortments in pet supplies, hardware, healthcare, beauty and eyewear as well as home and household products.

We're driving the business with a focus on seasonal relevance.

Our storefronts change with the seasons.

We want our customers to know what season it is when they come in the front door.

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

We're driving the business by creating merchandise energy and the thrill of the hunt throughout the store.

At Dollar Tree you always find an unexpected value.

And we're driving the business by being first of the month ready.

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

We're continuing the expansion of our frozen and refrigerated category.

In fourth quarter we installed freezers and coolers and 142 additional Dollar Tree stores.

We currently offer frozen and refrigerated product in 4,287 stores and growing.

Our plan is to roll out freezers and coolers to 400 additional stores in 2016.

We're on schedule with our planned conversions of our Deal$ store locations.

As we announced in October, we plan to dedicate our full energy and resources to our two primary banners: Dollar Tree and Family Dollar.

As planned the rebannering of our 222 Deal$ stores commenced in January.

And we're on track to complete this project on schedule.

We continue to support planned growth with infrastructure and distribution capacity ahead of the need.

Construction on our newest DC in Cherokee County, South Carolina is on schedule and on budget.

This $1.5 million -- excuse me, 1.5 million square foot automated facility will provide capacity and increased efficiency to support continued profitable store growth in the Southeast and Mid-Atlantic regions of the US.

We plan to begin shipping product from this new facility in July.

To support continued growth in Western markets we're expanding our Stockton, California distribution facility from 525,000 to 820,000 square feet, an increase of 55%.

This project is also scheduled to be completed by midyear.

Turning to the Family Dollar banner, we continued to make meaningful progress on the Family Dollar integration.

In fourth quarter Family Dollar stores completed the clearance of non-go-forward product at the beginning of November and quickly moved to the impact of the holiday merchandise set.

End caps were reclaimed for the holiday period and for the January promotional resets.

Systems on hands are cleaner and our service levels continued to improve.

Just over two quarters in the stores are cleaner, the shelves are better stocked, we have cleaned up old inventory and the end caps are more compelling and relevant.

The feedback we're receiving has been positive.

Our customer satisfaction scores have improved, validating that customers are taking notice.

Regarding sales, for the quarter the Family Dollar banner delivered a low single-digit positive comp store sales increase.

Same-store sales increased as the result of growth in both traffic and average ticket with traffic leading the way.

Same-store sales increased in both discretionary and consumables with slightly higher sales growth in consumables.

Sales were positive each month with the strongest sales increases in December.

Geographically, comparable-store sales at Family Dollar were strongest in the West and the Mid-Atlantic.

For the fourth quarter, we opened a total of 65 new Family Dollar stores and we relocated or expanded 42 Family Dollar stores for a total of 107 projects.

Additionally, during the quarter we rebannered 58 Family Dollar stores to Dollar Tree.

We completed the required divestiture of 325 stores to Sycamore Partners at the beginning of the fourth quarter.

We ended the fiscal year with 7,897 Family Dollar stores and a total Family Dollar and Dollar Tree combined store count of 13,851 stores across North America.

Just like Dollar Tree our primary areas of focus for Family Dollar stores are on the customer, the shopping experience and the value equation.

Merchants and stores are working hard to be first of the month ready and weekend ready.

We're paying special attention to opening price points, national brand pricing, the role of private-label products while rationalizing SKUs for increased productivity and a focus on basic in-stock levels.

Additionally, we're in the process of rolling out our smart ways to save program.

The value elements of smart ways to save are a combination of everyday low pricing elements and items, strategically planned sales and price drop promotions, incredible $1 wow items and an enhanced assortment of name brands, private label name brand equivalents and value brands.

In order to earn back our Family Dollar customers' confidence and frequency of visit we're committed to improving the customer experience.

There is a keen focus on table stakes including store standards and conditions.

We want them to be bright, clean and free of clutter.

The customer experience: full in-stock stores, easy to shop, trusted value.

Focus on the merchandise relevance.

We have to have what our customers need and want.

And we're focused on customer engagement, friendly and informed associates.

By identifying and establishing appropriate retelling disciplines and benchmarks customers are already seeing cleaner aisles with less clutter.

I'm very pleased to report that recent results from our customer satisfaction surveys are showing meaningful improvement in fourth quarter versus prior-year customer scores in each of our four primary survey categories which are store cleanliness, product assortment, customer service and speed of checkout.

Continued improvements in each of these metrics will contribute to Family Dollar becoming the neighborhood store of choice for our customers' shopping trips.

We will manage investments in table stakes with the same disciplined approach that we have used at Dollar Tree for many years, identifying and paying special attention to the customer facing metrics with a focus on return on investment and productivity enhancement while reducing cost, leveraging our shared services and back office functions and reinvesting some of these savings in the customer.

As we have done at Dollar Tree we will test and learn and we will invest prescriptively while measuring return on our investments.

As always our P&L will continue to be managed line by line, quarter by quarter with a keen eye on ROI.

Our quarterly guidance will reflect our expectations.

We continue to have great confidence in our ability to deliver at least $300 million in annual run rate synergies by the end of the third full-year post-closing.

And as previously disclosed, these synergies will be achieved with one-time cost of $300 million.

As a reminder we have identified synergies in four primary areas: first of all, sourcing and procurement; second, our rebanner program for optimizing store formats; third, distribution and logistics; and forth, overhead and corporate SG&A.

We still have a lot of work ahead of us but at this stage we are clearly on track to achieve our first 12 months milestone of at least $75 million in run rate synergies.

Plans and processes to capture sourcing and procurement synergies are well underway.

Our exact item match initiative to provide the lowest cost on identical items across both banners is complete with expected results.

No surprises.

The review of similar match items continues with outstanding results.

There is more to come here.

We are achieving planned savings from harmonizing of payment terms,.

Auctions, RFPs and a formal bid process are well underway on expense items.

Our savings continue to grow and meet expectations.

During the fourth quarter we rebannered an additional 58 Family Dollar stores to Dollar Tree, bringing our total of converted stores for fiscal 2015 to 205 stores.

This slightly exceeded our target of 200 conversions for the year.

The preliminary results are meeting expectations overall and feedback from customers has been positive.

We have plans to convert an additional 100 Family Dollar stores to Dollar Trees in 2016 and our analysis will continue.

Ultimately our strategy is to have a right banner in the best location to serve our customers.

We're finalizing the supply chain roadmap and we'll soon be piloting our first co-bannered distribution center.

With a cross organizational functional team we are integrating our warehouse management systems and we're making plans to rationalize the fleet of combined DCs, analyzing space needs by banner and determining our ability and the merits of shipping both banners out of all facilities.

This is a very large project with significant opportunity for long-term synergies.

Our first pilot facility in St.

George, Utah is planned to be operational before the third quarter.

We continue to make progress on reducing cost for a shared services model.

We're combining back office functions to support both banners through a shared services organization.

Over time these shared services will include human resources, finance, information technology, supply chain and logistics, indirect sourcing and procurement, real estate and construction, legal, strategic planning and internal audit.

Our goal is to provide consistent, efficient support of our business initiatives across the combined organization through a more cost-effective approach.

We're less than a year into the integration and we've made tremendous progress.

We still have a great deal of work ahead of us.

The timing of some will be dependent on our IT integration.

Our strategy is not to touch everything at once but to prioritize our areas of focus, to get it right the first time and build the overall business for the long term.

It's a process.

We're employing a well-planned, thoughtful, low risk strategic approach that will benefit our long-term shareholders.

Now I will turn the call over to Kevin to provide more detail on our fourth-quarter financial performance and our initial outlook for 2016.

Thanks, Bob, and good morning.

As a result of the acquisition year-over-year comparisons are difficult.

However, we have included tables with our press release which we believe will be helpful in better understanding the components of our business.

Total sales for the fourth quarter grew 117% to $5.37 billion which includes our second full quarter of Family Dollar sales.

This was at the midpoint of the sales guidance range of $5.32 billion to $5.42 billion.

Dollar Tree segment sales increased 8.6% to $2.69 billion while Family Dollar segment sales decreased 2.7% to $2.68 billion.

Year-over-year sales comparisons for Family Dollar were impacted by 205 rebannered stores and 325 divested stores.

Same-store sales on a constant currency basis increased 1.7% versus a very strong 5.6% in the prior year's fourth quarter.

The increase was driven by both traffic and ticket.

Adjusted for the impact of Canadian currency fluctuations, same-store sales grew 1.3%.

All of the recently acquired Family Dollar stores and newly rebannered Family Dollar and Deal$ stores are considered new stores and are excluded from our same-store sales calculation.

Gross profit for the combined organization increased by $734.5 million, or 80% to $1.65 billion for the fourth quarter of 2015 compared with the prior year's quarter.

The majority of the dollar increase was driven by Family Dollar's gross profit of $673.7 million.

Gross profit margin for the Dollar Tree segment was 36.4% during the fourth quarter compared with 37.1% in the prior year's fourth quarter.

Approximately one-half of the 70 basis point decline as a percent of sales was related to actual and accrued markdowns associated with the planned conversion of all Deal$ stores locations.

Other factors contributing to the year-over-year decline in gross margin rate was occupancy costs, higher distribution costs and shrink partially offset by improved merchandise cost.

Gross profit margin for the Family Dollar segment was 25.2% during the fourth quarter compared with 25.1% in the comparable period prior-year period.

Including the $15.9 million of inventory step-up amortization, gross profit margin was 25.9% for the quarter.

The improvement of 80 basis points on a comparable basis driven by improved mark on and lower markdowns partially offset by higher occupancy cost.

Selling, general and administrative expenses in the quarter for the combined organization increased 121% to $1.18 billion from $534.5 million in last year's fourth quarter.

The majority of the $648.4 million increase related to $608.4 million of Family Dollar expense.

Q4 SG&A expense for the Dollar Tree segment as a percent of sales was 21.4%, a 20 basis point as a percent to sales improvement compared to the prior year's quarter.

The current year includes $3.3 million of acquisition and integration related costs while the prior year included $6.7 million of acquisition related costs.

Excluding these costs adjusted SG&A improved to 21.2% for Q4 compared to 21.3% for the prior year's quarter.

This 10 basis point improvement was driven primarily by payroll-related costs including retirement plan contributions and store bonuses and was partially offset by higher operating and corporate expenses including legal fees and costs associated with the Deal$ store conversion.

SG&A expense for the Family Dollar segment as a percent of sales was 22.7% compared to 20.6% in the prior year's quarter.

The current year includes a $19.3 million for favorable lease rights amortization, $16 million in additional depreciation for useful life and fixed asset revaluation, $8.9 million of severance cost and integration costs.

The prior year's comparable period includes $10.8 million of acquisition-related costs.

Excluding these costs SG&A increased 70 basis point as a percent of sales to 20.9% from 20.2% in the prior year.

The increase was primarily driven by increased incentive compensation, repairs, professional fees and divestiture-related costs.

Adjusted operating income excluding acquisition- and integration-related costs for the Dollar Tree segment increased $17.4 million to $[407.7] million.

As a percent of sales adjusted operating income decreased 60 basis points to 15.2% compared to 15.8% of sales in the prior year's fourth quarter.

Adjusted operating income for the Family Dollar segment increased $1.9 million to $134.0 million.

The year-over-year comparison was impacted by 205 rebannered stores and the divestiture of 325 Family Dollar stores.

As a percent of sales adjusted operating income increased 10 basis points to 5% compared to 4.9% of sales in the prior year's comparable period.

Non-operating expenses for the fourth quarter totaled $117.2 million and were comprised primarily of net interest expense of $114.9 (sic - see Press Release, "114.8") million in the quarter which included an acceleration of $19 million in non-cash deferred financing costs associated with our prepayment of long-term debt of $1 billion in January.

For the fourth quarter the Company had net income of $229 million or $0.97 per diluted share.

Adjusted net income and adjusted earnings per share as detailed in the press release tables were $239.4 million and $1.01 per diluted share.

Our effective tax rate for the fourth quarter was 35% compared to 36.4% in the prior year's quarter.

The decrease was primarily attributable to an increase in the Work Opportunity Tax Credit in relation to the income for the fourth quarter and a decrease in state tax expense.

Looking at the balance sheet, combined cash and cash equivalents at year-end totaled $736.1 million compared to $864.1 million at the end of Q4.

And as noted we did make a $1 billion debt prepayment in late January.

Our outstanding long-term debt is now approximately $7.5 billion.

Inventory for the Dollar Tree segment at quarter-end was 18.9% greater than at the same time last year while selling square footage increased 10.4%.

Inventory per selling square foot increased 7.7%.

The primary contributors to the year-over-year increase in inventory levels relate to the West Coast port disruptions we experienced a year ago, an earlier Easter in 2016 and an earlier Chinese new year.

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

For the Family Dollar segment end-of-year inventory on a selling square foot basis increased 0.6% compared to the prior year.

We are pleased with the progress we are seeing on in-stock levels of key items.

We are continuing to review merchandise assortments and believe our current inventory levels are appropriate for the first quarter.

Capital expenditures were $144 million in the fourth quarter of 2015 versus $71.2 million in the fourth quarter of last year.

For fiscal 2016, we are planning for consolidated capital expenditures to range from $650 million to $670 million.

Capital expenditures will be focused on new stores including 350 new Dollar Tree stores and 200 new Family Dollar stores; the remodel, relocation or expansion of approximately 200 stores; the rebannering of approximately 100 Family Dollar stores to Dollar Tree stores; and the rebanner of the 158 remaining Deal$ stores for a total of more than 1,000 store projects in 2016.

In addition, we'll add frozen and refrigerated capability for approximately 400 Dollar Tree stores.

We will have IT system enhancements and integration projects, the completion of our new Cherokee County, South Carolina distribution center and the completion of our Stockton, California distribution center expansion.

Depreciation and amortization totaled $174.9 million for the fourth quarter.

This includes purchase accounting related costs of $19.3 million for favorable lease rights amortization and $16 million in depreciation for useful life and asset revaluation.

Depreciation expense was $54.4 million in the fourth quarter last year.

For fiscal 2016, we expect consolidated depreciation and amortization to range from $630 million to $640 million.

This range includes increases over the historical run rate of depreciation and amortization expense for Family Dollar for two items which are included in our guidance.

First, it includes $8 million for Q1 and $5 million for Q2 of depreciation above the historical run rate for Family Dollar as a result of harmonizing the depreciable lives accounting policies of the two companies and the increase in the value of the assets based on the purchase price allocation.

Secondly, it includes $18.7 million for Q1 and $74 million for fiscal 2016 for the amortization of favorable lease rights for the purchase accounting valuation of Family Dollar leases.

Turning to sales and earnings per share guidance, for modeling purposes our initial outlook for 2016 includes the following assumptions.

As a reminder at the beginning of Q4 2015 we divested 325 Family Dollar stores that represented approximately $500 million in annual sales and $45.5 million in operating income.

Our same-store sales calculation excludes Family Dollar stores and excludes stores that are rebannered.

These stores will be included in our same-store sales calculations when they have been opened as a Dollar Tree for 15 months.

We will continue to experience a higher than normal degree of cannibalization to Dollar Tree comps as part of our rebanner efforts.

This cannibalization expectation was planned and factored into both our rebannered strategy analysis and our outlook for same-store sales.

We will continue our initiatives to rebanner stores, first focusing on rebannering all Deal$ stores and then we plan to convert an additional 100 Family Dollar stores to Dollar Trees.

Easter will be one week earlier than the prior year.

This represents an estimated $10 million headwind to sales.

Inventory step-up amortization will be approximately $6 million in Q1 and $2 million in Q2.

We are budgeting lower diesel fuel costs than a year ago with the first half providing the most benefit.

Interest expense will be approximately $90 million per quarter in 2016 and we do not anticipate any share repurchases in 2016.

We cannot predict future currency fluctuations.

We have not adjusted our guidance for changes in currency rates.

Our guidance also assumes a tax rate of 36.6% for the first quarter and 36.8% for fiscal 2016.

Weighted average diluted share counts are assumed to be 236.4 million shares for Q1 and for the full year.

For the first quarter we are forecasting total sales to range from $5.05 billion to $5.12 billion and diluted earnings per share on a GAAP basis in the range of $0.75 to $0.83.

These estimates are based on the low single-digit same-store sales increase and year-over-year square footage growth of 132%.

Sales and earnings per share outlook for the full fiscal year, we are forecasting total sales to range from $20.76 billion to $21.11 billion and diluted earnings per share on a GAAP basis in the range of $3.35 to $3.65.

These estimates are based on a low single-digit same-store sales increase and 4% sales square footage growth.

I will now turn the call back over to Bob.

Thanks, Kevin.

I want to close by saying the strategic rationale for the Family Dollar acquisition is as compelling as ever.

This is an extremely large and complex transaction involving more than 13,000 retail store locations and 23 distribution centers.

While we are still in the early stages of the integration process I'm very pleased with our process and our progress.

Gary Philbin and the leadership team at Family Dollar are working the plan effectively and efficiently.

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

I believe we can exceed these expectations.

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

I'm extremely proud of our combined Family Dollar and Dollar Tree teams.

They have accomplished extraordinary feats in a very short time but this is just the beginning.

There's much more to do and I will tell you that as always we will 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 of the Family Dollar brand through improvements in sales, margins, expense control and greater customer satisfaction.

I will close the prepared remarks by saying 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 32 consecutive quarters the Dollar Tree banner has delivered positive same-store sales increases.

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

While our price point remains $1 our operating margin continues to lead the discount sector.

With the addition of Family Dollar, we are larger, stronger and more diversified business better able to grow in more markets while serving more customers with exactly what they are looking for: great value in every store every day.

Our future has never been brighter.

Operator, we are now ready for questions.

(Operator Instructions) Michael Lasser, UBS.

Good morning, thanks a lot for taking my question.

It's on the core Dollar Tree business.

This is the third quarter in a row where the comps were below 3%.

Are you seeing any indications that you're running into some of the limitations of your merchandise flexibility with the single price point model?

And along those lines, what are you anticipating on the merchandising side to see the benefit given what some of the Asian currencies have done and given how much that you source your product overseas?

And then I have a quick follow-up, thanks.

Michael, thanks for the question.

To the first part of the question we're not limited by the merchandise assortment or the price point.

We have more assortment than ever.

Our values are better than ever.

Our stores are larger, they are more merchandise and more assortment than we've ever had.

So there is no limitation to that.

If you look at fourth quarter largely we're up against a very big fourth quarter last year, 5.6% comp and the year before.

So basically in sort of a tough economy we are up against a fairly difficult comparison, 5.6%.

And I think the 1.7% comp that you see is admirable considering what we faced with that comp last year.

As to China, our sourcing continued to be strong and vibrant.

We still import a lot of product, about 40% of our business is in product that we import and that continues.

Our pricing out of China has been very positive.

We've been able to not only improve values in our product by taking the lower cost and turning that into more value for the customer but also we've been able to reduce costs on things that we buy every quarter, every year that we keep in our stores all the time.

So the basics we've been able to reduce costs on that, especially on the last trip.

So you had a follow-up question?

Yes, my other question was on the guidance for the year.

What have you assumed on wage increases, additional investments in the stores and the cost to harvest the synergies within your outlook for the upcoming year?

Thank you so much.

So Michael, as we work to put our guidance together for the full year we'll obviously take all those things into consideration.

Obviously from a wage perspective there are, continue to be certain states in the US as well as provinces in Canada that continue to raise their individual minimum wages.

And obviously we put those into the mix as we look at our business no different than any other year.

And to the point we've historically said we're competitive in the markets we're in and that's important because you have to be to get good employees at the end of the day.

So I don't think that's really changed but it is within the guidance.

As you look at the synergies and you look at the cost to achieve obviously we have an expectation that we will achieve synergies this year.

There are synergies baked in.

We haven't specifically said the dollars and part of that is due to the timing is a little bit hard to nail specifically down.

We are well on our way to meeting or beating the first-year run rate of $75 million of synergies.

So I think we've baked things in accordingly.

But still a lot of work to be done to make that happen but we feel good about where we're at today.

Okay, thank you so much and good luck with the year.

Scot Ciccarelli, RBC Capital.

Hey, we got Ciccarelli there.

Good morning, guys.

The first question is is there an estimate that you guys have in terms of the impact of cannibalization in the quarter?

Obviously, Kevin, you made that reference, I think you guys talked about it last quarter as well.

I think as we look at it and we obviously analyze it and we analyzed it going into it as we said within the prepared remarks that the expectation was there was going to be some effect.

And it was a little less than half a percent but I think directionally that's exactly where we expected it to be.

So in some ways, and that was all related to rebannering, so in some ways I guess you could say without that we would have been above a 2. But I think we all know that for the improvement of the business we're doing the right things with these rebannerings.

They are going to be great stores, great opportunity to put the best store in the best location for our customers and put our best foot forward.

And it will show in the bottom line as we go forward.

So I think that's the way we think about it.

Okay, that's helpful.

Then is there a synergy number that we can kind of think about for the quarter that's just completed?

Or is the bulk of that $75 million really going to happen in the first half of 2016 just given the timing issues that you already mentioned?

I think as we think about it it's probably more to the back half a little bit.

There is a little bit within the first quarter but we're not really going to speak to a specific number at this point in time.

But it is built into our guidance.

And was there anything that you were able to capture in the fourth quarter that you can outline?

I think obviously there was a little bit in the fourth quarter as it relates to the exact match process that Bob spoke to in his comments.

The merchants worked hard on that and there was some of that that did go into effect in a sense.

What you've got to remember is you've already got merchandise on hand basically at the prior price.

So it takes a while to work through the system to see the benefit, is kind of the way you need to think about that.

So in other words, just a final clarification here, the bulk of the synergies for first year we're really going to start to see accelerate in 2Q of 2016?

I think that's when we will start to definitely see some things hitting that will make a difference.

Got it.

Thanks a lot, guys.

Stephen Grambling, Goldman Sachs.

Hey, good morning, thanks for taking the questions as well.

Just a follow-up on the guidance, can you just provide a little more color on how you think about the profitability by segment maybe excluding the synergies?

Just whatever the high-level puts and takes to think about are.

You know, at this point we're going to give guidance as a combined Company.

I think as you look at it at the midpoint of our guidance our operating margin for Q1 basically gives about I mid-7% number.

If you look at it for the full year, you're at the high 7%s approaching 8%.

We're going to give guidance as a combined Company, we will give you color at the end of each quarter, but that's how we're going to factor that as we go forward.

Okay, fair enough.

Then is there any detail you can provide on what you're seeing from these rebannerings as it relates to the productivity so far and profitability?

And then any other color you can provide on the next group of stores and how they may differ from the first set?

Yes, I will tell you that the rebanners are meeting our expectations.

We started off as you know with an analysis of these stores that we thought could be better served, better serve the customers as a Dollar Tree than a Family Dollar and Family Dollars that were underperforming frankly.

Because obviously we can improve the performance of those Family Dollar stores by turning them into a Dollar Tree we'd like to take a look at doing that.

We modeled against really the Family Dollar or the Dollar Tree model to come up with a large list and then we went through the process of reviewing those stores, actually going out and sending people out to visit the sites and put their eyes on it as well as having the analysis.

So from that is how we picked the first 200, 300 stores now.

We'll continue the analysis.

I would tell you that I haven't learned a whole lot different from what we first did in regard to analyzing the Family Dollar stores.

Again they were underperforming Family Dollar stores that we put through the Dollar Tree real estate model and from the Dollar Tree real estate model we came with a sales projection and from that we knew what we could do, what we thought we could do as a Dollar Tree.

So that's how we chose them.

I don't think it's really early.

One of the reasons we are doing 100 this year instead of maybe more is the fact that I would like to let the first 200 sort of burn in and have a few months, some of them we've only had a few weeks on with results and most we've only had a few months.

So with a little more time then I think we'll probably find some more opportunity to improve that model and to improve the location and the rebannering project.

But I will tell you it's exciting.

Rebannering is absolutely hitting our expectations of what we can deliver.

And by the way, I think by running better stores then obviously we can improve as we do in all Dollar Tree stores from opening to really going after the customer in those markets and running great stores for those neighborhoods.

Thanks.

And one last one if I can't then I will yield.

But on the transition service agreement I think you talked about with the divested stores was that in place in the quarter?

And is there any way to help us size that?

Thank you.

The TSA was in place in the quarter obviously from the standpoint of we divested of the 325 stores at the beginning of the quarter.

We do support Sycamore Partners for these stores on an ongoing basis.

And again as we called out last quarter, there are certain costs that we are incurring and expect to incur as part of that.

On the flipside of that we do get some reimbursement as per the TSA for some of those services provided.

It was so on a go-forward basis my expectation is that it will be hopefully fairly neutral, but it's not totally known based upon all those services that we have to provide.

But we will be providing accounting services, the merchandise is still bought and distributed by us to those 325 stores.

We're really accounting services and HR services and various things like that.

So it's a fairly involved process realistically.

Great, thanks so much.

Best of luck this year.

(Operator Instructions) Dan Wewer, Raymond James.

Thanks, hey, good morning Bob.

Good morning, Dan, how are you?

Good.

How are you doing?

I'm terrific.

On the 1% to 2% same-store sales gain at Family Dollar, were you initially thinking it could be a bit better than that given that you've taken the 200 underperforming Family Dollar stores out of their comp base and as you alluded to the in-store standards are better, in-stock levels are better?

It seems like the Family Dollar segment could have achieved a little bit better same-store sales growth.

It's just early, Dan.

I think we can achieve better, more consistent same-store sales growth at Family Dollar.

But there was a lot of things going on there, including a clearance event that was ending sometime early November and changing around the store, the end caps, getting rid of old merchandise, working on improving the in-stock position, setting holiday merchandise that had already been bought and displaying that appropriately and just engaging in the customer.

So they really accomplished a lot of things at the Family Dollar business early on in addition to all the synergy work that's being done there and combining with the shared services.

So a lot was accomplished there.

I'm pleased with where we came from with the Family Dollar, frankly, business where we divested 325 stores, $0.5 billion in sales, that we rebannered 205 stores.

All those moving pieces have an effect on the base.

It's a little bit -- it's a lot to do for an organization in a short period of time.

And at the same time the business environment in the fourth quarter for consumers just wasn't as robust as you might have wanted it to be.

So let's give it a little more time.

I expect it's going to continue to improve and I have great confidence in the management team to do the things to focus on the customer and engage with the customer, provide more value in that business which that's where we're putting our focus.

Just like Dollar Tree we're going to run great stores.

We will win by running great stores at Family Dollar.

And then a follow-up also related to revenues, when you look at the core segment the Dollar Tree store sales per square foot is now the highest I believe since 2002.

Of course back then your stores were only, the prototype was only half the size that it is currently.

With that in mind, it's mathematically it's really difficult to get to 3% and 4% same-store sales growth because the denominator is so large.

So going forward do you think 2% is kind of the appropriate bogey for the core segment same-store sales?

I wouldn't agree on the 3% to 4% not being out of reach or even more.

It's really about how well we serve the customer.

And there are some headwinds out there from time to time in the economy and the economic environment and employment and all those things that we sort of whine about that we can't do much with.

But at the same time they cycle in, they cycle out.

And over the longer haul we can do more in our Dollar Tree stores.

Our sales productivity per foot is not at the peak of where it can be.

There's always, there always are things that we can do by expanding categories that are growing, by pulling back on categories that are declining, by increasing the value.

The idea of buying better with a combined larger Company and leveraging the power of our pencil to buy better, to distribute goods better, the logistics cost we ought to be able to leverage those for both banners and provide more efficient and better supply of merchandise to your stores.

So model as you wish.

But for the long haul I believe that our Dollar Tree business is going to remain vibrant for years to come.

Do you think that you are at a point where maybe you need to reinvest some of that industry-leading margin in the Dollar Tree segment back into marketshare initiatives?

We should always take a look at that and we should always let the customer market and the customer be our guide on what the value equation needs to be.

Everything is $1.

Other retailers will raise or lower their prices.

At Dollar Tree we change the product we will either improve the value or take a little more in margin.

So we will continue to do that.

I will tell you this, though, there is really room, there's a lot of room in operating margin to improve it.

One of the things I'm most proud of is the sector leading operating margin.

And there's a few things that we can do to improve that.

Even though it's sector leading we can continue to grow that.

We don't have to take away from it to invest in the customer.

We can run our business better still.

And it is driven by just a few factors.

First of all, we've got to improve our DC costs.

By improving our DC costs we'll be able to improve our operating margin.

By improving by the use of better staffing models and leveraging engineered standards and we can improve our DC cost.

Our shrink is higher than it should be.

It's grown over the last couple of years.

We can improve that.

We've always been able to run a very well-managed shrink component in our business.

And I expect that we're going to get back to a better shrink number.

Unfortunately, shrink as you know has a tail.

Once you know it and see it then all the initiatives that you do to bring it back in line sort of don't show up until you cycle through some inventories and the like.

But we're on top of it and we can improve our shrink.

We can also improve -- we'll leverage our occupancy with our comp store sales increases.

We've had 32 straight quarters.

Whether it's 2% or 3% or 4% we will continue to leverage those fixed costs with our comp sales increase.

Another big thing is by leveraging the combined companies as individual banner, 1 plus 1 doesn't equal 2 here.

As we start bringing together our shared services for both banners we're going to lower costs across both banners in the back office functions.

So there's room for us to continue to grow our comp sales, there's room for us to continue to invest in our customer and be relevant and offer the best values in the business for $1 and at the same time improve our operating margin.

Great, thank you.

Joseph Feldman, Telsey.

Hi guys, good morning.

I wanted to ask, you made a comment about the integration of systems and technology.

And I guess I just wanted to get an update on where that does stand because and how you're platforming across the two businesses?

Joe, well we've got a plan, we've got a roadmap that sort of we're not doing everything at one time.

Some things have to be done before you can do the next step by the way.

But we have a plan for that for over the next three years of systems integration.

We're doing a lot of work around bringing together shared services as a priority, being able to for example get everyone on the same financial system so that we can pay all the bills the same way using the same system.

We're currently -- you heard me reference St.

George's, Utah -- we're currently working on combining and integrating the WMS systems.

We're taking a Family Dollar bannered DC in St.

George's, Utah and we're doing that right now.

We'll start receiving some time April, May the Dollar Tree merchandise along with the Family Dollar merchandise.

And we'll start shipping and testing that shortly after that is the plan.

And of course when we get that right and we have confidence that we can do that other places then we will begin rolling out and combining some others DCs as appropriate to do two things.

One, is to give us more capacity in the buildings that we own whether it's Family Dollar that needs the capacity or Dollar Tree that needs capacity by being able to ship both banners out of any building will enable us to use the capacity better.

Secondly, to improve the cost structure by rationalizing the DC network, getting the DCs in the right places to serve the right banners.

So that's some of the priorities that we have.

We're going to keep the merchandising separate.

There are some of the back office things to do with merchandising.

We'll try to leverage but Family Dollar buyers are going to be buying and using Family Dollar systems and Dollar Tree like using the Dollar Tree systems.

As far as retail purchasing right now we're going to combine some of the back office things and leverage our international sourcing, leveraging freight rates across both banners, leveraging our international organization across both banners, our QA/QC, all of those things we'll be leveraging.

So that sort of gives you color.

There is a roadmap for the entire network system by system and it spans for the next three years with the most important things to get clean the most value the earliest at the front end.

Got it.

Thanks.

Then just as a follow-up, can you help dimensionalize maybe this $300 million in synergies?

I know there's the four buckets and I know we've talked about some of the merchandising ones probably coming earlier in the process of the three years.

But like how should we think about how big each bucket is going forward?

As we've talked to them the four buckets, the biggest one by far is the procurement bucket which includes both merchandise and the non-merchandise spend basically.

And that's roughly, it's over 60% basically of the overall $300 million.

So that's very -- it's a wide net as you might imagine not only when you think about all the things we buy.

So merchandise is merchandise but when you look at all the services and goods that we buy as organizations being able to leverage that across both organizations, streamline processes, determine the best way to go forward for both banners is really very exciting and very powerful.

So that by far is the biggest bucket.

The second biggest bucket that we've spoke to in the past is the rebannering process and taking underperforming stores and turning them into stores that are performing at a higher level at an average Dollar Tree rate.

So that's the second one.

And the third and fourth buckets are smaller.

We've always said that the distribution logistics has a chance to be a big number but it's a longer-term project.

So to Bob's point when he was speaking to the work being done today on looking at systems and how do you ship both banners out of one distribution center, that potentially has some big payback but it's a little further down the road.

So that's kind of directionally how to think about it.

That's helpful.

Thanks, guys.

Good luck with this quarter.

Matt Nemer, Wells Fargo Securities.

Good morning, this is actually Trisha Dill in format.

So I just had a question first on the core Dollar Tree operating margin that came in a little lighter than we expected and down versus last year compared to I think your expectations were relatively flat even ex- the Deal$ markdowns.

And STO came in a little above our expectations so I was just wondering if you could comment on what was different there versus your expectations in both segments?

And then I just had a follow-up after that.

I think on the Dollar Tree side of the equation I think obviously the Deal$ markdowns were a known number and that was by far the largest portion of the decrease in our gross profit.

On a lower comp we don't get as much leverage on occupancy and distribution as we normally would.

And again to the point of what we're trying to do there and to Bob's speaking to we know we can do better from a distribution standpoint.

And then shrink being the other item which we're not happy with our performance this year and we've obviously got teams focused on that but that was headwind.

What was really positive at the end of the day was the fact that our merchandise costs continue to be better.

The mark on was up so we're buying better.

Freight was a benefit, so a lot of things going really well there.

And that's very positive and will continue to be positive we believe as we go forward.

I think the other thing I would say about the Dollar Tree business is even on a lower comp for the quarter and even the year we were able to leverage our SG&A expenses.

So to me that's very powerful to the model.

There's a lot of companies that would not be able to leverage their SG&A at this type of a comp level, so again it's part of our disciplined approach as we go forward.

I think speaking to the Family Dollar business I think in general I think the gross profit came in about where we thought it would.

I think we've made some good strides, the team there working again to a lot of work being done to make sure we get some of the best net debt cost that we can in the system and be able to track that and base our business off of that.

So I think that's very positive.

I think as we spoke to in the prepared remarks some of the headwinds as far from a comparability standpoint relate to incentive compensation, divestiture cost and some things like that.

So overall I don't know that there were a lot of big surprises.

Obviously if sales maybe would have been more towards -- the good thing is sales were at the middle of the range, earnings were at the top end, towards the top end of the range.

So I think the flow-through was actually pretty good at the end of the day.

So I think that's how we think about it.

That's very helpful.

Thanks.

Then just a quick clarification on the full-year EPS guidance, last quarter you provided a reconciliation with a few adjustments leading to adjusted EBITDA.

And I'm just wondering if you can help us understand what those same adjustments would be for your 2016 guidance?

Yes, I think we've really laid them out to you in the sense of the prepared remarks.

Obviously we talked about the fact that the inventory step-up amortization is $6 million in Q1 and $2 million in Q2.

As we look to the purchase accounting items that we've talked about since the day of the first quarter, you'll continue to see favorable lease rates amortization is about $18.7 million for Q1, $74 million for the year.

And that $18.7 million steps down about $200,000 a quarter roughly at the end of the day.

And then you have additional depreciation above historical run rate related to the revaluation of assets and the change in policies.

And basically that's about $8 million in Q1 and $5 million in Q2.

So those are really the items as we see it.

So that's again why we give them to you today in the prepared remarks and that should help you be able to do any of the adjustments that you want to within your processes.

Our viewpoint is we gave GAAP guidance today.

We're going to continue to give GAAP guidance on a go-forward basis.

We think that's obviously the cleanest way.

Obviously we're required to do that to begin with, but secondarily it is the items are known, the adjustments are known now.

I think everybody understands them and I think it will be cleaner for everybody.

Great, thanks so much.

John Zolidis, Buckingham Research.

Hi, good morning and thanks for taking my question.

My question is on merchandising at the Family Dollar stores.

When you take a look at those stores and compare the model to the core Dollar Tree, is there any idea that maybe you can add some new categories of product to Family Dollar that might help to improve the productivity that simultaneously wouldn't take away sales from your core Dollar Tree stores?

Hey John, Gary Philbin.

Good morning.

Let me start by maybe just describing one of the reasons we did the acquisition was to have two compelling banners.

So this is not an exercise to turn Family Dollar into Dollar Tree.

And so we are rooted in the customers we serve and where we served them.

So I'd like to make sure we're very clear we're going to have a very productive Family Dollar banner with compelling assortments that we think fit the bill for the folks that shop us.

And that revolves an awful lot around first of the month and delivering basics and giving them items that on a discretionary basis they need to round out their shopping trip.

So starting with that I would say that's where we're grounded.

But part of the synergy effort is having our merchants sit together.

And just got back from our most recent trip in China where both our Family Dollar and Dollar Tree merchants are able to sit in the same room and take a look at items.

So that's going to be a piece, that trip after trip where merchants can sit in the same room and find the things that fit for Family Dollar that for us means opening price point, great value, items that can be imported that are private brands.

All those things are going to take shape as we continue iterations of our merchants getting together.

So there's going to be some items that you might see in both banners but if you ever go into a Dollar Tree or Family Dollar and mistake one for the other we've really missed the mark on that assortment.

You're going to see two compelling stores and assortments and quite frankly even on the real estate side where they live which really is the growth curb for both banners as we go forward.

So I hope that helps.

Thanks a lot for that answer.

Matthew Boss, JPMorgan.

Hey, thanks guys.

So as we think to the spring versus the fall of this year, what category should we keep an eye on in Family Dollar stores more on the merchandising and the pricing front?

And then anything to watch on the circular and promotional cadence?

Well of course we start with delivering the basics.

I tell our folks we have 12 holidays a year and it's called first of the month.

So we are spending a lot of energy at Family Dollar making sure that our stores are ready.

The investment that we want to make with our customer is really at kickoff around that time of the month.

Folks have money in their pocket to spend and we want to be ready.

So all the things that we've been working on getting the non-go forward inventory cleardown to get our on-hands better so that we can have our shelves better stocked, that's the effort we've made up to this point to go into the springtime.

Obviously we've got Easter holiday ahead of us going into a season that is obviously spring and summer after that.

But I would tell you an awful lot of what we're working on is delivering the basics every day which our customer research says they will give us credit for that if we're able to deliver on that week in, week out, month in, month out.

As far as promotional strategy, you might see we've introduced smart ways to save which really for me is a way of tying together what our customers are going to see.

Our ads will reflect our stores.

And so when you think about how you ought to save at a Family Dollar, our customers are giving us credit now for our everyday low price.

Of course we've always had traffic drivers on our sale items.

It's a Company even before we bought them certainly had over 1,000 $1 wow items in the store that customers love to shop.

We have an extensive private brands program that certainly lends itself to compare and save.

And what we're introducing is price drop which is nothing new compared to other retailers but for us it's a way of delivering value to our customers on some of the items they shop most often.

So it's another arrow in our quiver that allows us to deliver value to our customers on a monthly basis and truly a way of showing from ad to the store to even how we think about our customers' shopping patterns how they ought to come into a Family Dollar and shop.

So we think it's an exciting kickoff and really gives our merchants and really great support from our vendor community another way to drive more incremental cases at Family Dollar.

Great.

And then just a follow-up.

With some of the tougher comps behind us, I guess just any comments on current business?

And then within your 2016 guidance, what base case level of debt paydown is implied to get to the $360 million interest expense?

Is there any opportunity for additional paydown as the year progresses and just where do you see the leverage ratio exiting the year?

I will take the debt piece.

Basically the $90 million a quarter of interest, $360 million assumes no additional paydown at this point in time.

So obviously if we make the determination as we work through the year that we're ready to pay down additional that it could have a positive effect.

But at this point in time within the guidance there is no assumption of any additional pay downs.

So that's kind of where that stands at this point.

As far as current trends, obviously we've finished one period out of the three so it's still got two periods to go in the quarter but I'm pleased with where we are.

There's always you usually get a weather report sometime in February and when weather was adverse it wasn't as good as we thought.

But overall we ended up with a good first period and on track for a good quarter.

And frankly I'm looking forward to a period of time when we don't have those disruptions like we had last year from the port strike.

And I think you can see in our inventory we have the inventory that we should've had last year, we actually have that inventory this year.

So my expectation is that we're going to have -- we're on track for a good first quarter.

Easter is a little early.

Early Easters at Dollar Tree aren't usually good, so we've said that a $10 million headwind.

But at the end of the day we've given you our first-quarter guidance and any color on that is we're on track.

Great, best of luck.

Thank you.

Ladies and gentlemen, this does conclude today's Q&A session.

I'd like to return the floor to Randy Guiler for closing comments.

Thank you, Keith.

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

Our next quarterly earnings call is tentatively scheduled for Thursday, May 26, 2016.

Thank you and have a good day.

This does conclude today's program.

Thanks for your participation.

You may now disconnect.

Have a great day.