美元樹 (DLTR) 2017 Q2 法說會逐字稿

Good day, and welcome to the Dollar Tree, Inc.

Second Quarter Earnings Conference Call.

Today's conference is being recorded.

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

Please go ahead, sir.

Thank you, Rochelle.

Good morning, and welcome to our conference call to discuss Dollar Tree's performance for the second fiscal quarter of 2017.

Participating on today's call will be our CEO, Bob Sasser; CFO, Kevin Wampler; and Enterprise President, 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 constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors included in our most recent press release, most recent 8-K, 10-Q and 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 for your questions.

(Operator Instructions)

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

Thanks, Randy.

Good morning, everyone.

This morning we announced our results for the second quarter of fiscal 2017.

Sales increased 5.7% to $5.28 billion, and same-store sales increased 2.4%.

By segment, comp sales for the Dollar Tree banner increased 3.9%; and for the Family Dollar banner, comp sales increased 1%.

Our gross margin rate improved 50 basis points to 30.8%.

Operating income increased 17.4% to $419.5 million, and our operating margin rate improved to 7.9%.

Earnings per share increased 36.1% to $0.98 versus $0.72 in the prior year's quarter.

I am extremely pleased with the quarter delivered by both the Dollar Tree banner and the Family Dollar banner.

Dollar Tree continues to gain momentum and delivered its 38th consecutive quarter of positive comp store sales.

Both banners were successful in driving sales, enhancing gross margin and levering -- leveraging SG&A effectively as compared to the prior year's quarter.

Our total enterprise sales exceeded the high end of our guidance range.

Both banners delivered positive comp store sales growth.

Both banners showed improvements in gross margin, and operating margin improved 80 basis points from 7.1% last year to 7.9% for the quarter this year.

I am incredibly proud of our organization.

Our merchants are focused on exceeding the customers' expectations for value.

Our store operators across the chain have worked very hard to be certain that shelves are filled, promotions set and product is on the sales floor ready to welcome and serve our customers.

Our supply chain is focused on efficiency and ensuring continuous improvement in service to support our stores.

All of our support teams have embraced our shared services model and efforts to more cost-effectively support both of our large and growing banners, Dollar Tree and Family Dollar.

Our business model is strong and resilient.

We operate in the most attractive sector in retail with more than 14,500 store locations across North America.

Our goal is to deliver both value and convenience to our customers, and we do this through 2 solid and differentiated concepts.

Our 6,500 Dollar Tree stores are fixed price point, small box retail stores located primarily in suburban markets, serving a broad range of income levels.

Our 8,000 Family Dollar stores are multi-price point, small box neighborhood discount stores, serving the needs of customers largely in urban and rural locations.

Together, we are a diversified business of 2 well-known and recognized banners with years of growth ahead of us.

Additionally, I could not be more pleased with our Dollar Tree Canada team.

Our merchants and our store teams continue to run great stores and continue to gain momentum.

Dollar Tree Canada performed extremely well across the board during the quarter in sales, gross margin, SG&A and operating margin.

Today, we operate 224 stores in Canada with the opportunity to ultimately operate 1,000 stores north of the border.

In addition to brick-and-mortar stores, our online business at Dollar Tree Direct is growing in size and performance.

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

I'm very pleased with the year-over-year trends we are seeing in both traffic and sales in our Dollar Tree Direct business.

For the fourth consecutive quarter, we've seen mobile traffic on our site outpace visits from desktop computers and tablets.

We've enhanced our product video capabilities.

These videos are used on our website and made available through e-mail, Facebook, Pinterest and blog posts and are receiving very positive feedback from our loyal online customers.

Please visit our site at dollartree.com.

We have a concept that customers love.

When times are tough, we are part of the solution to help that customer make ends meet.

When times are better, customers appreciate our convenience and our value.

Shoppers today are focused on value and convenience more than ever.

And that's exactly what Dollar Tree and Family Dollar stores provide, value and convenience.

Now I'll turn the call over to Gary to provide more detail on our performance and our priorities.

Thank you, Bob.

Good morning, everyone.

I'm very pleased with the strong results in our second quarter and with the performance from each of our business segments.

The Dollar Tree banner delivered its best quarterly comp since Q4 of 2014 and continues to deliver sector-leading, double-digit operating margins.

The Family Dollar banner delivered positive same-store sales and a 120 basis point improvement in operating margin.

We are seeing traction throughout the business.

Our Dollar Tree Canada team is simply taking care of business by running great stores.

Our 224 store division is delivering comps well above the company average and, of course, our Dollar Tree Direct business, while it's a smaller portion of our business, continues to show nice year-over-year growth in sales, site visits and profitability.

Dollar Tree highlights for the quarter include: Our top-performing categories were snacks, beverage, party supplies, stationery, household products, food and candy.

Sales performance was again led by consumables.

Both consumables and discretionary comped at better than 3% for the quarter.

All 3 months comped positively in the quarter, and July was the strongest month.

Geographically, Dollar Tree same-store sales were strongest in the Northeast, Midwest and Southwest.

And all of our operating zones delivered positive comps greater than 2%.

The Dollar Tree business continues to be strong, consistent and growing.

These results represent our 38th consecutive quarter of positive same-store sales, and our operating margin continues to lead the value sector.

Our second quarter performance continues to validate the relevance of the Dollar Tree brand.

Customers love our fixed-price concepts and continue to shop for value and convenience.

In recent quarters, we have selectively and strategically invested in labor to ensure that our stores are getting the product to our sales floor.

We are very pleased with the traffic and sales results, as well as the flow of our inventory, we are seeing in these stores.

For Family Dollar, the highlights for the quarter include: Our top-performing categories were snacks and beverage, refrigerated frozen food products, school supplies and bedding.

Our comp performance was again driven by consumables.

July represented our strongest comp month for the quarter.

May was positive, June was slightly negative.

Geographically, Family Dollar same-store sales growth for the quarter were strongest in our Northeast, Midwest and West zones.

We are now just over 2 years into our integration, and we continue to make meaningful progress at Family Dollar around the key foundational elements that will drive performance; improving our store shopping experience with our table stakes initiative, focusing on merchandising value for our customers and consolidation of our shared services.

Evidence of our progress can be seen in our second quarter results.

Positive 1% same-store sales, a 60 basis point improvement in gross margin, a 60 basis point of SG&A leverage on that 1% comp and a 120 basis point increase in operating margin.

And importantly, as we continue to progress on our integration, our customers are seeing cleaner stores, greater values, improving product assortments, more consistent in-stocks and better customer service in our stores.

And they are rewarding us with their repeat visits.

We strive to be the neighborhood store of choice for the fill-in trip shopping needs of our Family Dollar customers, that typically live, work and shop near our stores.

On last quarter's call, I shared details regarding our renovation initiative for Family Dollar stores.

(inaudible) and touched in a material way in quite some time.

During the second quarter, we completed 111 Family Dollar store renovations.

Elements of the renovation include improved adjacencies and more productive end caps; expanded beverage and snacks, including immediate-consumption coolers near checkout; expanded assortment of food in coolers and freezers; an updated hair care assortment; expanded adult beverage in some stores; an exciting power alley to promote $1 Wow items; and a faster checkout process for our customer.

We are very pleased with the initial results we are seeing in these stores and especially about the feedback we are receiving from our store teams and customers.

We now estimate that we can complete 350 renovations for fiscal 2017.

We continue to make progress as planned with elevating our private brand assortment in stores.

These private brands are being developed to provide national brand comparable quality and terrific values to support our Compare and Save component of our Smart Ways to Save program.

Each of the brands will contain a 100% customer satisfaction guarantee.

And these brand improvements are taking place across the store and are already impacting performance in household products, candy, snacks, food, beverage, hardware, vitamins and other categories to come soon.

We look forward to providing updates to our progress in the quarters ahead.

Now looking at real estate.

In the second quarter, we opened a total of 133 new stores: 76 Dollar Trees, 57 Family Dollars.

We relocated or expanded 31 stores: 24 Dollar Trees and 7 Family Dollars.

We renovated 111 Family Dollar stores as part of the renovation project that I just spoke about for a total of 275 projects during the quarter.

We also added freezers and coolers into 101 Dollar Tree stores during the second quarter, bringing our total Dollar Tree stores with freezers and coolers to just over 5,000, 5,011 to be exact.

During the quarter, we closed 34 stores: 14 Dollar Trees and 20 Family Dollars.

And we ended the quarter with 14,581 stores: 6,506 Dollar Trees and 8,075 Family Dollars.

I'd like to share that last week, we held our Annual Leadership Conference in Charlotte.

This was our opportunity to share, learn, to recognize and reward our field leadership at Family Dollar.

We had great meetings, and I can tell you that our field leadership teams are aligned, focused and energized as we start the exciting back half and holiday season ahead of us.

We shared the excitement of the merchandise plans that will make Family Dollar stores the neighborhood store of choice for value and convenience as we go through the holiday period and first of the months ahead of us.

I will now turn the call over to Kevin to provide more detail on our second quarter performance and our outlook for Q3 and the full year.

Kevin?

Thanks, Gary, and good morning.

Total sales for the second quarter grew 5.7% to $5.28 billion.

Dollar Tree segment total sales increased 8.4% to $2.59 billion, and Family Dollar segment total sales increased 3.3% to $2.69 billion.

Enterprise same-store sales increased 2.4%.

Canadian currency fluctuations had minimal impact on our comps during the quarter.

On a segment basis, same-store sales for the Dollar Tree banner increased 3.9% and for the Family Dollar banner increased 1%.

Gross profit for the combined organization increased 7.6% to $1.63 billion and for the second quarter -- for the second quarter of 2017 compared to the prior year's quarter.

As a percent of sales, gross profit margin improved 50 basis points to 30.8% versus 30.3% in the prior year's quarter.

Gross profit margin for the Dollar Tree segment was 34.6% for the second quarter, a 30 basis point improvement compared with the prior year's second quarter.

Factors impacting the segment's gross margin performance during the quarter included lower merchandise costs, favorable freight costs, lower shrink as a result of favorable inventory results and lower occupancy costs, partially offset by higher distribution costs as a percent of net sales resulting primarily from our new Cherokee County, South Carolina DC opened in Q2 of last year.

Gross profit margin for the Family Dollar segment was 27.2% during the second quarter compared with 26.6% in the comparable prior year period.

The 60 basis point improvement was primarily due to lower merchandise costs and lower markdowns, partially offset by higher shrink, distribution costs and occupancy costs.

Consolidated selling, general and administrative expenses as a percentage of net sales in the quarter improved to 22.9% from 23.1% in the same quarter last year.

Q2 SG&A expense for the Dollar Tree segment as a percentage of sales increased 10 basis points to 23.4% compared to the prior year's quarter of 23.3%.

Higher store payroll costs, incentive compensation, repairs and maintenance and legal fees were mostly offset by lower health insurance costs, lower store supplies and utilities as a percentage of sales.

SG&A expense for the Family Dollar segment as a percentage of sales was 22.4% compared to 23% in the prior year's quarter.

The 60 basis point improvement was a result of lower depreciation costs, lower worker's compensation and general liability insurance costs, lower payroll costs related to the harmonization of vacation policies and lower debit and credit card fees.

These were partially offset by higher operating and corporate expenses, primarily related to advertising costs, health insurance, store supplies and business taxes.

In addition, for Q2, the company took a $2.6 million receivable impairment charge related to Dollar Express.

The company believes that there will be no additional impairment charges related to Dollar Express going forward.

Operating income for the enterprise increased to $419.5 million compared with $357.2 million in the same period last year.

Operating income margin increased to 7.9% for the quarter from 7.1% in last year's second quarter.

Operating income margin for the Dollar Tree segment improved 20 basis points to 11.2% when compared to the prior year quarter.

Operating income for the Family Dollar segment increased $35.7 million to $130.4 million, a 120 basis point improvement as a percentage of sales when compared to the prior year's quarter.

Nonoperating expenses for the quarter totaled $75.9 million, which was comprised primarily of net interest expense.

Our effective tax rate for the second quarter was 32% compared to 36.9% in the prior year's quarter.

The decrease was primarily attributable to the tax benefit of $9.9 million or $0.04 per share related to a decrease in North Carolina state tax rate, which decreased the deferred tax liability related to the Family Dollar trade name intangible asset.

For the second quarter, the company had net income of $233.8 million or $0.98 per diluted share compared to the reported net income of $170.2 million or $0.73 per diluted share in the prior year's quarter.

Combined cash and cash equivalents at quarter end totaled $693.3 million compared to $866.4 million at the end of fiscal 2016.

During the quarter, the company prepaid $500 million of its term loan A and accelerated $1.2 million of amortizable noncash deferred financing costs.

Our outstanding long-term debt is approximately $5.8 billion.

The company continues to focus on its stated goal of returning to investment-grade for its debt ratings.

We expect our rent adjusted debt-to-EBITDA ratio to be below 3.5x in early 2018.

Inventory for the Dollar Tree segment at quarter end increased 2.9% from the same time last year, while selling square footage increased 5.3%.

Inventory per selling square foot decreased 2.2%.

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

Inventory for the Family Dollar segment at quarter end decreased 5.2% from the same period last year and decreased 6.3% on a selling square foot basis.

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

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

Capital expenditures were $161.4 million in the second quarter of 2017 versus $180 million in the second quarter last year.

For fiscal 2017, we're planning for consolidated capital expenditures to range from $740 million to $760 million.

Capital expenditures will be focused on new stores and remodels, including fee development stores.

Our plans include renovating 350 Family Dollar stores in 2017, up from 250 previously; the addition of frozen or refrigerated capability to a total of 400 new and existing Dollar Tree stores; the expansion of frozen and refrigerated for 300 Family Dollar stores; IT system enhancements and integration projects; the start of construction of a new Dollar Tree banner distribution center in Warrensburg, Missouri; and the continued buildout of a new office building for the store support center here in Chesapeake, Virginia.

Depreciation and amortization totaled $151.3 million for the second quarter.

Depreciation and amortization expense was $161.9 million in the second quarter last year.

For fiscal 2017, we expect consolidated depreciation and amortization to range from $610 million to $620 million.

Our updated outlook for fiscal 2017 includes the following assumptions:

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includes a 53rd week.

The extra week in the fourth quarter is expected to add $400 million to $430 million to sales and $0.19 to $0.22 to earnings per diluted share, both of which are included in guidance.

We expect continued pressure on store payroll based on the states increasing minimum wages and general average hourly rate increases.

We have budgeted higher import freight costs than a year ago and higher diesel costs for the year.

Net interest expense will be approximately $70.5 million in Q3 and approximately $74 million in Q4, due to the extra week.

Our guidance does not include any share repurchase for 2017.

We cannot predict future currency fluctuations, so we have not adjusted our guidance for a change in our currency rates.

Our guidance also assumes a tax rate of 33.8% for the third quarter and 34.9% for the fiscal 2017.

Weighted average diluted share counts are assumed to be 237.6 million shares for Q3 and 237.5 million shares for the full year.

For the third quarter, we are forecasting total sales to range from $5.20 billion to $5.29 billion and diluted earnings per share in the range of $0.83 to $0.90.

These estimates are based on a low single-digit same-store sales increase and year-over-year square footage growth of 3.6%.

For fiscal 2017, we are now forecasting total sales to range between $22.07 billion and $22.28 billion compared to the company's previously expected range of $21.95 billion to $22.25 billion.

The company now anticipates diluted earnings per share for fiscal 2017 will range between $4.40 and $4.60, which includes $53.5 million or $0.14 per diluted share of receivable impairment charges.

These estimates are based on low single-digit same-store sales increases and 3.9% square footage growth and includes the benefit of the 53rd week occurring in Q4 of fiscal 2017.

I'll now turn the call back to Bob.

Thanks, Kevin, and thank you, Gary.

Just over 3 years ago, on July 28, 2014, we announced our agreement to acquire Family Dollar.

At that time, I described the transaction as a transformational opportunity.

There's been a great deal of work done since the transaction was completed 2 years ago, in July 2015.

And we still have a lot of work to be done.

But importantly, I'll tell you that our leadership team is as excited and as enthusiastic as ever about the opportunity ahead.

The combination of Family Dollar and Dollar Tree gives us a strategic advantage.

We have combined 2 great brands: Family Dollar, your neighborhood discount store, and Dollar Tree, where everything is $1.

Together, we operate more than 14,500 stores in the discount variety store space, but our stores are not all the same.

We operate more than 6,500 Dollar Tree stores and more than 8,000 Family Dollar stores.

Each banner serves the market in a distinctly different way.

Each is complementary to the market.

The power of both banners extends our growth opportunity and gives us the ability to serve more customers in more ways.

We have the flexibility to open a Dollar Tree or a Family Dollar store or both across markets.

With this flexibility, we have expanded our ability to operate, grow and serve more customers in more ways, and that's exactly what we're doing.

We have the singular opportunity to place the appropriate banner in the market based on customer relevance, while leveraging our back office functions.

And as you can see in our results, our Dollar Tree business is benefiting from the combined scale of our organization, and our Family Dollar banner is gaining traction as we leverage our back office cost through shared services.

We have a tremendous opportunity through the power of both banners to drive sales productivity, enhance gross margin and better manage our cost structure, each contributing to operating margin improvements over time.

In both banners, our focus is on the customer.

The main goal of our merchants is to offer a compelling assortment that satisfies our customers' wants and needs, while giving them the best value for the money.

We're creating merchandise energy and a fun shopping experience with product that is seasonally relevant and trend relevant.

Our operators are focused on running great stores, stores that are bright and clean and orderly, stores that are in stock and filled with surprising values and a friendly shopping experience.

We're focused on profitable growth.

While we work to improve the productivity in our more than 14,500 existing stores, we continue to grow the store base.

This year, we're opening 650 new stores and we have years of growth ahead.

We have identified an opportunity for 26,000 stores across North America.

We're focused on improving performance.

We operate in a culture of continuous improvement.

Every event and season for our business should be better than the one before.

We're pleased with the successes we are seeing in our store renovation program, and we've raised our fiscal 2017 target from 250 to 300 Family Dollar renovations.

We're focused on our balance sheet.

This past quarter, we prepaid $500 million on our long-term debt.

We have now paid down approximately $2.5 billion since January of 2016 and we'll continue to pay down debt as appropriate.

As we said, when we finalized the acquisition, our plan is to use free cash flow to pay down debt and return to investment grade.

As we approach that benchmark, we will continue to assess our capital priorities, and we will continue to deploy our capital for the benefit of our long-term shareholders.

We're focused on long-term shareholder value.

We're committed to managing our business for the benefit of our long-term shareholders by building a sustainable concept that will endure for years to come.

We are a growth company in the most attractive sector in retail, opening more stores, capturing synergies, improving efficiencies, generating significant free cash flow, paying down debt, focusing on our customers and running great businesses.

It's a great time to be Dollar Tree.

Operator, we are now ready for your questions.

(Operator Instructions) And our first question, we'll hear from Nick (sic) [Scot] Ciccarelli with RBC Capital Markets.

It's Scot Ciccarelli, and Rob Iannarone on for him today.

Just going through the results today.

Gross margins were obviously a bit better.

You called out a few of the different things you're doing there.

Thinking more about private label initiatives you've talked about in the past, can you just give us an update on how that's going, the transition potentially to Home Line from Family in the Family Dollar stores?

Hey, Scot (sic) [Rob].

Hello, this's Gary.

I think the way to think about it is, we are taking a look by category, but the biggest change our customers are going to see in store is going to be the brand changes.

So particularly in food and HBA, where there's been a Family Gourmet or a Family Dollar label on it, you're going to tend to see what we've seen in our private brand trash bags, Home Line.

So it upgrades the packaging for sure.

In some cases, we're upgrading the product and quality as well.

But I think, it really allows us to put the product and the face to what the customer sees on par with the national brands in a better way.

The value, of course, is, goes without saying that's part of our Smart Ways to Save.

Our Compare and Save piece for private brand is important.

And it's our intent to continue to drive private brand penetration in the right categories.

We're seeing that with some of the repackaging done already.

So customers are responding to it.

So we have probably a dozen packages or brands out there right now, more are coming.

We're excited about it.

And it's just one more arrow in our quiver that we think is going to drive performance up and down our isle, especially in the consumable portion of our store.

Great.

And just as a follow-up.

A rough idea of where penetration stands for private label in both sort of Dollar Tree and Family Dollar and maybe where it could go?

Or if you're kind of comfortable with where it's at?

Well, I don't think we've ever laid that number out.

But I would say, we have a strong base for a private brand today.

And whether you measure it with a discretionary added in there or not, we look at both segments of our business on the consumable and discretionary.

I think we tend to focus maybe a little more on the consumables side of it, just because that's what our customer is buying most often.

It's what she sees as the best way to save when she looks at the comparison to national brands, often.

And so we measure -- we have a historical 20% on the consumables side, and we certainly have some opportunity to grow that as we push it into this year and the balance of 2018.

Next we'll move to Matthew Boss with JPMorgan.

So on Family Dollar's comp improvement, I guess, what did you see from a traffic perspective as the quarter progressed?

And then as we've been in some of your stores more recently, we've seen the rollout of a number of high-velocity value items.

Can you speak to the size and scale sourcing opportunity?

Maybe some learnings as you're going to market as a combined entity?

And just the best way to think about the second half of the year and beyond in terms of your opportunity to improve values at the Family Dollar concept?

Thanks, Matt.

I think during the quarter, we saw both ticket and traffic increase.

And I would say, for the Family Dollar segment, to see the increase in traffic was really the driver for the quarter.

So that was good to see.

So as we look forward into the second half, thanks for calling out some of those values, but as we go through the assortment that we're reinvigorating category by category, those are some of the elements the customer is going to see that we think does 2 things for us.

It's going to drive additional traffic because it's what's new, it's what's exciting in the banner.

And for the average ticket, of course, we think we can sell that one more item.

I mean, both banners are very focused on that very fundamental piece of retail, can we sell one more item.

And we incent our store managers and folks to do that.

The combination of what people will see with some new assortment and the opportunity in the back half, of course, is driven around 2 things at Family Dollar.

We've got to be right on first of the month.

That's when our customers have more money in their pocket.

They count on us.

We're convenient.

We show the right values, they'll spend more with us.

And we've also got the big holidays ahead of us at Family Dollar, and we're excited about that because of what we've done on some of the merchandising, really kicking off with Game Day around Labor Day, going to Halloween, Thanksgiving.

And I would tell you, with the meeting we had last week, we have our teams jazzed up on what we think the Christmas season can become at both banners, but really with some reinvigoration at Family Dollar.

So it's the combination of doing all the things that we say we're going to do on the product side, but I would also say, it's the table stakes, the shopping environment that we're still working very hard on, that our operators are focused on.

So get the right items on the shelf, keep them full.

And let's have a store environment that we think our customers -- is fun, full, clean.

And we know we can continue to drive more traffic into the back half.

We're focused on delivering great first of the month and great holidays at Family Dollar for the back half of the year.

It's great.

And then just a follow-up.

As we think about SG&A at Family Dollar, Kevin, where do we stand on the synergy-related operating investments today?

And just beyond this year, how best to think about the comp needed to leverage SG&A at the Family Dollar concept?

Yes, Matt, I think, as we look at it, obviously, the teams continue to work on our goal of synergies and obviously the reinvestment of that.

As we've said from day 1, the expectation is to hit our goal and hopefully exceed our $300 million goal of -- $300 million of one-time investment.

I think the investment side, there's probably still some system side things that we'll continue to incur as we go forward.

But I think, we are seeing some benefits in some of the line items as the procurement teams have worked to drive costs out of our -- out of the business.

So it's definitely -- it's a component.

It's all obviously within the guidance as we go forward.

But we feel good about where we're at and what we're able to do.

And I think the big thing is it's a lot of people working very hard to improve the overall business going forward.

(Operator Instructions) Next we'll move to Paul Trussell with Deutsche Bank.

Very strong Dollar Tree top line results.

Kevin, can you just circle back to your comments on the puts and takes on the Dollar Tree banner margins?

I just want to make sure I fully understand the impact of maybe some of the bonus accruals and some of the other items you mentioned because I would've thought there may have been an opportunity for a bit more flow through this quarter?

You're speaking to SG&A, I assume, Paul.

And obviously one of the callouts, and really it's been a callout since we gave guidance at the beginning of the year, is the fact that higher store payroll costs.

So that's been an expectation.

Obviously, there's been state directed minimum wage increases.

We've seen our average hourly rate increasing at a faster rate than maybe since before the recession.

So I think that speaks a little bit to full employment as well as the state rates.

And then, Gary touched on the fact we made a conscious decision to spend more on our stores to make sure that we're providing a great shopping experience, that our shelves are full with the unbelievable values that our customers expect.

And we think that, that is very much an important piece of it.

And then, the other side of it is, one of the other things I spoke to, obviously, was incentive compensation and the fact that if you think about a year ago, we had a little weaker comps than this year.

So obviously, we do reward our store managers accordingly on -- when things go well.

And so our store bonuses, on a year-over-year basis, were going to run higher as a percent of sales, and our overall incentive comp, in general, was going to run a little higher as a percent of sales.

And then just the other couple other items we called out was repairs and maintenance being up.

And again, we don't defer maintenance.

We fully believe on getting things done and keeping our stores in shape.

And so a couple of areas around HVAC and freezers and coolers which, as our fleet ages, will have some ebbs and flows to that.

So not totally unexpected.

And then the last item we called out was legal and this affected last year.

A year ago, legal expenses were fairly, really low, probably lower than normal on a run-rate basis, and this year, they're probably a little more normalized.

So those are just some of the things.

Obviously, we did get leverage in other areas that we called out that offset some of these things but, again, as I always speak to SG&A, there's ebbs and flows to any given quarter, but the expectation for us in any given year is that we're going to improve on our SG&A.

That's helpful.

And then, just the quick follow-up.

Just want to ask about the promotional environment.

Obviously, you all are focused and have spoken to providing value items within the Family Dollar banner.

But just can you speak to what you're seeing around pricing and promotional levels from your peers in the marketplace?

And if you've had to react in a manner more meaningful than originally planned?

Paul, this is Gary.

And I will assume that most of that's aimed at Family Dollar because, I think, the Dollar Tree banner, I think, we were very excited about the performance and continues to show great values that our customers respond to.

At Family Dollar, obviously we're paying attention to everything that's in the news and headlines, and obviously the new entry of a competitor into the space.

But I go back to, it's a -- we get caught up on the grocery communication that flows through the marketplace, but we're very focused at Family Dollar as being value and convenience.

And we drive the items that are most important to our customers with our Smart Ways to Save.

So for us, our customers can save on -- that we have every day low price, that we have a powerful price drop in the ad, that we have Smart Ways to Save, that they can save on the private label item that we have on the shelf.

So we do measure and check and track everyone's retails with our strategy.

We put the items on end caps, on promotion and one of our Smart Ways to Save elements based on what drives traffic into a Family Dollar.

So we're certainly aware of what's going on out there.

We're -- be watching, but we're running our game plan that drives our ability to drive traffic and average ticket into our stores.

And really one of the highlights for both banners, but Family Dollar I'd give great credit to, one of our strongest performing categories was consumables during the quarter.

So with all the activity out there, great credit to our teams to continue to drive progress on that and it showed up in results, which is the most important part of it.

Next we'll move to Michael Lasser with UBS.

So there was clear progress at Family Dollar this quarter.

But arguably, when you bought this business 3 years ago, you probably didn't anticipate 3 years later that you'd be comping up only 1% and 2 of the 3 months out of the quarter were positive.

So is there evidence that perhaps the potential customers just haven't recognized the changes that have been made to the store?

Or are there other factors that are standing in the way of this business reaching its potential?

Michael, first of all, we bought the business 2 years ago, that's when we closed on it.

So over the last 2 years, we've done just a whole lot of things bringing Family Dollar along.

We planned up the stores, we planned up the merchandise, we reclaimed the end caps, we've changed the way we compensate people, we've changed the organizational structure.

We've just done a lot of work that we're really proud of.

The last quarter was just a terrific performance, 1% comp and led by traffic and led by consumables and with all the talk and discussion about price pressures and competition and new competition in consumables in the face of all that.

That's what led our earnings for the quarter in our Family Dollar business.

So clearly, we are hitting the sweet spot more closely on the customer than in the past.

I think we're improving the way we're performing, with the way we're running our stores.

I think we're getting traction.

I know we're getting traction on our Smart Ways to Save with our price drops and our ads and our digital coupons and all the things that we're doing in the store around value and surprising value and a real shopping experience in our stores.

So I think I couldn't be more proud of where we are 2 years into this with all the things that we've done.

It's a large company.

We have a total of over 14,500 stores, 23 distributions centers, 180,000 people working for the company, 48 states and 5 Canadian Provinces.

I think we've done just outstanding.

Our management team has just -- has led the improvements in Family Dollar in just a very outstanding way.

Now we still have room to improve.

We're not stopping here.

My expectation is that we will continue to run great stores, improve our merchandise values, relate to the customers, engage with the customers.

The people that are successful run great stores and offer great value.

And if you look back at this year and any year, you'll always see great companies, great retailers with great stores and great value and a focus on the customer.

That's what we're doing.

We can do better.

But I, certainly, am proud of where we were in the second quarter.

In my follow-up question -- and that's helpful, very helpful, Bob.

And my follow-up question is that, appreciating the fact you don't want to guide margins by segment by quarter.

But if we assume that the core business, its margins expand in the third quarter at the rate that was similar to 2Q, it implies that Family Dollar's market expansion slows a bit in the third quarter compared to what you experienced in the second quarter despite a much easier comparison?

So are there costs pressures?

Or just being conservative, might there be other factors that would stand in the way in sustaining this type of performance?

I'll let Kevin answer.

But I'll tell you there's always some things you don't know.

We guide -- I think we give pretty good guidance.

And I think we've had a history of being very transparent with our guidance and hitting our guidance, by the way.

But there's always something you don't know.

I'm pretty -- I feel pretty good about the guidance that we've given for third quarter and for the rest of the year.

Kevin can share more.

Yes, I think, Michael, as we look at -- and again, we don't give guidance by banner.

But again, we are expecting improvement.

We said after Q1 that we really had expected that the back half of the year had the opportunity to be better than the first half in total.

And obviously Q1 was a tough quarter.

We've obviously showed significant improvement in Q2.

As we look to the back half and we look to the full year guidance now, our midpoint on operating income for the entity, excluding the receivable impairment, is roughly about 8.9% versus 8.23% last year.

So as you look at it, I think that's really significant improvement year-over-year as an entity.

And, obviously, it takes contributions from both banners to make that happen.

It's not singular Dollar Tree, it's not singular Family Dollar.

Both banners have to pull their weight and there's an expectation of that.

And so, we're looking forward to the back half to the point of it gets into the holiday season.

Seasonal opportunities are always something that we look forward to, to build our business on beyond just the consumables side of it.

So we look forward to a good second half.

And I think our guidance as we've provided it and, in a sense, raised it for the back half, we feel pretty good about it.

And next we move on to Dan Wewer with Raymond James.

Kevin, wanted to ask you about the tax rate guidance.

Is the lower effective tax rate during the third quarter and the year coming from the same development that took place in North Carolina in 2Q?

And is this a transitory lower tax rate?

Or will this continue into 2018 and beyond?

You know there's always a lot of moving pieces as it relates to taxes, as you can imagine.

But the Q3 guidance, which is a 33.8% rate, which is a little normal than -- a little lower than our normal rate, really takes into consideration what we believe as it relates to our provision to return review that will take place, so really the true-up of last year's tax return, in a sense.

So it takes into consideration things that we would leave around that.

So on a go-forward basis, do I believe this is a new lower tax rate going forward?

Not necessarily, no.

I think each and every year stands on their own based upon the facts that we know.

And so I think next year, when we give guidance at the end of the year, that you would see a tax rate probably similar to what you would consistently -- you've consistently seen from us, which is around that 37% to 38% rate.

Okay.

My other question revolves around the rebanners, the Family Dollar and Deals stores to the Dollar Tree format.

Can you discuss how much of a benefit that was to the Dollar Tree banner same-store sales growth?

Yes, from an overall point of view -- so let's maybe take a step back in the sense that we've spoke to the rebanners, we've rebannered 300 stores, 300 Family Dollar stores to Dollar Tree.

We've taken our Deals chain of 210 stores and rebannered those to Dollar Trees as well.

We've talked about cannibalization over the last year up until this point as to how much that had affected us.

And I think last quarter, we said it was about a 30 basis point cannibalization effect on the Dollar Tree banner.

From a go-forward standpoint, basically, all those stores are basically in the comp base for the most part going forward.

So we really see it as a benefit as opposed to cannibalization as we go forward because these stores should mature on a go-forward basis.

Typically, a new store would mature over the first 3 to 4 years, and those 3 to 4 years is when you'd tend to see the biggest comps.

So the expectation is that those are actually a tailwind for us as we go forward.

So to make sure I understand, the 500-and-odd number of rebanners, were those all included in the same-store sales calculations for the Dollar Tree segment in this period?

Or is this a benefit that's not yet showing up in the comp sales results?

The vast majority of them are already in the comp base.

I think there's a few that are not, but the vast majority are in the comp base.

And we'll move on to Charles Grom with Gordon Haskett.

The 3.9% comp at the Tree was, like you said, the best in 10 quarters.

Just wondering, if you could shake out the changes you made to the assortment or marketing adjustments in the second quarter?

And then when we look at the back half, I know you provided low single-digit guidance, but how should we think about modeling each of the divisions in the second half?

Well, I can talk to you about the color on the sales initiatives at Dollar Tree.

It's -- we continue to invest in the customer, in-stock on basics, giving them what they need and maximizing on their shopping trip are things that we focus on and things that we work to do.

We want to be first of the month ready.

Just like at Family Dollar, at Dollar Tree stores, a lot of the business depends on folks when -- lower income folks, especially, first of the month, when they have jingle in their pockets and money to spend, we want to have chunky displays and all the key basics available for them.

At Dollar Tree, we talk a lot, and more and more, we're talking about the same things at Family Dollar.

We talk about seasonal energy.

And during the quarter, we had some pretty good seasons, starting with Mother's Day and Memorial Day and rolling into -- Father's Day is Father's Day, so you can't really hang your hat on that one.

But it is summer and celebration of Memorial Day, red, white and blue, on through the July 4th holiday.

We had some really nice results.

And, again, the seasonal energy through that period of time.

Fast, fun and friendly stores.

We worked really hard over the past several -- few months, especially, in making sure that our flow of product, our inventory per foot is down because we've flowed the product better.

We fill the shelves more completely.

We've cleaned out stock rooms.

We've done a lot of things to get our stores standing tall when the customer comes in.

We call it full, fun and friendly, well stocked with a surprising value.

We continue to add more frozen, refrigerated at Dollar Tree.

That's not a new initiative, but we continue to see the importance of that.

We continue to look for more Wow items in our mix, as we have in the past, bonus buys, special buys, bigger sizes, bigger savings.

So it's sort of the same blueprint, maybe different items and different promotions and different focus, but we go after our customers' every need and wish, offering the greatest value at $1 price point at the margin we're willing to accept.

And with that, we are successful -- have been successful with our 38th consecutive positive comp quarter at Dollar Tree.

We think the second half is a great opportunity at Dollar Tree.

Some of the seasonal -- the sales momentum that we gained in second quarter, that continues into the -- early, early, early into the third quarter, but there's no reason not to believe that we're not on a -- with the wind to our back, so to speak, as we go into the third quarter.

So I'm really excited and optimistic about the continued growth in our business.

That's helpful.

And then just on the remodels, I think you said 111 in the second quarter.

I'm wondering when you take a step back, how quickly you think you could roll that out across the entire Family Dollar banner?

And can you remind us what the cost is per remodel and the associated comp lift that you guys are expecting to receive and/or are receiving?

Chuck, the way we're thinking about -- we like the results we're seeing.

It's doing a lot of the good things that we intended when we went out to the stores.

And keep in mind, these are some of the oldest stores that in many cases haven't been touched for many years.

And so just from the standpoint of what we can do this year, we've upped it to getting 350 done by the fiscal year.

We're going to hit that blackout window around the holidays where really don't want to disrupt the stores as we get to having them full of holiday merchandise.

But we do need to bring the gates down sometime towards Halloween, so that we can stay focused on the holiday business.

We'll ramp it back up in January.

And then when we go into next year, we'll be very bullish on the stores that we want to do for next year.

And we've -- we said, can we do 500 a year?

It's probably in that neighborhood.

And I think, as we progress through our oldest stores, keep in mind, at some point it's not about fixing the plant facility which we're faced with now.

It's just getting the adjacencies and layout done in a better way that we've spoken to.

So we went into this saying that our investment ought to be about a 2-year payback.

We're hitting the ups and downs on that based on how old the store is and what the physical plant needs are right now.

I would say that's still in the ballpark with how we think about the renovation program over the long run.

And the best part is, I mean, our store teams and our customers come out loving it and what it does for us with some of the categories that we've intentionally put into the store to highlight, to impact the shopping trip with our customer.

We can do better, but we like what we see so far, and that's why we've upped it for this year.

And we do have time for a couple more questions.

We'll hear from Kelly Halsor with Buckingham Research Group.

I just had another follow-up on the store renovations.

It's good to see you guys bump up the number of stores you're willing to do this year.

How should we think about that in terms of the modeling of kind of how those stores perform within the first year?

And kind of overall, how much do you think -- if these continue to be successful, how many do you think that you could pursue on an annual basis?

Hi, Kelly, Gary.

We would -- anticipating saying that -- I'd like to think that we can go in and is there a 500 number a year in the out-years after we finish this year's 350, that's probably somewhere in the ballpark as we look forward.

And the modeling is, we like what it's doing on sales, on the gross margin accretion because of what we're doing in the departments and as much as anything what it does to fix some of our older stores that are usually the most at risk in terms of competition or just our customer not seeing the type of shopping environment they'd like.

So we like what we're seeing so far, more to come on it.

We have -- did 111 in Q2 and it'll be something that we speak to every quarter, obviously.

And our final question today will come from Brad Thomas with KeyBanc Capital Markets.

With respect to same-store sales, I was hoping you could just talk a little bit more about how much you think is coming here from your own execution, much of which we've talked about this morning, versus any changes in the consumer backdrop and the nature of the comparison that you're up against here?

Well, it's hard to separate the 2 there.

In retail, everything is evolving all at a time.

But I can tell you we are certain that we're seeing improvements based on our synergies and our initiatives, especially in the Family Dollar banner.

We have done all those things that we said we would set out to do or we are in the middle of doing them.

And customers are taking notice.

Customers are responding to our end caps, they're responding to our promotions, our digital coupons.

They're responding to all the things that we hope they would respond to.

That doesn't mean we're perfect.

We still are improving and tuning up and responding and changing and evolving with all of those.

But it's clear to me that we're seeing the benefit of greater values in running better stores in our Family Dollar, and our customers are responding.

At Dollar Tree, we've had -- we just have a model that customers love.

I mean, everything is $1, 10,000 square-foot store, everything is $1.

You walk in for the things that you need, you end up being challenged by things you didn't know that you came for but the values are so great you just can't pass them up.

And so that surprising value, that treasure hunt, that merchandise energy in the Dollar Tree stores continues to amaze and delight our customers.

As long as we continue to do that, I think we have a terrific business.

We've been doing it now for 30 years.

So I think we've proven the concept.

So it's always hard to separate.

I do feel like in second quarter, somewhere towards the end of the second quarter, especially, it felt like the consumer was in a better place and was responding overall with little more zeal and more robustly, I guess, that's not a word but the -- to our offering.

So whether they're in a better place or whether there's more customer confidence, I really can't tell you.

It's probably too early to proclaim that.

But it did feel like there was some tailwind from a customer perspective and shopping and -- as I see other retailers report, great retailers reporting good results.

So I think there's a little bit of both.

I'm real pleased, though, with what we've done at Family Dollar and what we continue to do with Dollar Tree.

Great.

And if I could squeeze one last one in on store labor.

Feels like you're seeing some return on the investments you've made there.

As we lookout over the next year or so, how are you feeling about the need for potential additional investments in labor?

I'm going to keep thinking about labor as an investment in the customer and what does it take to deliver the brand standard.

So right now, I think, we're in a pretty good place.

We wanted to make some investments in Dollar Tree, especially, to get positioned not only to drive sales now, but positioned for the great business that we expect coming up in the second half, getting ready for the third quarter holidays and the fourth quarter, especially.

So we've made some investments now in that.

And it has paid -- we've seen return in the form of sales and sales comp and in general customer satisfaction to our stores.

Not only that, but to my satisfaction in our stores as I travel and look and see, I'm seeing inventory levels in the stockroom lower and I'm seeing fuller shelves and I'm seeing happier customers.

And so we're going to keep managing our business in that regard.

We've always been able to manage that as well as managing the other lines on the P&L.

If we invest a little more in labor, we're always looking for where can I take it from to invest, always thinking about investing in the customer-facing part of our business, our stores and taking it away from the back office portions of our business and the things that the customer doesn't see.

So I think, if you look at what we've done in the past, I would tell you that we'll continue to -- when business is good, we'll continue to drive that.

And I think that's what you should expect for us -- from us in the third quarter.

And that will conclude today's question-and-answer session.

I would like to turn the call back over to Randy Guiler for any additional or closing remarks.

Thank you, Rochelle.

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

Our next quarterly earnings conference call to discuss Q3 results is tentatively scheduled for Tuesday, November 21, 2017.

Thank you.

And that will conclude today's call.

We thank you for your participation.